In this issue:

U.S. Debt Rollover Threatens Weimar-Style Hyperinflation

Annual Debt Service on U.S. Debt Now Nearly $6 Trillion

Flagship Financial Times Makes It Official: Recovery Is 'Fairy Story'

Samuelson: Foreboding of Unthinkable Crisis

The Wall Street Police Blotter

Post-9/11 Terrorism Insurance Costs Zoom Out of Sight

Biggest Slide in U.S. Retail Sales in Six Months

Bethlehem Steel De-Listed from New York Stock Exchange

Ontario Pulls Back on Privatizing Electricity

Financial Turbulence Crescendoes Throughout Ibero-America

Singapore Warns of Dollar Collapse

Israeli Economy Continues Plunge; Sharon Must Face Crisis

Kirch Media Empire: Germany's Biggest Postwar Bankruptcy


From the Vol.1, no.15 issue of Electronic Intelligence Weekly

ECONOMICS NEWS DIGEST

U.S. Debt Rollover Threatens Weimar-Style Hyperinflation

The increasing amount of U.S. debt, and thus of debt that requires rollover, is creating the eruption of a hyperinflation of the type that ravaged Weimar Germany, from March through November 1923.

U.S. debt has grown, as businesses borrow for leveraged buyouts, or just to survive; and households borrow through credit cards, or for car loans, home purchases, and so forth. One can see the tendency in the increase in indebtedness of the major categories of U.S. debt.

Table1
U.S. Debt,by category andtotal
($ Trillions)
Year
Household Debt (1)
Gov't Debt (2)
Business Debt (3)
Total U.S. Debt
1950
0.07
0.28
0.10
0.45
1960
0.22
0.36
0.23
0.81
1965
0.34
0.43
0.37
1.13
1970
0.46
0.53
0.64
1.63
1975
0.74
0.76
1.12
2.62
1980
1.40
1.25
2.05
4.71
1985
2.29
2.50
3.84
8.62
1990
3.63
4.20
6.35
14.18
1995
4.90
5.99
8.37
19.26
2000
7.11
6.91
15.00
29.02
2001
7.72
7.16
16.30
31.12

(1) mortgage, consumer installment, credit card debt
(2) debt of Federal, state, and local governments
(3) non-financial company, and financial company debt

source: Federal Reserve Board of Governors, "Flow of Funds Accounts"; OMB; EIR.

The debt explosion is concentrated in household and business debt, as opposed to government debt. Notice that household debt, which was $1 trillion less than government debt in 1995, has leapt ahead, and is now more than $500 billion greater than government debt. The business debt consists of two types: that of non-financial companies, like GM and IBM, and farms; and that of financial companies—banks, insurance companies, Fannie Mae, etc. The debt of financial companies has zoomed upward. From 1995 to 2001, total business doubled, a phenomenal rate of growth.

Adding U.S. domestic debt—$31.12 trillion—plus foreign debt—approximately $2 trillion—we get a total of $33 trillion. While Brazil has approximately $550 billion in debt and outstanding dollar obligations, which by itself is large enough to blow out the world financial system, U.S. debt, at $33 trillion, dwafts all others.

For the last four years, U.S. total debt has been growing at the rate of $2.2 trillion per year, or almost $200 billion per month.

Table 2 Dollar Rise in Debt,for Each Dollar Rise in Gross Domestic Product
1970s $1.75
1980s $2.99
1990s $3.60
2000-01 $4.91

source: Federal Reserve Board of Governors, "Flow of Funds Accounts"; OMB; Department of Commerce; EIR.

This shows the ratio of the increment in the dollar volume of debt, to the increment in the dollar size of GDP, for each decade (on average); except for the last figure, which is for one year.

Annual Debt Service on U.S. Debt Now Nearly $6 Trillion

EIR has determined that the debt service on America's debt is approximately $5.7 trillion per year. The debt service consists of the part of the principal that must be paid, plus the interest charge. Most of the $31.12 trillion in U.S. domestic debt, is in the form of either bonds, or bank loans. The approximate average maturity of the totality of bonds, is 7.5 years. Bank loans have, on average, a maturity of 2.5 to three years. Based on this, on $31.12 trillion in total debt, approximately $4.0 to $4.2 trillion in principal must be repaid each year.

