ECONOMICS NEWS DIGEST
Unemployment Swells: What Recovery?
During April, U.S. official unemployment shot up by 483,000 workers, bringing the official total to 8.594 million, as the U.S. Department of Labor's Bureau of Labor Statistics (BLS) announced May 3 (See IN DEPTH article: "The Mis-Fortune 500"). While forced to report this, the BLS report also contained the following ruse: an alleged increase of 43,000 workers on non-farm payrolls. This 43,000 increase is dubious, as we will show.
The U.S. government has been busy releasing a plethora of faked reports: On April 30, the Commerce Department reported an astonishing increase of 5.8% in Gross Domestic Product during the first quarter of 2002; on May 7, the BLS reported another increase of 8.5% in productivity. Both reports use wildly fraudulent methods in order to portray an economic recovery underway.
The reality is far different. As a recent piece in the German edition of the London Financial Times showed, foreign capital flows, which have held up the U.S. financial bubble, and thus, America's position as importer of last resort, are drying up.
The May 3 BLS report underscored the fraud of the "recovery": How can you have a recovery, with no jobs? When unemployment hit 8.594 million in April, that meant the U.S. unemployment rate rose to 6.0% that monthunemployment rate and level both being at their highest point in eight years. (And in reality, as EIRNS has shown, the official BLS unemployment figures are vastly understated.)
Manufacturing Jobs
The BLS report also highlighted the collapse of one of the most critical sectors of the economy: manufacturing. Since July 2000, some 1.742 million manufacturing payroll jobs have been axed from the U.S. economy, as manufacturing capacity has shut down. As mentioned above, the Bush Administration and the media adopted a sleight of hand to put a "positive spin" on the latest numbers. The BLS cited the fact that by the "establishment data series" in April, there was an increase of 43,000 workers in non-farm payroll employment.
But wait a minute! In March, the BLS had also reported an increase in employment of non-agricultural workers, at that time by 58,000only to revise that March figure downward, from plus 58,000 to negative 21,000! In February, the BLS reported an increase in employment of non-agricultural workers of 66,000, only to revise that February figure downward from plus 66,000, to negative 2,000!
Yet, in reporting on the employment situation in April, every media outlet, from Bloomberg to Reuters, reported the alleged 43,000 gain; not a single one reported the actual increase of 483,000 in unemployment in April, because reality would puncture the "recovery" hoax.
GDP Fraud
In addition, the government set out to manufacture growth, by putting out figures that claimed that Gross Dometic Product (GDP) grew by 5.8% during the first quarter. GDP is always a meaningless measure, based on underlying fraudulent methodological assumptions. But the Commerce Department outdid itself in the way it reported the first-quarter 2002 GDP. As we reported in EIW #9, last week, the Commerce Department faked private business inventories, in order to show a 3.1% "increase" in GDP, during during the first quarter of 2002.
Commerce used other fraudulent methods to make up the rest of the 5.8% growth figure at a time when the economy was actually contracting. Since "productivity" is based on GDP, with some adjustments, the reported productivity growth is based on the same hokum.
But reality is asserting itself. The May 7 German edition of the Financial Times reported that during the first two months of 2002, compared to the same period of 2001, foreign investors' purchases of U.S. stocks fell by 75%, and foreign investors' purchases of U.S. corporate bonds fell by 40%. The U.S. depends on foreign purchases to keep up the financial bubble, and to pay for its current account deficit, which is greater than $400 billion a year. Without such foreign purchases, the U.S. can maintain neither the bubble, nor its current account deficitand down comes the world financial system. No amount of fraud will hide that reality.
State Revenues Hit Bottom of Barrel; No Bailout from Taxes
Even before April 15 tax collections have been tallied, 40 of the 50 states, and the District of Columbia, have slashed expenditures in order to balance the budget before fiscal year's end, June 30, 2002. The National Association of State Budget Officers (NASBO), as of the end of March, estimated total state-budget shortfall had reached $40 billion. Budget-cutters have now had to slice deeper into the bone in crucial areas of education, health care, aid to towns and cities, or, in some cases, even public safety. As of the end of March, the National Conference of State Legislatures "State Fiscal Update" reported: 17 states had cut K-12 education programs; 29 states cut higher education; 22 cut Medicaid programs; 16 cut Temporary Assistance to Needy Families; 25 cut corrections; while 10 laid off state workers, three imposed furloughs on state employees, and five reduced employee benefits, including health-care coverage. Such cuts ultimately increase costs as they undermine the health, well-being, and future of the citizens.
