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From the Vol.1, no.9 issue of Electronic Intelligence Weekly

ECONOMICS NEWS DIGEST

Time To Wake Up on the Economy: No 'Dracula' Recovery

In comments to collaborators at EIR magazine and EIW, 2004 Democratic Presidential pre-candidate and renowned economist Lyndon LaRouche stated that an April 30 Times of London article by Anatole Kaletsky (see following story) was the big story of the day, and that it should be shoved under the noses of American policy-makers and citizens. Tell them: "Here's what Europeans are saying about the fraud of the 'recovery' in the U.S., and the coming dollar crash."

Except for publications associated with LaRouche, the world's media are stubbornly refusing to put together the picture which has become evident over the past week: Dracula did not recover. The report of a 5.8% growth in the U.S. Gross Domestic Product is a fraud, just as the accounting numbers from Enron and other U.S. bubble corporations are fraudulent; the party is over. Both the European and the U.S. sides of the financial edifice of are collapsing. By May 1, the numbers already showed that all three major U.S. stock indices skidded downwards in April: The Standard & Poor's 500 index fell 6.7% for the month, as index companies' 1Q earnings slid 12%—the biggest monthly loss since September 2001. The Nasdaq index lost 11% in April, while Dow[n] Jones lost 4.7%. Chief investment officer of MFS Investment Management Kevin Parke said "This is probably the most scared market I've seen in 18 years."

London Times: 'Is America's Ascendancy on the Wane?'

Top voices in the City of London are echoing Lyndon LaRouche's assessment that George W. Bush is becoming a "lame duck." This was the analysis of Anatole Kaletsky, a well-known London insider, in his April 30 column in the Times of London titled "Is America's Ascendancy on the Wane?" In keeping with the insane blackout policy of the Anglo-American establishment, Kaletsky does not mention LaRouche by name at all, but any informed observer can see the impact of LaRouche's international warning two weeks ago, that Bush's failures on the Middle East, and in every other policy, spells "lame duck."

Kalestky also notes that, although last week's U.S. economic figures show a growth rate of 5.8% in the first quarter (while, at the same time, the British economy grew at only 0.4%), Wall Street fell sharply, and the dollar sank to its lowest level since December, against the euro and the pound. The simple explanation is the classic case of "buy on the rumor and sell on the news." Kaletsky continues by saying that he suspects that the weakening of the U.S. dollar and Wall Street, after last week's economic figures, conveyed a more important message: that investors may be starting to lose faith in the long-term strength of the American economy, and are starting to take seriously the possibility of a reallocation of global capital towards Europe and Japan.

Kaletsky suggests that things are looking up in Europe and Japan, but that in America, long-term trends point mostly in the opposite direction. The Bush Administration has backed away from free trade and competitive principles with its protectionist concessions to the steel, textile, and farming lobbies. Macroeconomic policy is veering in a dangerous direction, with tax cuts and military spending putting additional pressure on both trade and budget deficits. U.S. politics is becoming increasingly uncertain, as President Bush blusters ineffectually against Israel, and fails to deliver on his threats against Iraq and the "axis of evil." It is even conceivable, Kaletsky ads, "that President Bush could become a lame-duck leader by the end of this year.

"Regular readers of this column may find this gloomy statement about America surprising," he continues. "Throughout last year I was at the optimistic extreme in my views about the U.S. economy, arguing that the U.S. recession would never have happened at all had it not been for September 11." But now, he says, "I now see reasons for short-term caution." After going through various factors which augur ill for the U.S., Kaletsky continues: "Regular readers may find my pessimism about investment surprising. Throughout last year, I argued against what I called the 'prophets of doom' who predicted that the technology investment binge of the late 1990s would precipitate a Japanese-style slump.

"In sum, there are several reasons to question the strength of the U.S. economy suggested by last week's figures," he says, concluding: "A shift in the relative attractiveness of the U.S., European, and Japanese economies would have big effects on currencies and financial markets. It could mark the end of the period of ascendancy enjoyed by the dollar and Wall Street for most of the past decade."

EIR: GDP Growth Is a Pitiful Coverup

The U.S. Commerce Department-released figures of a real, inflation-adjusted GDP growth of 5.8% for the first quarter of 2002 are a ludicrous attempt at a coverup of the true situation. According to the official figures, released April 26, GDP in real (1996 constant dollars), allegedly rose from $9.346 trillion in the fourth quarter of 2001, to $9.482 trillion in the first quarter of 2002. There are several forces that show that this GDP figure is completely faked.