EIR assumed a 5% interest rate on this debt. This is very conservative, as the prime lending rate is now 5.5%, and some of this debt was undertaken at 7-8%, and some at above 10%. On $31.12 trillion, a 5% interest charge is $1.55 trillion.

Thus, the total U.S. debt service is, conservatively, $5.7 trillion, which is equivalent to 55% of U.S. 2001 GDP of $10.21 trillion.

This presents a paradox: How does the U.S. pay $5.7 trillion in debt service per annum? The U.S. can, and does, loot the population's living standards, plus plant and equipment. Next, it can also roll over a portion of the debt, through refinancing and other mechanisms. It can also monetize a portion of this debt, or take equivalent steps.

However, the increasing debt service (and the debt) is so huge, that there is no response to this paradox that can be undertaken within the geometry that existed even in the 1980s, when the economy was in better shape, let alone today. This crosses the boundary condition in which all attempts to hold up the values of the financial aggregates, and its mass of debts, derivatives, etc., produces a hyperinflationary shock front.

Flagship Financial Times Makes It Official: Recovery Is 'Fairy Story'

The editors of London's august Financial Times finally admitted what our readers have known for months: The so-called U.S. "recovery" never happened. Under the headline "The Recovery Myth," the FT's Martin Wolf, in a signed lead editorial June 6, writes that "the world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the U.S.-led worldwide bubble of the second half of the 1990s." According to "conventional wisdom," the worst part of the adjustment to the blowout of the bubbles is now over, and the U.S. is about to lead the world into a new era of prosperity. This view, says Wolf, is "comfortable but false. In truth, the adjustment has barely begun." The recovery promise may turn out to be "no more than a fairy story for frightened children."

Price/earnings ratios on global stock markets are still double the long-term average. At the same time, the U.S. economy is extremely vulnerable, the FT warns, especially, once the "gigantic net borrower from the rest of the world" faces "diminished willingness of foreigners to purchase U.S. assets." This could coincide with "further asset price adjustment" and "weakening household demand." As a consequence, "There may be brutal adjustments in the near future, with a vicious downward spiral in U.S. and world equity prices, higher long-term interest rates, an exodus of capital and dollar weakness. This would force a strong reduction in investment and consumption in the U.S. and an unpleasant adjustment on the rest of the world."

Samuelson: Foreboding of Unthinkable Crisis

Meanwhile, back in the United States, economist Robert Samuelson is thinking along the same lines as the FT's Wolf. In his June 12 Washington Post column, Samuelson writes that the downgrading of Japan's bonds to credit-risk status, is a sign of the world's plunge into "huge and imponderable hazards," dangers that would have been unthinkable a decade ago.

Samuelson warns that "among economic elites, there's a foreboding that something—terrorism, corporate scandals, a dollar crisis, a stock market crash, a Japan crisis—is leading us to we know not where."

This foreboding "could become self-fulfilling if it paralyzes people and companies."

The Wall Street Police Blotter

With this issue, EIW Economics Digest introduces an occasional report on the latest crimes of Wall Street firms, which are increasingly filling newspaper pages, airwaves, and courtrooms around the country. We begin with the following:

Reading the business pages of any major U.S. newspaper has become like reading Wall Street's Police Blotter. But this is not merely corporate crime and corruption, it is systemic fraud that was used to create and maintain the bubble. Among the items on the docket, are criminal investigations of former executives at ImClone Systems and Tyco International, the trial of the Arthur Andersen accounting firm, and a pre-criminal investigation of Glaxo.

Samuel Waksal, former CEO of biotech firm ImClone Systems, was arrested on June 12 by the FBI on a Federal criminal complaint of insider trading, charged with warning family members to sell company stock just before the Food and Drug Administration on Dec. 28 rejected ImClone's application to market Erbitux, an experimental cancer drug—which sent ImClone's stock price plummeting. In addition to the nine criminal counts of conspiracy, securities fraud, and perjury filed by the Justice Department, the Securities and Exchange Commission filed a civil complaint seeking to recover $10 million that Waksal's father, Jack, and daughter, Aliza, made on the trades on Dec. 27 and 28. Waksal allegedly learned from his brother on Dec. 26 that the Erbitux application would probably be rejected, then so informed family members, who sold the stock. Waksal, who had more than $80 million in debt at the time of the alleged illegal trades, according to the FBI, attempted to sell $5 million worth of his shares, but was blocked by brokers.