Other balance-the-books accounting tricks used throughout the year have included: raiding "rainy day" funds (26 states); tapping other reserves (25 states and D.C.); taking special or dedicated funds (14), raising taxes (seven), boosting user fees (four), delaying capital improvement projects (13), and/or selling off tobacco settlement funds (17), all to get a one-time, quick fix to fill the budget holes that began appearing with the start of the fiscal year July 1, 2001. These desperate acts mean they will have no cushion to fall back on as the economy nosedives and the revenues vanish.
Most states have been anxiously waiting for April 15 tax collections, hoping against hope for a quick revenue boost. Although the final tallies are not yet in, those few states which have reported their revenue estimates, now project even bigger shortfalls. The likelihood of emergency legislative sessions to slash budgets further in these last six weeks of the fiscal year is probable in at least five to nine states, and it could be more. Depending on how short these monies come in, states that used every accounting trick, and cut to the bone, will, in all probability, be in emergency sessions in the fall, in the midst of elections, scrambling to find funds to keep government services running.
Here is a sample picture:
*California: Prior to April collections, state officials have scrambled to plug a $22-billion revenue deficit. On May 14, finance officials will release a revised report on the status of the state's finances, based on the April tally. However, an initial estimate shows that the personal income tax (PIT) component fell short of expectations by $2.876 billion, or 33% below forecast.
*Illinois: The $1.2-billion deficit, having already required across-the-board cuts, including state-employee layoffs, just got bigger. The state's Economic and Fiscal Commission, after totalling April collections, announced revenues for fiscal 2002 will be down $456 million, resulting in a $1.35-billion hole; lawmakers had assumed a $900-million gain when they passed the budget. Governor George Ryan is holding one-on-one meetings with legislators who have hit an impasse on dealing with the budget, while 4,000 AFSCME workers marched on the statehouse protesting the newly announced 1,800 layoffs, which are on top of 1,800 already made.
*Iowa: The budget crisis here is deemed to be "the nightmare that never ended," as April collections estimates trickled in, forcing the seventh downward revision of revenue estimates. Having already made two across-the-board cuts to the existing budget, causing an 8% reduction in the state workforce, the May 8 report of the state's Revenue Estimating Conference states, that Iowa has a revenue shortfall of $219 million this year, and should expect a $212.5-million one for the fiscal year starting July 1. Governor Tom Vilsack will call a special session of the legislature in late May.
*Michigan: On May 9, the House Fiscal Agency reported tax revenues are down $458 million in the first six months of the fiscal yearcompared to a year ago, a drop of 13.4%. It also reported that tax revenue for the last three months is down 24.6% from a year ago.
An example of the 30-year gutting of our manufacturing base is the plight of the formerly industrialized city of Flint. After two years of massive budget cuts, it still had a $38-million deficit, as of April. City officials, desperate to prevent a state takeover of the city, called for more bloodletting, proposing $9 million in additional cuts, including in the police force, ending ambulance service, out-sourcing waste collection, etc. The budget reduction plan also sought $1.25 million in concessions from the unions. Despite all this, by the end of April, Gov. John Engler was expected to put the city of Flint into financial receivership. Flint's general fund deficit reflects depression conditions. In one year, from June 2000 to June 2001, its deficit grew by 100%, from $13.09 million, to $26.6 million.
*New Jersey: Newly elected Democratic Governor Jim McGreevey, who took office in January, assuming a $2.4-billion budget deficit, immediately imposed across-the-board cuts to all agencies, laid off hundreds of state workers, used some accounting tricks to plug the hole, and even planned for a $500-million surplus to aid in dealing with next year's expected $5-billion shortfall. But April tax returns, still being tallied, changed the picture: It is now estimated there will be a $700-million shortfall which will swallow up the $500-million surplus and require $200 million more in cuts or new revenues.
*North Carolina: On May 3, the state's Budget Officer David McCoy issued a memo to all state agency department heads, projecting a budget shortfall of at least $1.5 billionhalf a billion more than expected. He ordered "additional expenditure restrictions" including, a hiring freeze, payments of only mandatory obligations of current payroll, utilities, debt service, and required state aid which is defined by statute as compulsory or required for public safety and welfare. Yet, for next year's budget, now being debated, $330 million in cuts are proposed to public-assistance programs such as Smart Start for infants and young children, prescription drug assistance to the poor and elderly etc.
