Home page

From the Vol.1, no.3 issue of Electronic Intelligence Weekly


ECONOMICS NEWS DIGEST

U.S. Trade Deficit Grows, Despite Collapse of Imports

According to a March 19 release by the U.S. Chamber of Commerce, the United States' trade deficit in goods and services rose to $28.5 billion in January, from a December 2001 deficit of $24.7 billion. The trade deficit on merchandise (physical) goods alone rose to $34.1 billion, from $31.0 billion in December.

The principal reason for the growth in the deficit is that imports rose, while exports remained the same. Some economists tried to present a widening trade deficit as a good sign. Britain's Reuters news service claimed that the deficit occurred as "an improving [U.S.] economy boosted demand for foreign oil and other imports."

But there are three reasons that this is not so.

First, about 40% of the physical goods imports increase in January, relative to December, was due to imports of consumer goods. One-sixth of the increase in imports was due to increased oil imports, reflecting mostly a price increase in petroleum in January.

Second, while this January's import levels increased relative to their very depressed levels in December, January's physical goods import levels, at $106.5 billion, are still down 13.7% from the $123.4-billion level of January 2001. This January's physical goods exports, at $54.8 billion, are down 15.7% from the $65.0-billion level of a year earlier. This indicates an overall decline in the United States' role as the importer of last resort for the world economy.

Third, America's insane appetite for such a large volume of physical goods imports is not a sign of health, but rather reflects the fundamental condition that America can no longer reproduce its own existence by its own productive facilities, and must siphon physical goods imports from the rest of the world to prevent an increase in the rate of collapse.

Even Greenspan Nervous at U.S. Current Account Deficit and Foreign Debt Claims

In his address via satellite to the Independent Community Bankers of America conference in Honolulu March 13, Federal Reserve chairman Alan Greenspan noted: "During the past six years, about 40% of the total increase in our capital stock in effect has been financed, on net, by saving from abroad. This situation is reflected in our ongoing current account deficit, which, by definition, is a measure of our net investment in domestic plant and equipment financed with foreign funds, both debt and equity. But this deficit is also a measure of the increase in the level of net claims, primarily debt claims, that foreigners have on our assets. As the stock of such claims grow, an ever-larger flow of interest payments must be provided to the foreign suppliers of this capital. Countries that have gone down this path invariably have run into trouble, and so would we."

Securities and Exchange Commission Still Protecting U.S. Housing Bubble

Speaking to the House Financial Services Committee on March 20, SEC Chairman Harvey Pitt backed off from requiring Fannie Mae and Freddie Mac to file financial statements, despite widespread knowledge that the two "government-sponsored enterprises" are oversubscribed with derivatives, and face an imploding real estate market that could bring down the speculative bubble with a splat.

Pitt first suggested the two corporations should be held accountable, held to the same disclosure requirements as other publicly traded companies, then later "clarified" that they would not be required to do so. "Disclosure is critical for the GSEs [government-sponsored enterprises] as well as for other public companies," he said. But currently, Fannie Mae and Freddie Mac are not required to disclose insider transactions, file audited financial statements, and register their securities with the SEC.

An SEC spokeswoman later said that while Pitt believes GSEs should meet the highest standards of disclosure and transparency, neither he nor the commission "is advocating any change in the legal status of GSEs."

During the same hearing, Franklin Raines, Fannie Mae's chairman, testified that the GSE will disclose insider transactions. But Raines also admitted that the company holds $533 billion in interest-rate derivative contracts. Clearly, this is a bubble about to explode.

IMF Sees Some Big Risks to World 'Recovery'

"Setbacks in the fight against international terrorism" could hit the U.S. economy and world stock markets later this year, warned the International Monetary Fund in a draft of its World Economic Outlook released to wire services March 20. The report will be officially released in mid-April. Reuters claims it obtained the draft from an unnamed "Group of Seven government source." According to Reuters, the draft states that there are "good reasons to expect the global economy to pick up." However, risks remain, such as an overvalued dollar, the high current account deficit, and low savings. Overoptimism in the financial markets and "setbacks in the fight against international terrorism" could also undermine the recovery process.

