In this issue:

U.S. Dollar Crash Reflects Systemic Problems

Even Wall Street Is Worried About Machine-Tool Shutdown

Ford, GM Demand WalMart-Style Price Cuts from Suppliers

GOP Newsletter Highlights Incredible Shrinking U.S. Middle Class

Broder: Economic Recovery Celebrations Are Premature

More Americans Lack Health Insurance

Touted IT Sector Lost Over Half-a-Million Jobs in 2002


From Volume 2, Issue Number 47 of Electronic Intelligence Weekly, Published Nov. 25, 2003

U.S. Economic/Financial News

U.S. Dollar Crash Reflects Systemic Problems

The U.S. dollar plunged to an interday trading low on the New York Comex exchange Nov. 18, of 1 euro to $1.1974. This represents the biggest one-day drop in the value of the dollar against the euro since April 3, 2001 (the dollar moved upward, but by a very small amount, at the end of New York trading).

The fundamental force driving the dollar's fall is the United States' inability to finance its current account deficit, within the context of a bankrupt world financial system. The Treasury Department released a report last week showing that net foreign capital inflows into the U.S.—that is, foreign purchases of U.S. Treasuries, stocks, etc.—fell from $49.9 billion in August of this year, to a miniscule $4.19 billion in September. According to the Financial Times, this is the lowest level of foreign monthly capital inflow since the Long-Term Capital Management hedge fund failed in September 1998.

During the second quarter, the U.S. ran a record current account deficit of $138.7 billion, and it is on a trajectory to run a current account deficit of above $550 billion for the whole year. The only means by which the U.S. can finance such a huge deficit, is through attracting foreign capital inflows into the U.S., which are drying up. "This goes back to the question of how can the U.S. fund its fiscal and current account deficits," Bryan Smith of Barclays Global Investors said Nov 18. "The Treasury report shows it's not going very well." Should foreigners reduce their inflows of capital into the U.S., and in fact, reverse it, and pull dollars out, the U.S. dollar would shatter, and along with it, the dollar-based world banking system.

At the same time, gold futures for December delivery rose on the New York Mercantile Exchange by $2.60, to $400.30 an ounce, which is the first time gold has crossed above the $400 level since April 1996. Jonathan Best, finance director of AnglGold Ltd., the world's second-biggest gold producer, stated, "We've been saying ... it wouldn't surprise us to see the gold price go through $400, because it is driven by dollar weakness."

Some "experts" have attributed the dollar's fall to the U.S. government's announcement this week of some restrictions on U.S. imports of Chinese textiles, but this analysis is an attempt to obscure underlying realities. However, it appears that a secondary cause of greater significance—intersecting the primary cause of the unsustainability of America's current account deficit and the over-valued dollar—is America's losing the war in Iraq. Mary David of Credit Suisse First Boston in London, stated Nov. 19, "The broader issue is how the U.S. is doing in Iraq. If there is further deterioration ... [it] will impact the dollar."

Even Wall Street Is Worried About Machine-Tool Shutdown

A front-page article in the Wall Street Journal Nov. 21 highlights the decimation of the U.S. machine-tool sector, at the heart of the nation's once-mighty economy. The National Tooling and Machining Association estimates that 30% of U.S. tool-and-die shops have shut down, in just the past three years, and expects many more to close in the next few years. Manufacturers' orders for machine tools have plummeted 63% during 1997-2002; and in the first nine months of 2003, have fallen 16% from the level in the same period last year. Machine-tool makers produce the metal-cutting and -forming machines (such as dies and molds), used by manufacturers to make everything from televisions to cups, from car doors to surgical devices.

The collapse of the machine-tool sector, the Journal warns, also endangers national security. Unmanned drones and body armor for troops in Iraq, consists of composite materials made using special molds and advanced machine tools. Ingersoll, which recently declared bankruptcy, was one of only two U.S. companies that made tools needed to produce components of stealth aircraft.