*Pennsylvania: Governor Mark Schweiker, expecting a $667-million deficit, got a rude awakening on May 7, when top budget officer Robert Bittenbender announced a $1.2-billion deficit based on the results of lackluster April returns. For now, the state plans to loot its "rainy day" fund to cover the hole.
*Rhode Island: A state with a relatively smaller budget just got a hole blown through it when April collections came in $83 million below target. Overall revenues for the year are off by $119 million from a year ago. The shortfall may result in cancelling a promised 4.5% raise to state workers, cuts to state programs, as well as withholding payments to cities and towns.
*Tennessee: News of April's tax collections, reveal the state is experiencing a negative 3.25% rate of growth in revenues. The shortfall for the fiscal year is now estimated at $475 million. Revenues from tax on stock-and-bond dividends were down 26.5% over last year. Lawmakers expect to heavily drain reserve funds to get to June 30. Based on a projected revenue growth rate of 1.8% to 2.3%, a scant $100-140 million in new tax money for state programs can be expected. This is far short of the $550 million required, and points to a train wreck about to happen.
O'Neill: U.S. Government May Default on National Debt
U.S. Treasury Secretary Paul O'Neill warned that the government could default on the national debt, unless Congress raises the debt ceiling by $750 billion, above the present limit of $5.95 trillion. "If we run into the ceiling, that's really bad," as it "casts a shadow on the good faith and credit of the United States," he said in a speech to the Republican Main Street Partnership, AP reported May 8.
The U.S. Treasury has shifted funds from the Federal retirement system, to avoid hitting the debt ceiling in mid-May, but those maneuvers won't work in late June, raising the prospect of a default on payments to holders of government bonds.
Whether Congress will comply in raising the debt ceiling in the next two weeks is uncertain. What is more likely is that Treasury will juggle trust funds, or tinker with Treasury auction schedules, to keep the government operating. But Treasury officials realized last week (after tallying tax receipts), that the shortfall is so great that, by June 28, when the U.S. government must make $60 billion in semi-annual interest payments to trust funds, primarily Social Security, the juggling act will be overthe government will not have the funds to meet the debt.
"The end of June is really the end of the party," admitted Bush Administration Undersecretary of the Treasury Peter Fisher. "Congress [must] do this before the end of June," he insisted, adding somewhat hysterically: "We expect they are going to do it before the end of June. They need to do it before the end of June." The House Ways and Means committee's top Democrat, Rep. Charles Rangel (NY), was not so sure: "No one wants the government to default.... But the people and their representatives have a right to know how the Bush Administration plans to get the nation out of this fiscal mess before it authorizes a debt ceiling increase."
Dollar Slide Signals Trouble for U.S. Economy
"Time Is Running Out for the Dollar," headlined an op-ed by Paul Craig Roberts, in the Washington Times May 8. Roberts writes that the U.S. current account deficit is running about 4% of GDPor approximately $1 billion a day. For a number of years, this deficit was accompanied by a strong dollar, but now, the strength of the dollar may be coming to an end.
What will happen to the dollar when foreign investors decide not to hang onto U.S. holdings, he asks, or when they own the economy? A fall in the dollar, relative to foreign currencies, will raise the cost of what are now cheap goods from overseas, even creating political instability, as people find it harder to pay for what they need. "If crisis a arrives, it is a good bet Washington will have no clue," he concludes.
Outside of the publications associated with Lyndon LaRouche, this is the first op-ed or article to appear in the U.S. press, addressing the dollar slide against the euro and the yen.
Consumer Credit Zooms Through the Stratosphere
Outstanding consumer credit rose by $4.6 billion in March to a total $1.69 trillion, the Federal Reserve said on May 7. The increase in borrowing was led by a $3.1-billion jump in non-revolving credit, including loans for cars and vacations, while revolving credit, such as that on credit cards, rose by $1.5 billion.
German Economist: America Is Delirious with Debt
Nor are America's economic tribulations going unnoticed in Europe, as indicated by the headline of a half-page guest commentary"America and the Delirious Debt"written by the former Dresdner Bank chief economist Kurt Richebaecher, and published in the leading German business daily Handelsblatt May 3. Richebaecher points to the barrage of accounting tricks which are now routinely being used by the U.S. government, to fabricate the "recovery" hoax. As an example, Richebaecher indicates the monthly "increases" in employment figures or industrial orders which are being engineered by simply revising downward, the figures for the previous month. Or, a relatively small $1.5-billion increase in corporate computer sales during the fourth quarter, is transformed into a $20.3-billion increase by sophisticated "adjustment" techniques.