The Philippines May End Current Program Under IMF

Sources told Business World that some quarters view the IMF's post-program monitoring (PPM) facility in the Philippines as having limited effectiveness, especially since it excludes any financial assistance. "If it proves to be of little use, the government might as well terminate it," an official said, requesting anonymity. He was quoted in the March 20 edition.

At present, the Philippines subscribes to the PPM, which broadly aims to provide a continuing review of the country's monetary, fiscal, and macroeconomic performance. Local officials reportedly asked IMF officials to clarify and define more clearly the program's parameters and benefits, and what is expected of the government's economic managers. Officials complained that since the PPM is not an official funding program, the country does not have access to IMF resources in the event it encounters balance-of-payments problems associated with capital flight.

This is aggravated by the fact that the government's bilateral dollar swap arrangements signed with various ASEAN-plus-3 countries last year are conditional upon an IMF program. "The bilateral swaps facility can only be availed in tandem with an IMF program," the official said. "So since the PPM is not an official funding program, we are effectively shut out from the bilateral facilities as well.

"Either they upgrade the PPM to a full program or they can just terminate it," he said.

Malaysian Prime Minister Seeks Cooperation in Russia and Europe

Malaysian Prime Minister Dr. Mahathir Mohamad, speaking March 14 at an official luncheon sponsored by Russian President Vladimir Putin during Mahathir's visit to Moscow, called for cooperation between the two countries on Land-Bridge projects in Central and East Asia. While not using the term "Land-Bridge," which is universally identified with Lyndon and Helga LaRouche's Eurasian Land-Bridge perspective, Dr. Mahathir said, "Our private sectors should look beyond their borders, to the economically dynamic and vibrant region of East Asia and Central Asia. Malaysia has envisaged plans to extend its economic reach to the East and Central Asian region through railway connections with China. This will pave the way for greater interchangeability of goods and technology amongst countries in the region, with Russia being an integral partner of it. The prospects appear to be even better with the eventual creation of an Eastern corridor that will link Southeast Asia with East Asia. The ensuing economic growth will in turn bring about a more stable and peaceful international security environment in the region.

Dr. Mahathir went from Moscow to Germany, where he and Chancellor Gerhard Schroeder also discussed projects of intensifying economic and scientific cooperation.

Egyptian Company Plans Largest Ever Investment in Russia's Aerospace Industry

Egypt's Sirocco Aerospace International, which was created in 1996 by an Egyptian businessman to market a commercial airplane from the famed Russian Tupolev line, has already invested about $200 million in Russia's Aviastar SP company. Sirocco owns about 18% of the southern Russia-based aircraft manufacturer. The Aviastar plant in Ulyanovsk, the Wall Street Journal reports, is the largest aircraft factory in Europe, and produces the Tu-204 passenger jet. Unable to compete with giants Boeing and Airbus in the commercial aircraft market, for lack of capital investment, Aviastar has dropped its labor force from 36,000 to 10,000 over the past decade, and the number of aircraft it produces, from 60 per year to five.

Reportedly, Sirocco is planning to invest $280 million over the next three years to modernize the plant, and increase production to nine planes next year, and to 36 by 2005. In return, Sirocco will receive at least a 25% share in the factory, and a similar share in Tupolev. An investment agreement is expected to be signed by the end of March.

Germany's Premier Construction Firm Files for Bankruptcy

Philipp Holtzman AG, the German construction firm which built the Baghdad Railway, filed for bankruptcy March 21, after 152 years in business. The plan for a bailout, which had been proposed by the firm's largest shareholder, Deutsche Bank, was rejected by Dresdner Bank, Commerzbank, and the HypoVereinBank Group. Deutsche Bank has been allied with Holtzman since the 19th century, when they collaborated to build the Berlin-to-Baghdad Railway. Loans valued at 1.5 billion euros are at stake, and as many as 40,000 jobs are at risk around the world.