1. Private-Business Inventories. During the first quarter, private businesses reduced inventories by $36.2 billion; by comparison, during the fourth quarter of 2001, private business had reduced business inventories by an even larger $119.3 billion (all stated in so-called 1996 dollars). Since business reduced its inventories, during the first quarter, by $83.1 billion less than it had during the fourth quarter of 2001, the Commerce Department counted this as a positive $83.1-billion contribution to GDP!

How? According to the fraudulent GDP accounting system, since private businesses were lessening the amount by which they reduces inventories, then, in an offsetting way, they must be building new production, even though the economy was not really building new production. The $83.1 billion, supposedly contributed by inventory changes, added 3.1% to the "growth" of the GDP, all by itself, during the first quarter of 2002. Thus, of the alleged first-quarter 5.8% GDP "growth," 53.4% derives from this inventory accounting.

2. The Commerce Department used so-called "hedonic adjustments" to inflate the alleged purchases of information-processing equipment, and computers and peripherals. Consider the actual amount spent for information processing equipment and for computers, and what was done after the hedonic adjustment:

Table 1

($ billions)

***********
Actual Spending
*****
Alleged Spending In 1996 Dollars, with 'Hedonic' Adjustment
__4Q/01 __1Q/02 _Change ___ 4Q/01 _1Q/02 _Change
Information Equipment

404.2
408.1
+ 3.9
567.4
577.7
+10.3
Computers
79.8
83.4
+ 3.6
286.0

310.1

+24.1

Thus, there was an increase of $7.5 billion in the combined spending for information equipment, and computers and peripherals, in the real world during the first quarter of 2002, over the level of the fourth quarter of 2001. After adjusting for the real inflation rate, that increase would likely be zero, or a neglible amount. However, the Commerce Department used the "hedonic adjustment," under which, allegedly, computers and information processing equipment are more powerful, and therefore, this is counted as an alleged increase in production. One can see that, during the first quarter of 2002, businesses actually spent $83.4 billion on computers and peripherals, but the Commerce Department counts it as if businesses spent $310.1 billion on computers and peripherals, a 3.5-fold increase.

During the first quarter, using the fraudulent hedonic method, the Commerce Department said that information equipment and computers added $34.4 billion to GDP (when it actually added close to zero), which all by itself accounts for 1.3% of the 5.8% fake increase in GDP. (Nonetheless, even with use of the hedonic adjustment, the overall category of business capital spending fell).

3. Consumers spent $17.9 billion more for home purchases during the first quarter of this year, than during the fourth quarter of 2001, according to the Commerce Department. But, this is largely passing on of the process of the hyperinflationary housing bubble. The purchase of homes, by itself, accounts for 0.55% of the 5.8% fake increase in GDP. Thus, just by taking account of the three fraudulent above items, one reveals 5.0% of the so-called 5.8% GDP increase.

There are additional problems: the rates of inflation and of consumer spending that the Commerce Department uses to calculate GDP, are fraudulent. However, there is the underlying fraudulent methodological nature of the GDP by its own construction: more than two-thirds of GDP is services, and when services increase, that increases GDP; it fakes its accounting of real production, and it does not account for the immense breakdown of real infrastructure. Rather, as LaRouche has asserted, the real physical economy is plunging.

FAZ: Even Foreign Capital Inflow Can't Stem U.S. Deficit

On April 29, a front-page analysis article in the Frankfurter Allgemeine Zeitung expressed fears that even massive foreign capital inflow cannot contain the U.S. government deficit, which will, in turn significantly affect the value of the dollar. The leading German daily voices strong doubts in the upfront news on the alleged U.S. recovery. FAZ writes that: 1) the fact that U.S. firms have replenished their emptied inventories, does not signal an upswing; 2) even with U.S. interest rates at their lowest level in years, corporations would not invest. The alleged U.S. upswing stands on "unsteady legs," the FAZ notes. Additional problems can be expected with the budget, which will run into a $100-billion deficit this year, because of the visibly dropping tax revenues, and because of expenses for the military mobilization.

But the bigger problem is the current account deficit, which rose above 4% GDP, coming close to the 5% ratio which, according to the Fed's own standards, would set off a red alert. The $440-billion deficit rests on foreign capital inflows, largely: 11% of all U.S. stocks, 21% of corporate shares, and 36% of all government bonds, are held by foreigners. Because of that, it does not come as a big surprise that there is fear on the markets of a weakening of the dollar, the FAZ reports.