At the same time, he says, the ugly reality of the U.S. economy is still being neglected: "the monstrous discrepancy between money and credit expansion and the growth of gross domestic product." In spite of stagnating incomes, U.S. private households increased their debt burden by another $610 billion, but only one out five of such borrowed dollars resulted in consumption. In the year 2001, U.S. Gross Domestic Product increased by $235.4 billion, but the debt of consumers and non-financial corporations increased by $1 trillion.
On top of this, the financial sector borrowed an additional $916 billion. Much worse was the turnout during the fourth quarter, when the annualized net borrowing of households, corporate, and financial sectors amounted to $1.916 trillion, compared to a measly $38.4 billion increase in GDP.
Richebaecher emphasizes that we are obviously not dealing here with a usual inventory-cycle recession, but instead with "the most severe profit and capital investment crisis in postwar history, which has its roots and is still being driven by an excessive generation of debt in particular for the use of consumption and financial speculation."
Richebaecher was co-speaker with Lyndon LaRouche at the Nov. 5, 2001 EIR seminar in Berlin on the global economic/financial crisis.
Documents Prove Enron Manipulated California Energy Prices
Internal documents handed over to the Federal Energy Regulatory Commission (FERC) and released May 6, provide details of how Enron, under cover of deregulation of electricity, created and carried out a corporate conspiracy to drive up energy prices in California last year. In testimony before Congress in April, California Public Utilities Commission (PUC) head Loretta Lynch charged Enron with creating imaginary shortages, through multiple sales of the same power between its own subsidiary companies, and fraudulant sales of power to create congestion on the state's transmission grid. Enron even provided fanciful names to these shenanigans, likely taken from movies and videogames.
For example, the "Death Star" strategy is described in internal memos, as having Enron collect payments "for moving energy to relieve congestion without actually moving any energy or relieving any congestion," according to the New York Times May 7. The "Load Shift" strategy, which generated about $30 million in profits in the year 2000, created the appearance of congestion through overstatement of the amount of power it was going to deliver.
As has been alleged by the state PUC, Enron engaged in "megawatt laundering," buying electricity in California at $250 per meagawatt-hour, the maximum under the price cap, and reselling it outside the state for nearly five times as much.
California Senator Dianne Feinstein (D) has reportedly asked Attorney General John Ashcroft to "pursue a criminal investigation to determine whether, in fact, Federal fraud statues, or any other laws, were violated." Numerous criminal investigations are also still underway in the state.
Not Just Enron: FERC Orders Power Sellers To Preserve Records
The Federal Energy Regulatory Commission (FERC) has ordered all power sellers to preserve records in electricity-trading strategies in California during 2000 and 2001, widening its investigation beyond Enron, to other energy traders who may have manipulated the state's deregulated markets for financial gain. The FERC notice, posted on the agency's website May 8, instructed all energy traders dealing in the California market to keep documents detailing "trading strategies that are discussed in" the three Enron memos. The memos, showing how Enron ripped off the state, were released by FERC on May 6. "Such material includes, without limitation, correspondence or memoranda discussing trading strategies or correspondence between companies with respect to transactions that are part of such trading strategies," the FERC notice said.
SEC Plans Formal Probe of Dynegy Natural Gas Deals
The Securities and Exchange Commission (SEC) plans a formal investigation of Dynegy Inc.'s natural-gas transactions, an upgrade from an informal investigation into deals that inflated how much cash the company generated from operations. The SEC will be able to subpoena documents or testimony about "Project Alpha," the agreement by one of Dynegy's partnerships to buy gas over five years from ABG Gas Supply LLC. Dynegy, which backed out of a deal last November to buy Enron Corp., recorded $300 million in cash from operations for the planwhich required a $300-million loan from Citigroup to subsidize the tradesand now Dynegy is reclassifying $300 million as coming from financing. Dynegy also reaped $80 million in tax benefits.
Texas Governor Proposes State's First Big Desalination Plant
Texas should build its first large-scale ocean-water desalination plant, Gov. Rick Perry (R) proposed April 29 at a San Antonio water plant, to provide desperately needed fresh water for the state. Perry is featuring the $208-million proposal in his "Controlling Our Destiny" program, which includes financing options and additional water measures. "It is not a matter of whether saltwater will one day be used as an abundant source for public use, but when," Perry said. "As a people, we must have the courage to look into the future and invest today in a better tomorrow. There is no greater untapped source of water than the ocean water which Texas can easily access." The population of Texas is projected to double over the next 40 years.
