In this issue:

Bank of Japan Goes Wild with Currency Interventions

Bundesbank Chairman Warns of Global Risk from U.S. Deficits

Mahathir: Trade Oil in Gold Dinars, Not U.S. Dollars

High Debt Places Millions of Britons 'At Risk'


From Volume 3, Issue Number 4 of Electronic Intelligence Weekly, Published Jan. 27, 2004

World Economic News

Bank of Japan Goes Wild with Currency Interventions

Last year, the Bank of Japan, authorized by the Japanese Finance Ministry, spent 20.1 trillion yen (about $188 billion) for interventions on foreign-exchange markets, in a desperate attempt to keep the yen from rising too fast against the dollar. This amount was not only an historic high, but triple the previous all-time record. Nevertheless, the dollar has plunged to the lowest level against the yen in three years. All of the 2003 interventions are probably nothing against what's going on right now. According to a recent report in the Japanese daily Yomiuri—the official data will be presented much later—Japan has already spent another $56 billion on currency interventions during the first 18 days of the new year.

In order to make these interventions, the Japanese Finance Ministry first has to borrow money, which is then used to buy dollar assets through the Bank of Japan. For the current fiscal year, which ends March 31, the Japanese government has already used up its entire 79-trillion-yen borrowing limit for currency interventions. In the new fiscal year, the limit will be nearly doubled, to 140 trillion yen. In the meantime, the government relies on short-term credits from the Bank of Japan for its currency operations. On Jan. 14, the BoJ granted the government a first injection of 5 trillion yen (almost $50 billion). As a byproduct of these operations, the interest rate on short-term interbank borrowings on the same day plunged to minus (!) 0.30%, which is an all-time record low for Japan.

Another consequence of the currency interventions is the fact that Japan has now by far the biggest holdings of U.S. Treasuries—$525 billion—of any country outside the United States. Japanese Finance Minister Sadakazu reported on Jan. 20 that by the end of the fiscal year, Japan will have about 8 trillion yen ($74 billion) in unrealized losses on its foreign-exchange holdings, following the sharp decline of the U.S. dollar.

Bundesbank Chairman Warns of Global Risk from U.S. Deficits

In a speech at the traditional New Year's reception for the northern German bankers in Hamburg Jan. 19, Juergen Starck, vice governor of the Bundesbank, departed twice from his usual "everything is under control" rhetoric, to warn of "risks" that cause grave concern.

Starck mentioned "world economic imbalances, which are manifest predominantly in the dual deficit of the USA. It is unclear, how long and under which conditions the rest of the world is going to finance the rising balance of payments deficit of the USA, and what medium- to long-term influence the high budget deficit will have on the U.S. and worldwide interest rates."

Starck furthermore noted that the current flowing supply of liquidity to global financial markets, which has also led to a "massive increase of volumes and pace of transactions," could "favor the emergence and growth of bubbles, for example on real estate and bond markets, for the time being."

As Starck certainly attended the Bundesbank event with U.S. Federal Reserve Board chairman Alan Greenspan in Berlin last week, his remarks seem to reflect the impact of LaRouche associate Jonathan Tennenbaum's intervention, and Greenspan's admissions of crisis symptoms, in his exchange with Tennenbaum there.

Mahathir: Trade Oil in Gold Dinars, Not U.S. Dollars

Trade oil in gold, not dollars, former Malaysian Prime Minister Mahathir bin Mohamad told Saudi Arabian officials on Jan. 18. Speaking at an economic conference in Jeddah, Saudi Arabia, Mahathir noted: "The price of oil is $33, but the U.S. dollar has declined by 40% against the euro, so you're effectively getting $20 [worth]. So you're being shortchanged." He again presented his proposal that countries should tally their total annual imports and exports, and settle the difference, at the end of the year, in "gold dinars."

Mahathir further warned Saudi Arabia against joining the World Trade Organization (WTO): "Everybody should be careful before joining the WTO, because it is not all positive. It can be very negative if you don't handle it properly. They try to impose their agenda without regard for some other countries."

High Debt Places Millions of Britons 'At Risk'

Millions of Britons are "at risk" from high personal debt levels, warns Britain's Financial Services Authority (FSA) in its "Financial Risk Outlook for 2004," released on Jan. 20. The report states that a large number of British households have overestimated their ability to repay their debts, and even a 1% rise in interest rates could force families to cut spending or sell their homes. There is already mounting evidence of financial stress, such as an increase in cash withdrawals on credit cards, and this could get much worse once interest rates or unemployment rise. "There are signs that some households have already borrowed more than they can comfortably afford. Households may begin to reach the limits of their ablity to borrow relative to their income and a small change in borrowing costs or household outgoings may have a significant impact."

On the very same day, the OECD put out its latest "country report" on Britain, warning that the British real estate bubble is about to burst, and this could lead to a "dramatic decline in private consumption."

Spanish Personal Debt Rises to Record High

Here is a short example of "Sancho Panza" accounting in Spain, according to El Mundo Jan. 21, in the article "Spanish household indebtedness for the first time above 500 billion euros." According to the Bank of Spain, the indebtedness of Spanish households rose for the first time in history, above 500 billion euros, in the third quarter of 2003, representing a dramatic 14.7% rise compared to the same period the year before. The main trigger for the rise of household indebtedness was the low level of interests rates and the rise in home prices, luring people into expanding consumer credit and mortgages.

El Mundo claims that all of this is no problem, because in the same period, the financial assets of Spanish households went up by 12.6% to 1.219 trillion euros as stock prices recovered last year. Therefore, the households' "net financial wealth" grew in the second consecutive quarter, reaching 719 billion euros.

The problem, of course, is that the assets are concentrated among the highest income classes of Spanish private households, while the lower income classes are sitting on most of the debt. And what happens once interest rates shoot up and home prices drop?

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