Holtzman has lost money since 1994, and was bailed out in 1999 with a $1-billion rescue package, after Chancellor Gerhard Schroeder's intervention. Its stock has fallen from a high of 536 euros to 2.75, leaving the capitalization of the company at only 47 million euros.

This Week's Collapse in the U.S. Physical Economy

Despite reams of "recovery" hype which is being produced by the major U.S. press, the unrelenting pattern of collapse in physical production and jobs, not to mention increased bankruptcies, cannot be missed by anyone who is not gripped by a delusion.

One leading element of the collapse is collapse of state budgets, caused by the sharp reduction in tax collections. Another is the ongoing crash of the telecommunications sector. Internationally, KPN, a Dutch telecom company, had a record $6.6-billion (7.5-billion-euro) net loss in 2001; some 5,280 jobs will be cut this year, and an additional 1,300 jobs by the end of 2004.

Meanwhile, the auto giant General Motors plans to cut spending by $4.3 billion this year, imposing fiscal austerity to "help meet our goal of earning $10 a share mid-decade," by cutting $2 billion from its North American material costs; $1.3 billion from its manufacturing, engineering, and health-care budgets; and $1 billion from capital spending, executives told securities analysts at a meeting in Detroit on March 19. The company has said it will have to inject $2 billion into its pension plan next year. Engineering staffs will be slashed, in favor of unscientific, and deadly, "benchmarking"; less expensive generic drugs will be promoted; and the number of suppliers will be reduced from the current 3,300.

The cuts would cause another ratcheting-down of the economy as a whole, hitting machine tools, steel, etc.

Then there's Verizon, the major U.S. telephone company, which has revealed that it has $18.7 billion in debt due within the coming 12 months, out of its total of $64.3 billion in debt. Marconi announced March 22 that it has failed to obtain new bank loans to deal with its billions of pounds in debt, and is cutting 13,000 jobs.

Goldman Sachs, a top U.S. investment bank, saw its first-quarter profit tumble by 32%, to $524 million from $768 million a year ago, and is planning job cuts, as merger activity slows down.

A regional example of the non-existence of the "recovery" is the Silicon Valley area of California, where much of the "New Economy" was headquartered. According to a major article in the San Francisco Chronicle Business Section on March 17, "The main indicators of the Valley's economic health--job creation, unemployment, office vacancy rates--are still deteriorating, and are expected to do so for months to come." Vacancy rates for valley office space have gone from 0.6% in the second quarter of 2001 to 15% in the fourth quarter of 2001, with a 25% jump from the third quarter to the fourth quarter of last year. "Start-up" companies that rely on outside venture capital, began running out of cash in the fourth quarter, and are now collapsing at an escalating rate. The article quotes Paul Fassinger, research director of the Association of Bay Area Governments, predicting a rise in the unemployment rate to 8.5% in coming months.

U.S. Steelworkers Pledge To Fight for Health Benefits

A March 13 statement from United Steelworkers of America union president Leo Gerard said that the battle over "The Steel Industry Retiree Benefits Protection Act of 2002," expected to be introduced into the Congress by Sen. Jay Rockefeller (D-W Va), will be "the fight of our lives, ... a fight that will make the battle to secure tariff remedies seem easy." It urges locals to begin to gear up for demonstrations in support of the measure. Many retirees will begin to lose their benefits as of March 31.

Gerard sounded a similar theme in March 14 testimony before the Senate Committee on Health, Education, Labor and Pensions, chaired by Barbara Mikulski (D-Md.). In his testimony Gerard reviewed various Bush Administration general proposals for increasing health benefits, such as tax credits and the "Medicare Prescription Drug" legislation, pointed to their obvious inadequacies and declared that the USWA insists that honoring pension and health benefit promises is as important as tariff relief. Gerard told the committee, "No one is asking us to bail out the bosses; this is to help real working people who have suffered."

While continuing his attack on unfair and illegal trade policies, Gerard refrained from direct attacks on alleged "competitor" nations such as China and Russia, and in a welcome departure from previous statements made no reference to "world overproduction of steel."

All rights reserved © 2002 EIRNS