Perry said that financial assistance for water projectssuch as those proposed within the state's 16 regional water planscan go further with increased public-private partnerships and design-build authority.
He also proposed use of Private Activity Bonds, which are tax-free investment bonds. These bonds, frequently used for industrial projects, have been an underused source of financing to develop new water sources, Perry said. Under current state law, Texas will have more than $2.2 billion for Private Activity Bond projects over the next five years: "Even if we use half of that bonding money for water projects, not only can we fund a desalination plant, but a significant portion of important water projects needed across our state."
Without Desalination, U.S. and Mexico Face Standoff Over Water
A nasty "water war" could be fomented between Texas and Mexico, if smaller minds insist on "getting theirs" in the midst of a severe drought, rather than setting out to create more water, as Texas Governor Rick Perry has proposed. Texas farmers were to meet with U.S. state legislators on May 3 in the border town of Brownsville, to show them their dying fields, while the farms across the border in Chihuahua are allegedly green. The farmers are urging Congress to stall bills sought by Mexico (such as on immigration), until the dispute is settled. AP, which headlined its May 3 article "U.S. and Mexico in Standoff Over Water," quoted an irrigation manager from Mercedes, Texas, saying, "It's time to teach them a hard and bitter lesson" for "illegally" using Texas water.
U.S. officials estimate Mexico owes Texas famers 1.5 million acre-feet of water, under the terms of the 1944 treaty between the U.S. and Mexico. Mexican officials acknowledge they have not complied, but say it's physically impossible to meet their treaty obligations, because the water is simply not there. Both sides of the border have been suffering from drought for several years. For example, reservoirs in the state of Chihuahuawhose farmers have reportedly dared to expand cultivation of "thirsty crops" like corn and alfalfaare at less than 25% capacity, too.
Swiss National Bank Cuts Interest Rates; Dollar Fall Stalled
The Swiss National Bank cut interest rates, stalling a fall of the U.S. dollar. Bloomberg's spin on the story, was that the Swiss move, described as "capping gains in the franc," was read by speculators as a sign that the dollar had fallen too much in the past months. The Swiss get 45% of their GDP through exports, so the stronger franc was seen as a problem. Even Bloomberg admits that this will have only a temporary impact on the falling dollar.
German Industrial Production Falls; Unemployment Rises
German industrial production "unexpectedly" fell in March by 0.8% compared to the previous month, while unemployment in April rose for the 15th time in 16 months. The March production figures, released by the German Finance Ministry on Wednesday, are quite shocking in comparison to the level of one year ago: Total industrial output was down 11.2% and capital goods production down 15.4%. Production of durable consumer goods in March was 17.3% lower than one year ago. While industrial decline during the recent 12 months was much sharper in western Germany than in eastern Germanywhere there is not much left to cuteastern Germany was hit by a further 10.3% drop in construction output in March compared to last year. German Finance Minister Eichel describes this process as the early stage of a "recovery."
UK Manufacturing Shrinks at Fastest Rate in 20 Years
Manufacturing output in the United Kingdom faced its biggest decline in a decade, in 2001; however, during the first three months of 2002, this process accelerated even more. Government figures released on May 8 show that manufacturing production unexpectedly declined by 0.8% in March compared to February, a 6.8% drop over one year ago, marking the biggest year-on-year percentage drop in more than 20 years, since June 1981.
Even seven rate cuts by the Bank of England last year, which have brought short-term interest rates to the lowest level in 38 years, have failed to avert the disaster in the British industrial sector. Instead, the liquidity-pumping further boosted the British real-estate bubble. In April, housing prices in Britain rose at their fastest pace since 1988. According to Lombard Street Research in London, real-estate prices surged 13.8% within the last 12 months. This amounts to an asset-price increase of 300 billion pounds, compared to an annual disposable income, for all British households, of 700 billion pounds, and annual savings of just 35 billion pounds.
O'Neill Pushes IMF's 'Poverty-Making Machine' on Argentina
[See IBERO-AMERICA NEWS DIGEST]
Argentina Pays IMF at Demand of Bankers
[See IBERO-AMERICA NEWS DIGEST]
Foreign Banks Bolting From Argentina
[See IBERO-AMERICA NEWS DIGEST]
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