As an example of the destruction, the Journal cites the case of Ernst Buchmayer, the head of Western Industrial Tooling in Redmond, Washington, who is depleting personal savings in order to keep his machine shop operating. He has already slashed more than 50% of his workforce, from 55 workers to 25. Sales have plunged 70% from their peak in the 1990s, to just over $3 million in 2002, when the company lost $500,000.

The plunge in machine-tool orders reflects factory bankruptcies and manufacturers' moving of production to countries such as China, under the paradigm down-shift to a predatory consumer society, dependent on cheap labor overseas. Manufacturers are demanding low-cost machine tools. As a result, some U.S. toolmakers, Buchmayer notes, are forming joint ventures with companies in China. Buchmayer's newest company client, has outsourced manufacturing to Singapore.

Ford, GM Demand WalMart-Style Price Cuts from Suppliers

Top U.S. automakers Ford and General Motors are demanding steep price cuts from their parts suppliers, in a move reflecting the broader industrial breakdown, and likely leading to more job and wage cuts, and outsourcing of engineering work and product development, the Detroit News) said Nov. 18. The struggling automakers seek to slash purchasing costs and boost profits, in order to offset the painful impacts of rising rebates and low-cost financing deals.

In early November, Ford executives told 100 of the company's top suppliers, that prices eventually must meet the industry low, which is charged by suppliers based in low-wage countries, such as China. As a first step, suppliers—led by Delphi, TRW Automotive, and Visteon—must cut prices by 3.5% by Jan. 1, 2004. Then, Dearborn-based Ford wants suppliers to slash design costs by 20% compared to 2003 levels. By the end of next year, suppliers must reduce the price gap with lowest-cost firms by a "minimum" of 50-75%.

Detroit-based GM threatened that if a supplier's price were found to be higher than that of its European or Asian rival, the supplier would have 30 days to apply corrective measures—or it would not lose its business with GM.

GOP Newsletter Highlights Incredible Shrinking U.S. Middle Class

The Nov. 17 issue of the GOP-linked newsletter, The Big Picture, featured a lead story by Richard Whalen on the collapse of the American middle class, citing a recently published book, and the Nov. 8-14, 2003 special issue of The Economist, on the U.S. economy. Summarizing the London Economist story, Whalen wrote, "We Americans are working ourselves to death and borrowing ourselves into bankruptcy to pay for wildly overvalued housing and 'good' schools, falsely promising secure middle class status, income and lifestyles for our children and ourselves." The Economist study noted that, while in 1982, Americans and Europeans worked the same number of hours a year, now Americans work 300 more hours, with an average 45-hour work week and four-six hours mandatory overtime.

Moreover, "One hundred million Americans shop at Wal-Mart, and many of them are forced to live from paycheck to paycheck," according to the Economist. The giant retailer now finds a mid-month dip in sales from the 14th of each month to the 16th, even in purchases of essential food and pharmacy staples. Consumers are tapped out. "The consumer's liquidity crisis is the worst that Wal-Mart has seen and is the most pronounced in the last five to seven years," writes Wall Street retail analyst Bill Dreher, as reported in Barron's."

"The disturbing news from the outwardly prosperous U.S. is that America's middle class is going broke at an alarming but little-noticed rate," Whalen also notes. "Between 1981 and 1999, one in seven of America's seemingly most solid families—married, middle class, middle income and in early middle age, with children—was being forced to file for bankruptcy.... This year, more people in the U.S. will end up bankrupt than will graduate from college, be diagnosed with cancer or suffer a heart attack." Those alarming statistics came from a recently published book, The Two Income Trap: Why Middle Class Mothers and Fathers Are Going Broke, by Harvard law professor Elizabeth Warren and her Wharton MBA daughter, Amelia Warren Tyagi. Whalen concluded by reviewing the "Mafia-like" usury policies of credit card companies, concluding, "The two-income debt-trap problem has long since grown beyond individual irresponsibility and profligacy. A systemic bias now pushes vulnerable middle-income Americans into over-borrowing and bankruptcy."