Financial Times: Financiers Don't Know Anything About Economics

The jig is up: Financial analysts were wrong and bankers don't know anything about economics, reports an April 30 article, "The Trail of the Bears" by Fredmund Malik, in the German edition of the Financial Times of London. Like the Kaletsky article reported above, it scrupulously avoids any reference to LaRouche, but betrays his influence, in every word. Excerpts follow:

"The financial analysts have become quiet; the terror, that they were able to exert for a couple of years, on the basis of their supposed infallibility, doesn't work any more. It is being acknowledged that the financial economy and the real economy were being confused, in an unhealthy manner. The illusion of endless bull markets and the New Economy euphoria, are now showing themselves to be what they always were: a lack of professional understanding of economics, even though well packaged in the glamour of the Zeitgeist, lack of knowledge about the history of economics, youthful inexperience, not infrequently, sheer economic stupidity, casino mentality, pretending, and sometimes simple economic criminality...."

There follows a discussion of how an economy works. "This way—and only this way—through correct management of a firm, can the economic result in the form of productive potential be achieved, be it in factories, or computers, be it in bricks or in bytes, in the form of goods and services, personal revenue [for the population] and social product, in the form of wages, taxes, interest and profits.

"This perspective aims at the real economic side of economic activity, instead of—what the shareholder value does—on the financial economic side. Through shareholder value theory, combined with the explosion of the stock markets, it has come to a confusion between the two sides of economic activity: the real economy and financial values. The inevitable result was also the confusion of the businessman [entrepreneur] and the businessman's tasks, on the one hand, with the investor, and his different task, to build up investments, on the other.

"Both are required; both fulfill important functions in a modern economy, but they follow completely different logics. Earlier, financial values and the real economy had a clear relationship: financial instruments served the needs of the real economy. Financial volumes therefore, until about the end of the 1980s, stood in a stable relationship (ratio) to world trade flows and world investments. Thereafter, the two developed so independently of one another that one has to talk actually about wo different economies...." In conclusion, the author cites Peter Drucker, who "put it, perhaps with a bit of exaggeration: Bankers know everything about money, but little about the economy."

New York Financial Reporters Criticize 5.8% GDP Data

"How can the economy look so good on paper, but feel so bad in the real world?" asks the New York Post's John Crudele in his column of April 30. "Answer: The paper pushers are out of their mind[s]." Crudele takes apart last week's announcement of 5.8% growth of GDP in the first quarter. In fact, he says, the economy is softening, not getting stronger, as shown by recent stats on existing home sales, durable goods orders, and the jobs index of the Conference Board. As to the 5.8% GDP growth: 3.2% was inventory build up. Plus there are guesstimates/assumptions built in, such as a 3.5% annualized rise in personal consumption (in reality, retail sales are falling), and 0.8% of inflation (CPI was rising at an unadjusted 4.8% annual rate over the past three months).

If inflation is taken into account, Crudele concludes, and don't count the inventory buildup, then economy was actually contracting in the 1st quarter. Another voice debunking last week's GDP data is New York Times columnist Paul Krugman, who writes, on April 30, "Hype Springs Eternal," in reporting the GDP—while business investment has been declining. How did economic forecasters become cheerleaders for the "boom"? Krugman asks. He notes that Morgan Stanley's Stephen Roach, one of the few to defy the economic orthodoxy, has been ostracized; Roach signs his e-mail "From the wilderness." Krugman himself says that it's likely that the recovery will stall, it could be a "jobless recovery" with growing GDP, while unemployment stays high and profits low.

New Farm Bill Passes House of Representatives

A new "anti-free-markets" farm bill sailed through the House of Representatives May 2, with a vote of 280 to 149, in the form agreed to by the House/Senate Conference Committee. President Bush said he will sign it, as soon as Senate votes it up, which is expected next week. The bill is a rejection of the radical "markets-based" 1996 Freedom to Farm law (expiring in September), in that it extends and increases subsidies to producers of many farm commodities. Bush and lawmakers call it a "safety net" for farmers. Despite the lack of cost-of-production, or parity-based concepts, and despite the continuance of U.S. commitment to cartel imports for food supplies, the new bill is raising shrieks of protest from free-trade ideologues, and trading partners.

Cheerleaders for the Boom: Treasury Secretary O'Neill

U.S. Treasury Secretary Paul O'Neill exhibited his usual lack of concern for what he has, in the past, called "the so-called current account deficit," at a hearing before incredulous U.S. Senators May 1, where the unspoken issue was the threat of a collapse of the U.S. dollar. O'Neill said that his "feeling" about this deficit, is that it is "financed by international capital flows, which have risen because of foreign interest in investing in the United States. As long as we continue to have the best investment climate in the world, people in other nations will send their savings here, where those resources fuel our economic growth and job creation."

