WORLD ECONOMIC NEWS
BIS Warns of Dangers of Asset Bubbles; Echoes LaRouche on 'Bretton Woods Regime'
In its latest "Working Paper No. 114," headlined "Asset prices, financial and monetary stability: exploring the nexus," the Basel, Switzerland-based Bank for International Settlements (BIS) calls on central bankers to rethink monetary policy and recognize that fighting asset-price bubbles is at least as important as fighting inflation.
After examining periods of financial bubbles in the last 100 years, the rather technical paper notes that contrary to the liberal dogma that bubbles can never be identified before they have burst there are indeed clear indicators for emerging bubbles, such as "sustained rapid credit growth combined with large increases in asset prices." In a thinly disguised swipe at U.S. Federal Reserve chairman Alan Greenspan, the BIS notes that once such indicators show up, central bankers, by failing to act, can create long-lasting problems: "Lowering rates or providing ample liquidity when problems materialize, but not raising them as imbalances build up, can be rather insidious in the longer run. They promote a form of moral hazard that can sow the seeds of instability and of costly fluctuations in the real economy."
Arguing that monetary policy can become a driver for financial instability, the BIS, known as the "Central Bank of Central Banks," also reviews the most important monetary regimes of the recent century. Echoing the words of Lyndon LaRouche, whose call for a New Bretton Woods system is well known in Europe, it notes that only under "the Bretton Woods regime" was there, at least for a while, "monetary and financial stability." This was not only the result of fixed exchange rates as such, but even more important of the accompanying "complex web of regulations" and "financial repression," which helped to constrain cross-border and foreign-exchange transactions. Due to financial deregulation and liberalization following the dismantling of the Bretton Woods system, "financial instability has re-emerged as a major policy concern."
Vivendi Posts $12-Billion Loss; Downgraded to 'Junk Status'
The disintegration of the world's second largest media company, the French-based Vivendi Universal, has begun. The company posted $12.2 billion in losses in the first half of the year Aug. 14, and needs a $10-billion emergency liquidation of assets to survive the next few months. By spending $77 billion on takeovers, former chief executive Jean-Marie Messier transformed the company from a 149-year-old established utility, into a rival of "new economy" giants like AOL Time Warner. Now that rivalry is of another kind: Vivendi is competing to post the biggest losses in corporate history. For the year 2001, Vivendi had already reported a colossal 13.6-billion-euro loss.
Even more worrying than these, are the short-term cash problems at the company. The new CEO Jean-Rene Fourtou, in a conference call Aug. 14, admitted a "liquidity problem," while Finance Director Jacques Espinasse said the company would have $5.5-billion refinancing requirements by the end of the year. In order to get cash, Vivendi is negotiating a $3-billion credit facility with its banks, and plans to sell at least 10 billion euros' worth of assets. However, the question arises, who, under present market conditions, would be crazy enough to give cash for worthless assets? As a consequence, Standard & Poor's downgraded Vivendi's credit and debt ratings to "junk status." Vivendi stocks the same day slid 20%, and were suspended from trading. Vivendi is the worst performing stock in the Dow Jones Euro Stoxx-50 index this year.
Dollar Skids Again vs. Yen, Euro; Fed Policy 'Worst of All Worlds'
Led by a sharp jump in the yen, the dollar weakened across the world Aug. 14, after the Federal Reserve's decision to leave interest rates unchanged. Dealers said the Fed's acknowledgment of economic risks ahead, while doing nothing about it, has eroded confidence that there will be a recovery in the United States. The dollar is at its weakest point against the yen in a month: Y116, down from Y120 earlier this month.
Japan's top currency diplomat, Haruhiko Kuroda, was quoted in Jiji Press calling the rapid yen rise inappropriate. According to one European bank, the slide in the dollar has prompted the Bank of Japan to telephone foreign-exchange desks to check currency rates, which often precedes intervention. "Word is going around from bank to bank," said one banker, that "BOJ is checking rates and advising people not to go home short."
"The Fed's statement is the worst of all worlds really, in that they're warning of the risks, but not prepared to do anything," said one trader. "The question arises that when they do, it might be too late." The U.S. Treasury also made a very large $20.3-billion coupon payment for August, and Japanese investors own some 11.5% of Treasury debt, so a lot of that is being sold for yen and repatriated to Japan.
Bank of Japan Governor Masaru Hayami, in an Aug. 13 Tokyo press conference, failed flagrantly in an attempt to talk up the dollar, reversing his previous comments about the currency's inevitable blowout. "The dollar is the key currency in the world," and "Everyone wants to hold dollars," Hayami announced. He said he was still confident that, barring unforeseen events, the dollar would remain firm. Hours later, the dollar collapsed.
Bank of Japan: Weak Dollar Undermines Hope of 'Recovery'
After five months of happy talk about "recovery" reports, the Bank of Japan said, in its Aug. 12 monthly statement, that Japan's economy "may already be losing momentum," due to the coming collapse of the U.S. dollar and markets. "Uncertainty regarding external conditions seems to have increased further," the BOJ wrote, due to the weak dollar and the collapse in global demand for IT goods. "Under these circumstances, it should continue to be heeded that further destabilization in the foreign-exchange and financial markets at home and abroad could easily exert a negative influence on the economy.... There is little momentum for a self-sustainable economic recovery in Japan," the bank admitted.
Indeed. Japan has only barely kept itself above water via a boom in exports to Asian countries that have been experiencing a temporary influx of hot money, due to the collapse of the U.S. stock bubble. This obviously can't last long. Japan's current-account surplus for January-June grew by a record 52%, the government announced Aug. 12, to $67 billion, due mostly to a 39% rise in the trade surplus to $49 billion. While imports slid, due to falling demand in Japan, exports to the rest of Asia rose 6%, covering a drop in shipments to the U.S. and Europe.
Mass Layoffs Hit Israel's High-Tech and Telecom Sectors
Comverse, one of Israel's largest telecoms, announced another 600 layoffs, one-fifth of the company's workforce, and the third such announcement in the past year.
"The company has a regular drill for mass layoffs a team of paramedics is brought in to deal with employees who faint, and the doors to the top floor of the building are locked so that the desperados can't get to the roof," says an un-named employee at the company.
Comverse is not alone: ECI Telecom is axing 220 jobs, after having already dismissed 1,500 employees in the last 18 months. Amdocs the same company that was accused of spying for the Mossad recently fired 900 employees. In the past period, 16,000 of the 80,000 high-tech workers lost their jobs.
Meanwhile, Israeli Military Industries is expected to lay off 1,000 workers, one-third of its workforce, and close down several factories.
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