ECONOMICS NEWS DIGEST
Mexico Beware: 'Heed the Lesson of the Enron Debacle'
On April 13, EIR economics specialist John Hoefle, a collaborator of Lyndon LaRouche, issued a memorandum called "Heed the Lesson of the Enron Debacle: Stop Energy Privatization. Re-Regulate in the Public Interest," as a discussion document for opponents of energy privatization in Mexico and other countries. More than a year before Enron's bankruptcy, Hoefle and EIR were warning U.S. policy makers in Washington, and California, of the disaster energy deregulation would bring. The Calfornia energy crisis, and the Enron collapse have become leading examples of why Americans " should have listened to LaRouche." Here we excerpt Hoefle's memo. - * * * -
When the financial oligarchy began pushing energy deregulation in the United States in the 1990s, economist Lyndon LaRouche warned that such a policy would be an unmitigated disaster, triggering a deadly combination of decreased capacity and higher prices. Any nation which tolerates such a policy, he warned, would be committing economic and political suicide.
On Feb. 4, 2001, as the California energy crisis worsened, LaRouche gave a telephone-address to a seminar there, near the Salton Sea:
"To understand the cause of crises such as that striking the West Coast of the U.S.A. today, we must recognize these developments as the predictable outcome of a systematic wrecking, begun by the pro-Malthusian Carter Administration, of that post-1929 system of regulation, which had been established, initially, by cooperation between the administration of the outgoing President Herbert Hoover and the incoming President Franklin Roosevelt. The present crisis, as typified by the California case, has been the result of overturning those rules of bankruptcy and general economic regulation, upon which the 1933-1965 economic recovery and prosperity of the U.S. economy had depended."
Noting the worsening energy hyperinflation ... LaRouche stressed, "The most devastating impact has been felt in the area of production and distribution of electricity, hitting hardest in what has become the most vulnerable sector of the national economy as a whole, the California-centered West Coast region."
LaRouche's recommendations for re-regulation were issued in February 2001, as a mass 24-page pamphlet, which was printed in several hundred thousand copies. - Background: 'Controlled Disintegration' -
LaRouche identified the deregulation and privatization movement, as part of the "controlled disintegration" plan pushed over decades by certain anti-nation-state political/financial interests, as a mechanism by which the industrial power of the United States would be replaced by a de-industrialized "Information Society," based upon financial speculation.
During the 1970s, the Council on Foreign Relations in New York City published this perspective in what became a 30-volume report, Project 1980s, outlining their strategy in detail. Included was the following statement of intent: "A degree of controlled disintegration in the world economy is a legitimate objective for the 1980s and may be the most realistic one for a moderate international economic order."
Among the leading individuals associated with this outlook was CFR leader Paul Volcker, who, as the new chairman of the Federal Reserve Bank System, in October 1979 began hiking up interest rates, reaching an incredible 21.5% for prime-rate borrowing in 1980. These rates were intentionally deadly to industries, agriculture, and productive project investments. While industry collapsed, Wall Street speculation thrived.
This "disintegration" policy was a deliberate step backward.... In short, it was part of a plan to return the world to the feudal era, where the empires ruled, and the common man had a status not much higher than cattle.
The entire world saw what happened. Under a combination of political pressures and financial incentives, a corrupt U.S. Congress abdicated its responsibility to protect the General Welfare of the People, and systematically stripped from U.S. law, the protections which had been passed during President Franklin Delano Roosevelt's political war with the international bankers in the 1930s....
1993: In January, a ruling was made by the Commodities Futures Trading Comission that it would abandon any regulation of over-the-counter derivatives--futures of any kind, including related to energy markets. Enron lobbied strenuously for this, along with the other big names--Exxon, Mobil, British Petroleum, and J.P. Morgan, Chase Manhattan, and other banks. The Commission's Chairman who made the decision was Wendy Gramm, wife of Texas Senator Phil Gramm (R). Following her decision, she resigned, and joined the board of Enron, heading up its now-infamous audit committee.
1996: California became the first state to deregulate its energy system; Pennsylvania followed within a month, and many other states thereafter.
1998: In April, the deregulation of the electricity market began in California, opening up a new venue for derivatives speculation and price manipulation. Markets for natural gas had already been deregulated nationally.
1999: Congress repealed the last vestiges of the 1933 FDR Glass-Steagall Act, which regulated banking and finance, by passing the Gramm-Leach-Bliley Act.
2000: The Commodities Futures Modernization Act passed, specifically exempting derivatives by law, from regulation by the Commodity Futures Trading Commission.