Waksal, freed on $10-million bail, refused to testify on June 13 before Congress, citing his Fifth Amendment right against self-incrimination. The House Energy and Commerce Committee's investigations subcommittee, presented internal memos suggsting that both ImClone and its partner in devloping the drug, Bristol-Myers Squibb, might have tried to minimize the seriousness of the FDA's concerns about Erbitux.

Home design and K-Mart schlock diva Martha Stewart is under investigation by Federal prosecutors, and reportedly by the New York Stock Exchange, to see if she had inside information from close friend Waksal when on Dec. 27 she sold her 3,928 ImClone shares, at $58 per share. The NYSE denied that it is probing her transactions. Stewart claims she had a standing "sell" order if the stock price fell below $60, and that she did not speak to Waksal before the sale. No word on whether she is creating a "Prison Everyday" domestic collection.

Dennis Kozlowski, one day after being forced to resign as chairman and CEO of conglomerate Tyco International, was indicted June 4 for evading New York sales taxes on a set of paintings he bought with $13.1 million of company money; he is also charged with trying to write the paintings purchase off as a business expense. He faces up to four years in prison for avoiding $1 million in taxes and falsifying business records, according to Manhattan District Attorney Robert Morgenthau.

Prompted by Kozlowski's troubles, the DA's office has reopened an investigation it conducted three years ago into the sale of a house in Florida from a Tyco board member to the company's general counsel. According to the New York Times, property records show that the house was sold by board member Lord Ashcroft to his wife for $100, who then sold it to Byron Kalogerou, Tyco's vice president and general counsel for $2.5 million; both transactions took place on Oct. 27, 1997.

Lord Ashcroft is the former chairman of the security company ADT, which Tyco acquired in 1997, rewarding then-Senator John Ashcroft with a seat on the board. An investigator said that, because the transactions on the house took place at the time of Tyco's acquisition of ADT, it raises questions of possible violations of New York's securities laws.

The original inquiry uncovered no evidence to warrant charges, but the investigation into Kozlowski prompted prosecutors to look at the transactions on the Florida house as part of a broader inquiry into his "tangled" finances. Tyco has lost $100 billion in market value since December, much of that attributed to the actions of Tyco's executives.

The Securities and Exchange Commission plans to open a formal investigation into whether Tyco executives improperly used a stock options fund to buy real estate and personal items.

In a separate inquiry, the SEC reopened a probe conducted in 1999-2000 as to whether Tyco used reserves and other bookkeeping strategies to inflate earnings following its acquisition binge.

The company replaced top lawyer Mark Belnick on June 10, on the grounds that he received $20 million in undisclosed compensation during 1999-2001, and for refusing to cooperate with an internal investigation into misuse of corporate funds.

Arthur Andersen is on trial for blocking an SEC fraud investigation into Enron Corp. financial disclosures, by destroying documents related to the accounting firm's audits of Enron; Arthurr Andersen faces a felony charge of obstruction of justice. The jury, deadlocked in its ninth day of deliberations on June 14, asked whether they can vote to convict if they don't agree on which Andersen employees acted with corrupt intent.

Glaxo, the British pharmaceutical giant, is alleged by the Internal Revenue Service to have improperly avoided a significant portion of U.S. taxes on $29.5 billion in drug sales during 1989-99, including on its blockbuster ulcer drug, Zantac. GlaxoSmithKline apparently overpaid its British parent for the drugs, thereby artificially reducing U.S. profits and paying lower U.S. taxes as a result.