Broder: Economic Recovery Celebrations Are Premature

Even syndicated columnist David Broder reports that the celebrations for the so-called economic recovery that followed the "Snow job" report of a 7.2% increase in U.S. gross domestic product, is premature. Writing in the Washington Post Nov. 16, Broder observes that, in the real world, state budgets, and programs funded by them, are being devastated, because states are undergoing severe budget crises.

* Arizona's Joint Legislative Budget Committee staff reports that, "without smoke and mirrors, fund transfers and other gimmicks used to balance the 2004 budget, revenues for fiscal 2005 will be about $961 million less than anticipated spending."

* In California, the Associated Press reports that, "to solve the state's budget problem and help pay for new school construction, voters may face a March ballot featuring more than $30 billion in proposed bonds—by far the largest amount ever put forward on any statewide ballot." Though Broder does not say this, this is on top of $10.7 billion in outstanding California bonded debt. Meanwhile, doctors are suing to stop a 5% cut in reimbursements for services to 6.5 million Medicaid payments. The doctors' lawsuit says the new cut "is being imposed on a system already in crisis." The state Transportation Commission says that expected lower gas receipts mean a five-year moratorium on new highway or transit construction. This is what Beast-Man Arnie will have to deal with.

* In Connecticut, Republican Gov. John Rowland told the Associated Press that, "We don't see the revenues to the state picking up until next year. We're not going to have any easy sailing budget-wise for at least two years."

* In Iowa, Democratic Gov. Tom Vilsack is rescinding a $1.6 million cut in the budget of the Department of Public Safety because of his discomfort at learning "there are fewer troopers on the road than there were 30 years ago." Vilsack said he would have to cut elsewhere to make it up, but he could not say where.

* In Michigan, Democratic Gov. Jennifer Granholm is touring the state, seeking ideas about where to cut spending and deal with a $920 million shortfall. She is raising private money to pay her travel expenses.

* In President Bush's home state of Texas, 54,000 children have been dropped from the Federal-state health insurance program, under new regulations from Austin.

Broder concludes that "the celebrations of economic recovery in Washington, may be as premature as that 'Mission Accomplished' banner hung behind Bush on the USS Abraham Lincoln to hail the end of major combat in Iraq."

More Americans Lack Health Insurance

Some 43 million Americans—15.2% of the population—were forced to go without health insurance in 2002, according to the Census Bureau of the U.S. Commerce Department. State budget cuts are making matters worse: In Texas, Gov. Rick Perry cut state subsidies for health insurance as part of a larger set of cuts, to close a $10 billion budget gap, which will cost Texas $500 million in Federal matching money, and is expected to further spur the rise in the number of uninsured.

A growing share of those without health coverage are middle-class families whose annual wages are insufficient to cover the cost of health-insurance premiums. Examples abound of health insurance rising so high that low income families have to drop it.

According to the Commerce Department, one-third of all foreign-born are without health insurance coverage.

Touted IT Sector Lost Over Half-a-Million Jobs in 2002

U.S. employment in the Information Technology (IT) sector dropped 8% to 6.0 million in 2002, from 6.5 million workers in 2001, the American Electronics Association reported. In addition, AEA warned that more than 200,000 jobs will be lost this year in electronics manufacturing, communications services, software, plus engineering and tech services.

The largest decrease in jobs was in electronics manufacturing, which fell by 233,000 jobs (or 13%), representing more than half of all tech jobs lost between 2001 and 2002—intersecting the industrial breakdown.

AEA denounced budget-cutting in education and R&D. AEA's president and CEO William Archey lamented the "decline in basic research, particularly in technology, by the federal government." "We worry that we have eaten the seed corn of Federal research of 20 and 30 years ago; that is not being replenished."

All but three states lost IT jobs in 2002, led by California and Texas.

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