2000-2001: The "California" energy crisis blew wide open, with prices soaring nationally in direct defiance of the 1935 Federal Power Act and Public Utilities Holding Company Act, which Federal regulators would not enforce, as the energy-privateer companies manipulated energy supplies and manipulated the markets.
The result of this process was that the energy pirates, led by Enron, bankrupted the state of California, looted the U.S. population, and laid waste to a growing segment of the U.S. manufacturing sector. Examples:
*California's overall energy costs, which were $7 billion in 1999, rose to $27 billion in 2000, then soared to $70 billion in 2001, because of deregulation, speculation and manipulation.
*California, throughout 2001, went from having a sizable state budget surplus, to a deficit of $4.2 billion. Early in 2001, the state had to directly purchase electricity on the deregulated "market," spending some $7 billion as of June, to do so. Over the summer, the state was forced into an urgent, new bond issuance of over $11 billion.
*U.S. citizens and businesses in 2000 paid $263 billion more than they did in 1999, for energy costs, due to the hyperinflated, deregulated energy markets. - Financial Piracy -
One sector which did benefit--or at least appeared to benefit for a time--was the financial sector, which skimmed off tens of billions of dollars of income from inflated energy prices, mergers and acquisitions, loans, derivatives and related financial maneuvers. In the first quarter of 2001, compared with 2000, the following hyper-profit rates of increase were posted by Enron and leading energy-cartel companies: Enron Oil and Gas, profits were up 448%; Reliant, 104%; Duke Energy, 51%; British Petroleum, 52%; MobilExxon, 44%; etc.
Of course, it came to pass that a large part of this income proved to be an illusion. Enron and its fellow pirates never made all the fabulous money they claimed to make; Enron was exposed as a giant financial scam.... [But] it is part of a U.S. corporate pattern, not an exception....
The same financial interests which suckered the U.S. into accepting deregulation are now assaulting Mexico, attempting to strongarm that country into abandoning its sovereignty and opening up the nation for California-style looting. - Take Heed from Those Who Know -
Mexico should heed the blunt warnings of those who came to acknowledge the destructive intent and result of "Enronomics":
*2001, January: In a speech Jan. 8, California Gov. Gray Davis called his state's deregulation scheme "a colossal and dangerous failure" which "resulted in skyrocketing prices, price gouging, and an unreliable supply of electricity--in short, an energy nightmare." Concluded Davis: "Never again will we allow out-of-state profiteers to hold Californians hostage."
*2001, June: "This is an emergency that threatens to bring down the California and national economy," was the characterization by Rep. Bob Filner (D-Calif.) of the crisis now battering the United States because of out-of-control energy prices. Filner also went to Mexico, and to the Philippines, repeating his warning.
In June, the U.S. Senate switched to Democratic control, and under fierce political pressure, the Federal Energy Regulatory Commission was forced into implementing some form of energy prices control--namely, re-regulation.
*2001, July: Nevada State Sen. Joe Neal (D-Las Vegas), on July 11, pointed to the blackouts hitting his state for the first time ever, and also Arizona, as evidence that, "Anything short of national re-regulation of energy won't work." Neal successfully led the fight for the April 2001 law reversing deregulation in his own state, but he warned that the chaotic "market" and distribution conditions in the West and elsewhere, are forcing the issue of national reregulation.
Over this entire period, there were repeated warnings from Lyndon LaRouche, whose analysis and re-regulation proposals were presented in written testimony to many Congressional hearings on the crisis.
On a Leon, Guanajuato radio interview May 28, 2001, Lyndon LaRouche urged Mexican citizens to grasp the context of the obvious energy and other financial scams: "The essential thing is that there's no possible way the present U.S. system, the present world system, can continue to function. It's doomed. Nothing can save it. You can save the nations, but you can not save the financial system. All the leading financial institutions of the United States are presently hopelessly bankrupt. You have the same situation in Japan, you have the same situation in continental Europe.
"What you can do, is, you can put the whole world through bankruptcy reorganization. That's the only solution, which means cancelling most of the debt, especially the financial derivatives and similar debt. Most of the foreign debt of the Ibero-American nations will have to be cancelled. And then, what this New Bretton Woods means, is, going back to 1945, to the legacy of Franklin Roosevelt, to create the kind of system we had between 1945 and 1958, and continuing into the middle of the 1960s."