Post-9/11 Terrorism Insurance Costs Zoom Out of Sight

Premiums for property and casualty insurance at showcase properties, large institutions, and commercial sites in Washington, D.C. and New York City, have risen by 50-100% compared to a year ago, according to a study by New York City-based Marsh Real Estate Practice; the insurance premium rise amounts to tens, or even hundreds, of millions of dollars a year, raising concerns that whole enterprises could be wiped out. The price increases, hitting as 70% of Washington-area policies come up for renewal at mid-year, are passed on to the main tenant—the Federal government. Terrorism insurance that was included for free before Sept. 11, 2001, generally has been excluded from policies or, if available, is priced 10-20 times as high as the entire original policy—up to $1 million per $100 million of coverage—often with strict limits, such as exclusions for chemical and biological attacks, radiation contamination, or anthrax.

Some businesses close to what are considered target locations (such as businesses near the White House in Washington) find they can't get terrorism insurance for any price.

Biggest Slide in U.S. Retail Sales in Six Months

U.S. retail sales—consumer activity constitutes two-thirds of all economic activity—fell 0.9% in May, the biggest drop in half a year, the Commerce Department reported June 13. The downturn is blamed on the lowest auto sales in four years, as GM and Ford scale back zero-interest loans, and as shoppers turned to discount shopping, rather than pricier department stores. Sales were $297 billion during the month, according to the Commerce Department.

Bethlehem Steel De-Listed from New York Stock Exchange

The New York Stock Exchange announced June 12 that bankrupt Bethlehem Steel Co., the nation's third-largest producer of steel, will be dropped from the exchange listing, because the price of its stock has fallen below a dollar a share for more than 30 consecutive days. The stock had plunged from $4 a share last June, to 15 cents the day after the company filed for Chapter 11 bankruptcy protection Oct. 15. Bethlehem had been listed on the NYSE for 96 years, and for nearly seven decades on the Dow Jones Industrial Average.

Ontario Pulls Back on Privatizing Electricity

Ontario Premier Ernie Eves announced June 12 that the intended selloff of Hydro One—the electric-transmission-grid system of the parent company, Ontario Hydro—will not take place this month, as planned. The sale was expected to be the biggest ever in Canada, in the range of C$5 billion. Eves said that a sale may take place in the future, but for a delimited stake of 49% or less, thus leaving the Province the owner. Ontario enacted electricity deregulation legislation in 1998; subsequently, Ontario Hydro, one of the biggest systems in North America, was split into five parts, for intended privatization—beginning with the electricity-grid system. But on April 19, amidst growing public revolt, a ruling came from a Provincial justice that privatization would be an illegal sale of public assets.

Nothing is resolved. Last week the board of Hydro One was forced to resign, and a new 11-member board of directors was appointed June 11 by the Eves government. The nominal issue is excessive executive compensation, but the real issue is whether a public-interest policy drive will emerge in the Province and Canada, in the direction of the international LaRouche dialogue to restore national economies?

Financial Turbulence Crescendoes Throughout Ibero-America

Here are some of the latest developments (see also IBERO-AMERICA NEWS DIGEST):

Ecuador: Growing public protest has forced the government to suspend plans to privatize power companies, which the IMF is demanding as a conditionality for a $240-million standby loan. (This is also the case in Peru, where even George Soros's pet President Alejandro Toledo has had to pull back on some of his energy privatization plans.) An IMF mission is in Ecuador now, and the government is resisting a Fund demand to reallocate 10% of the funds from its oil-stabilization fund, to buy back debt bonds. This would be in addition to the 70% the government has already agreed to use for that purpose. Instead, the government wants to allocate the 10% to social programs.

* Paraguay: The peasant and trade-union mobilization which forced the Senate on June 6 to suspend a law authorizing privatization of state-owned companies, provoked a complaint from U.S. Ambassador David Greenlee, who said the privatization program would have helped create a "dynamic economy." Now, the Federation of Industry, Trade, and Production is debating whether to call a general strike, to protest tax hikes and other austerity measures, although it apparently supports privatization.