Continuing in this vein, O'Neill said: "I believe we should strive in both the private and public sectors to always be the best place on earth to invest. As long as we are the most productive economy in the world, our nation will continue to be prosperous." Pursued on the current-account-deficit question, O'Neill cited a report by Alan Sinai, which claimed to show that any attempt to reduce this deficit "hurts the U.S. economy, as compared to leaving the current account deficit alone."

Most Senators were complaining about the elimination of industries in their states (Zell Miller about the timber industry in Georgia, for example), which they said could not compete internationally at today's high dollar-exchange rate. But John Corzine of New Jersey pointed to the possibility of sudden, catastrophic foreign disinvestment in the U.S., as the sort of problem to be feared. Senator Phil Gramm supported O'Neill's anti-interventionist mantra, with his usual kitchen-table economics on the value of "free trade."

The 'Recovery' Continues: U.S. To Step Up Borrowing

The U.S. Treasury will sell $33 billion in new Treasury bills, at its regular quarterly auction next week, and has scrapped, for the entire second quarter, its plan to buy back Treasury debt, Bloomberg reported May 1. The Treasury has to float the new debt, because it has a growing U.S. budget deficit, due in large measure to the collapse of the U.S. economy.

Biggest U.S. Bank Lending Collapse in 30 Years

The first-quarter collapse of bank lending was the biggest rate of decline in 30 years. Lending fell by 7.4% compared to the first quarter of 2001, according to the Federal Reserve. This follows a 6% fall in the last quarter of last year. This is the second-largest recent extended fall in bank lending, after that of August 1990 to December 1993. Bloomberg ascribes this to both the lower need for financing in the current business environment, and to fears by lenders that borrowers could default. Bloomberg also reports that Citibank, J.P. Morgan, Bank of America, and others, are "refusing to finance businesses that don't retain them for other services."

U.S. Army Corps of Engineers Water Projects To Be Halted

Major General Robert H. Griffin, the civil works director of the U.S. Army Corps of Engineers (ACE), announced April 29 that the Corps will suspend work on 150 Congressionally approved water projects, in order to assess them for environmental impact and cost-benefit analysis. No work will go forward on these projects until the review is completed. This is the first time this has happened in the Corps' history, as work is being suspended on billions of dollars of worth of essential projects.

For the past few years, there has been a two-pronged assault on the Corps. On the one side are the fanatical budget-cutters like Sen. Robert Smith (R-NH), who has proposed legislation to "overhaul" and gut the Corps. Smith was instrumental, along with Bush's OMB Director Mitch Daniels, in forcing the recent ouster of the Corps' civilian chief, Michael Parker, who had complained bitterly about the budget cuts of Corps projects. Also pushing for gutting the Corps of Engineers, is the group Taxpayers for Common Sense.

On the other side, are the environmentalists, who want to tear down every dam and river project built since the Depression. In 2000, the Washington Post published a series of articles that targetted a $1-billion project to expand and improve the locks on the Mississippi River. The environmentalists and the Post also targetted a $165-million flood-control pump in the Mississippi Delta; a $690-million barge-canal widening in New Orleans; and a $311-million widening of the Delaware River.

In response to the Corps' announcement that it was putting under review and suspending work on 150 water projects, National Wildlife Foundation senior vice president Jamie Clark stated, "I'm just blown away. This is a terrific opportunity."

Children's Diseases Return with Global Economic Breakdown

Infectious disease experts who met in Milan, Italy during the week of April 25 reported that whooping cough Bordetella pertussis, the childhood disease which is often fatal, is making a dangerous comeback. A growing number of teens, adults, and elderly are carrying the disease and exposing unvaccinated infants—which leads experts to believe that protection from immunization wears off after a few years, and that the bacterium has outsmarted vaccines used to control it for decades.

New outbreaks of pertussis in the Netherlands and Canada recently, indicate that the bacteria circulating today are different than those circulating in the past. Until immunization against whooping cough became available, it was one of the most frequent and severe illnesses for infants in many countries. In countries where vaccine is not used, it is a major cause of death in children, with an estimated 51 million cases and 600,000 deaths annually. In the United States, there were 7,796 cases in 1996, the highest annual number reported since 1967.

As EIR has reported recently, there is an acute, long-term shortage in the United States, of eight of the 11 standard childhood vaccines, including for DTaP, or diphtheria, tetanus, and pertussis/whooping cough. The current U.S. supply of DTaP meets about three-fourths of the nation's need.

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