'Bubbles' Greenspan in Desperate Denial About Housing Bubble
At the moment, the U.S. home real estate market is a leading edge of the process of the U.S. financial bubble. Home prices have no real connection to the value of the home, nor to the capacity of the home-owner to pay the enormous mortgage attached to the home. On April 13, Lyndon LaRouche laid out the conceptual basis: "Think of the houses themselves as virtually mere packaging material, wrappings whose most significant function is to conceal, rather than reveal the purely illusory physical basis for the recent spiral of seeming inflation in prices and mortgages. When you then consider the degree to which the inevitable collapse of the entire U.S. monetary-financial system has been postponed by, chiefly, the margin of fictitious financial gains in this real-estate/mortgage market, the extraordinary significance of Alan 'Bubbles' Greenspan's real-estate inflation in masking, temporarily, the underlying, worsening rottenness of the U.S. economy as a whole" is brought to light.
The upward spiral in home real estate can be gauged by the collective value of all U.S. households' home real estate holdings.
- Table I -
($ Trillions)
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Collective Value of All of U.S. Households' Home U.S. Real Estate Holdings
|
Value of CapitalizationAll Stocks Traded on Stock Markets
|
1980 |
$2.944
|
$1.514
|
1985 |
4.591
|
2.319
|
1990 |
6.608
|
3.537
|
1995 |
7.630
|
8.331
|
1998 |
9.203
|
15.57
|
1999 |
9.954
|
19.581
|
2000 |
11.065
|
17.566
|
2001 |
12.038
|
15.186
|
The collective value of all U.S. households' home real estate holdings rose rapidly during the decade of the 1980s, reaching $6.608 trillion by 1990. But between 1990 and 1995, the value of these holdings only rose by $1 trillion. However, since then, it has shot upward: just between 1999 and 2001, the collective value of all households' home real estate holdings increased by $2.084 trillion, a rise of 20.9% during that time period. EIR estimates that 80-90% of that increase represents fictitious value.
Notice the change in the value of capitalization of all stocks traded on U.S. stock markets. Between 1995 and 1999, driven by the New Economy, this value rose from $8.331 trillion to $19.581 trillion. But with the rupturing of the New Economy, $4.5 trillion of the fictitious capitalization of stocks, has been wiped out.
The collective value of all U.S. households' home real estate holdings is now just $3 trillion less than the value of capitalization of all stocks traded on U.S. markets. The principal instrument whose enlargement is holding up the U.S. financial bubble, as LaRouche says, is the home real estate market bubble.
Insane! What Greenspan Told Congress
In his April 17 testimony before the Joint Economic Committtee, Federal Reserve Board chairman Alan Greenspan hysterically denied there was any possibility that the U.S. housing bubble could burst, going so far as to claim that no such bubble exists. But, in reality, as Lyndon LaRouche has warned, the bursting of the mammoth real-estate bubble could sink the U.S. economy overnight.
Greenspan stated, "The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock-price bubble is imperfect." Greenspan tried to make a distinction between the housing market and the stock market, and offered ridiculous reasons why a housing bubble could not exist, such as the fact that when a home-owner sells his home to realize a higher price, he must move out, and this "entails significant financial and emotional costs." Therefore, he built to his main point: The housing market is "scarcely tinder for speculative conflagration."
All this may indicate that Greenspan is, aware, on some level, that the housing bubble is indeed tinder for such a development; probably discussion of this process, led by LaRouche's assessment, is lively, behind the scenes.
What Recovery? U.S. Economy Collapses Further
*Delphi Corp., North America's largest auto-parts maker, plans to cut another 6,100 jobs, with a $51-million loss in the first quarter of 2002, due in part to losses in its pension funds' investments, and relying for 67% of its sales to General Motors.
*Boeing Co., the world's biggest aerospace firm, may cut "a couple thousand" more jobs, amid a $1.25-billion loss in the first quarter of 2002--its first quarterly loss in more than four years--mainly due to costs for the purchase of the satellite business from Hughes Electronics. Earnings plunged 50% at Boeing's space unit.
*Ford Motor Co. lost $800 million in the first quarter of 2002, as U.S. sales fell 12%, the biggest drop among the six largest automakers, and global sales fell 7%. U.S. marketing costs, including incentives, rose to 15.7% of company revenue from 12.2% a year ago.
*IBM had a 37% drop in its original equipment-manufacturing business, for sales to technology companies, with overall sales falling by 12%, down in nearly every product category, causing first-quarter earnings to plunge 32% to $1.19 billion, from $1.75 billion a year ago.
*Tellabs, a phone-equipment maker, will cut another 1,200 jobs, and close a factory in New York, as first-quarter profit plummeted nearly 80%, to $5.3 million from $122.5 million a year ago. Sales fell 50% to $371.5 million, from $772.1 million a year ago.
*Anchor Glass Container Corp., the nation's third-largest manufacturer of glass beverage containers, has filed for bankruptcy protection.