Venezuela: The bolivar closed at a record low June 13, falling 1.7%, and bringing its decline year-to-date to 36.6%. The volatile political situation, which includes plans by the opposition to President Hugo Chavez, to conduct big marches June 15, has reportedly fed a soaring demand for dollars. Planning Minister Felipe Perez, a University of Chicago-trained monetarist extremist, said June 11 that Chavez's economic program (which Perez designed) "lacks credibility," but they'll keep working on the problem, he said. The austerity plan includes increasing the VAT tax, eliminating some tax exemptions, and eliminating the fuel subsidy, a provocative measure which is guaranteed to unleash social protest.

Perez announced June 12 that the government will have to borrow more abroad this year than originally anticipated, because tax revenues will be below target. For the first four months of this year, tax revenues were only 88% of the government target for that period.

Uruguay: A 24-hour general strike June 12 was directed against the government's IMF-dictated austerity program. Unemployment now stands at 15%, or 200,000 people, while another 560,000 people hold jobs categorized as "precarious." There are only 3 million people in this small country. The strike led by the PIT-CNT labor federation was joined by trade unionists and public-sector employees, including teachers and electricity, oil, energy, and water workers. Health-care, banking, and transport workers also had planned to join the strike. PIT-CNT leader Luis Puig told Reuters, "We're trying to change the direction of economic policy, because here we're heading down the same path as Argentina."

Singapore Warns of Dollar Collapse

Writing in the June 11 Singapore Business Times, Larry Wee's commentary, entitled, "Why the U.S. $ Is on Dangerous Ground," asks "Would you buy U.S. dollars today?," and answers, that the question is crucial because people have to understand that they don't have to sell the dollar to make it fall—they only have to stop buying!

Wee reviews some of what EIR has been saying for some time, i.e., that the global economy continues to chug along partly because the United States keeps raising the ceiling on the current account deficit. The danger is that it now takes more than U.S.$1 billion daily in foreign goods and services to keep that bubble going. If no one buys U.S. dollars for just one month, there will be more than U.S.$30 billion to be converted back to the currencies of those who sold goods and services to U.S. buyers. What happens when those who already hold those dollars, start to sell?

Wee reports that the dollar has already fallen to a seven-month low vis-à-vis the yen, a 17-month low vis-à-vis the euro, and a two-year-plus low vis-à-vis the Swiss franc and gold, and, making matters worse, the Wall Street markets continue to slide, because valuations of U.S. stocks, by most accounts, are still relatively high. The U.S. dollar's fortunes have become increasingly closely correlated to Wall Street's.

Israeli Economy Continues Plunge; Sharon Must Face Crisis

Bank of Israel Governor David Klein met with Finance Minister Silvan Shalom June 12 in preparation for an evening meeting the next day with Prime Minister Ariel Sharon, just returning from a trip to the U.S. and Britain.

Klein and Shalom, who are known to be at daggers drawn, held what had been billed as a "turning the leaf" meeting, after which Klein did not rule out further increases in the interest rate. However, Klein is known to have said that a budget deficit of 3.9% of GDP, in local terms, would be the equivalent of 7% in international terms, and was unacceptable. Also, at present, official inflation is at 3.9%, as compared with 2-3% in most European Union countries. The shekel has fallen 17% in value against the dollar since the end of December (now 4.96 to the dollar), when Klein cut the interest rate to a record low of 3.8%.

At the meeting with Sharon and Shalom, Klein was expected to demand that the Prime Minister and Finance Minister implement cuts of billions of shekels in both this year's and next year's budgets. The Israeli daily Hatzofeh reported that the Prime Minister summoned Klein and Shalom to try to put the brakes on the collapse of the Israeli economy. Attempting to convey calm, Sharon before the meeting said, "I have confidence in the shekel and the Israeli economy." Also, the Israeli daily Ma'ariv editorialized, "Sharon, who, up until today, hasn't expressed himself on economic issues, must increase his involvement in this field."

Kirch Media Empire: Germany's Biggest Postwar Bankruptcy

Putting the final touches on Germany's biggest bankruptcy since World War II, Kirch's holding company and its investment arm filed for protection from creditors in a Munich court, as the last pillars crumbled of the nation's media empire, which has collapsed under $5.7 billion in debt from a money-losing venture in pay television, and acquisitions that didn't pay off. More than 80 companies are looking at buying what's left.

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