Telecom-Sector Meltdown Update
*SBC Communications, the second-largest U.S. local phone company, plans to cut an additional 4,000 jobs during the remainder of the year, after cutting 4,000 jobs in the first quarter, following an $81-million loss in the first quarter of 2002, the first quarterly loss in five years, as corporate customers spend less.
*Nortel Networks, North America's second-biggest maker of phone equipment, will cut another 3,000 jobs, as first-quarter sales tumbled 49%, compared to a year ago, creating a $841 million loss.
*Qwest Communications, the top local phone company in 14 Western states, will cut another 2,000 jobs, and is in talks to sell its Yellow Pages directory business for $9 billion, to reduce its $25 billion debt.
*Nokia, the world's #1 mobile-phone maker, plans to cut 625 jobs, or 9% of its U.S. workforce, in Texas, as first-quarter profit declined 11% from a year earlier, due to a drop in demand for cellular phones.
*NTelos will cut 200 jobs, or 15% of its workforce.
U.S. Layoffs, Plant Closings, Bankruptcies This Week
*Exide Technologies, the world's largest automotive battery maker, filed for bankruptcy protection on April 15, facing default on $2.5-billion debt. Exide traces its history back to Thomas Edison.
*General Motors temporarily shut down its Detroit-Hamtramck Assembly plant for one week, starting April 15, affecting 3,200 workers.
*General Electric will eliminate 7,000 jobs at GE Capital, its financial services unit, as part of a move to cut costs by $1 billion.
*Worthington Industries started shutting down its steel plant in Malvern, Pa., one of eight plants it plans to either shut down or drastically cut back.
*Caterpillar, Inc., the world's largest maker of heavy construction machinery, announced that its first-quarter 2002 earnings fell 51% from 1Q 2001. Net earnings January-March were $80 million, down from $162 million 1Q last year. Leading the decline were a 10% drop in heavy machinery sales and an 8% drop in engine sales. The Illinois-based Caterpillar, which also designs and makes mining and agriculture machinery, is projecting 2002 sales to stagnate at the 2001 level, while pundits seeing a "recovery 'round the corner" say the outlook is too conservative.
*Xerox Corp., founded in 1906 as The Haloid Company, renamed Xerox in 1961, now with 78,900 employees worldwide, including 46,600 in the United States, is once again in danger of going out of business. The copier giant warned, in a filing with the Securities and Exchange Commission April 17, that it would default on $7 billion in bank loans due in October, if all 57 banks involved were not able to renegotiate terms of the loan. The circumstances raise "substantial doubt about our ability to continue as a going concern," Xerox said.
'Recovery' Rears Ugly Head Again--This Time in Southeast Asia
Among the many signs of "recovery" in Southeast Asia:
*Singapore: Exports of Singapore-made goods slid 17.3% last month over March 2001. Exports of electronics products, which account for two-thirds of all shipments of Singapore-made goods, fell 18% over the same month last year; and non-electronics products declined by 16%. In terms of markets, domestic exports to Singapore's top market--the U.S.--fell 23% last month from a year ago. Exports to the European Union were down by 22%, those to Malaysia fell by 11% and those to Japan slumped by 14%.
*Taiwan: Asian contract manufacturers fear loss of business due to the HP-Compaq merger. Hewlett-Packard's plan to buy Compaq Computer is forcing Mitac International and other Asian suppliers to brace for possible lost business as the merged company shifts orders. Compaq and Hewlett-Packard were the biggest foreign buyers of Taiwanese electronics last year, ordering about $9 billion and $5.6 billion worth, respectively.
Analysts say that if the merger is approved, the new company, displacing Dell Computer as the world's largest PC-maker, is likely to jettison some suppliers, and force others to accept lower prices. That may drive some companies out of business, analysts say. Many companies on the firing line are Taiwanese.
While Mitac makes desktop PCs for Hewlett-Packard, Hon Hai Precision Industry does the same for Compaq. Similarly, Hewlett-Packard's notebook computers are made by Compal Electronics and Quanta Computer; Compaq's are made by Inventec, Arima Computer, and South Korea's LG Electronics.
*Indonesia: Foreign investment here has fallen to nearly zero. Actual foreign investment last year fell to an insignificant $50 million, despite $9 billion in investments approved by the government, according to the head of the Investment Coordinating Board, Theo Tumion. For the first two months of this year, only $489 million was approved, as against $2.33 billion approved in the same period last year. The ADB said in its annual report, released in April, that there is a "widespread perception, that the policy environment for investment in Indonesia has turned harsh and unsupportive." Various "experts" are quoted calling for tax holidays and other "incentives" to foreign investors.
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