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From the Vol.1, no.8 issue of Electronic Intelligence Weekly

ECONOMICS NEWS DIGEST

Mexican Senate Votes Down Energy Dereg: Victory for LaRouche Movement

One week after nationalist forces in Mexico took on the neoliberal policies of President Vicente Fox, by bringing in Nevada State Senator Joe Neal and Lyndon LaRouche's 2004 Presidential campaign Western States spokesman Harley Schlanger, to warn against the disastrous impact of energy deregulation in the U.S., the Mexican Senate voted down every initiative for privatization of electricity April 24, after a debate of more than four hours. Schlanger and Neal, who had also visited Mexico in 2001, were invited back by Marivilia Carrasco, chairman in Mexico of the Ibero-American Solidarity Movement (the LaRouche movement in Central and South America).

During the intense Senate debate, Sen. Manuel Bartlett of the PRI Party declared it "a victory for Mexico," while the PRI's Dulce Maria Sauri said the vote defines "the future of the country." It is clear that the LaRouche movement's interventions shaped the debate, especially LaRouche's frequent references to the U.S. Constitution's commitment to the "General Welfare," as the basis for all government policy: PRI Senator Genaro Borrego stated that what is at issue, "is the concept of a public service, and the essence of this is the right of all Mexicans to have electricity."

There is other breaking news, indicating a paradigm shift in the energy privatization/dereg area. See below.

Ontario Court Halts Privatization of Provincial Electric Transmission

On April 19, Ontario (Canada) Superior Court Justice Arthur Gans handed down a bombshell ruling that there can be no sell-off of Hydro One—the owner of the provincial electric transmission system, and also 18 local utilities. Hydro One is government-owned, and the suit was brought by two unions, the Canadian Union of Public Employees, and the Communications, Energy and Paperworkers. The Justice ruled that the government has no legal authority to go through with the privatization of public assets, without legislative approval. The government is now scrambling to appeal and proceed anyway. The red-hot issue is causing reconsideration of the entire energy-deregulation process begun in the province in 1998, when government-owned Ontario Hydro started to be split up, for picking off by the "markets."

California and Ontario Face Electricity Shortages

"What is likely to happen in 2004-05 could easily be a lot worse than the shortages of 2000," California Energy Commissioner Robert Laurie is quoted as saying by the Times of London of April 24. "It is logical to believe that the next step will be publicly owned power," he added. Laurie points to the fact that private energy companies have stalled on building new (natural gas) generating plants. In 2004, California will be in a crunch in which demand exceeds supply; the state already gets 25% of its electricity from out-of-state. Local jurisdictions and the California Power Authority may have to build and run generating plants.

In Ontario, Canada, the Independent Electicity Market Operator, a provincial government agency that oversees the power market, issued a report earlier in April warning that Ontario is at risk of energy blackouts over the summer months. The IMO warns that over the next 18 months, there will likely be periods of "negative reserve margins" of electricity, a phenomenon which could hit as early as June. In July, the IMO figures reserve capacity at 16% of total capacity needed for reliability, but there will likely be only 11.5%. Depending on the weather and other factors, there may be no shortages, but it's now a gamble.

Enron Continues To Disintegrate: Assets Going, Going...

Enron's assets are worth only half the $50 billion it reported when it filed for bankruptcy Dec. 2, according to a filing made on April 22 with the Securities and Exchange Commission. Enron said $14 billion in assets would have to be written off the balance sheet, with a "substantial majority" due to the bankruptcy, and a "material portion" due to "possible accounting errors or irregularities." And the company identified further "potential downward adjustments" of $8-10 billion in the value of hedges against its energy trading.

"No party should rely on any previously reported financial information of the company prior to the commencement of Chapter 11 cases, nor should any reader of this operating report place undue reliance upon the information contained herein," Enron warned in the SEC filing.

Telecom Meltdown: Leading the Way into the Virtual Recovery

Following the gloomy report by its Finnish competitor Nokia, the Swedish telecom equipment producer Ericsson, the world's biggest producer of mobile-phone networks, this week announced a further 40% meltdown of orders during the first quarter 2002. But it is not just European telecoms.

* Lucent, the biggest U.S. maker of telephone equipment, will cut about 6,000 more jobs, or 11% of its workforce, and said it does not see a return to profitability any time this year. Sales fell by 40% in the second quarter, to $3.52 billion, from $5.91 billion a year ago, leading to a $495-million loss—the eighth straight quarterly loss.

* WorldCom, the second-largest U.S. long-distance telephone company, saw its shares tumble 33% to the lowest level in almost a decade, after cutting its sales forecast for 2002 by $1.6 billion, and warning that earnings would be $1.4 billion less than expected. Standard & Poor's cut its short- and long-term credit ratings on $30 billion of WorldCom debt, and several brokerage firms downgraded their ratings on WorldCom stock; Credit Suisse First Boston slashed its rating to "sell."

* Avaya, a provider of voice and data networks spun off by Lucent in 2000, had a net loss of $63 million in the second quarter, as sales fell by 31% compared to a year ago.

Dramatic Shifts in Patterns of Farm Output: 'Global Sourcing' Ushered In

As this is being written, a conference committee of the U.S. Congress—after years of bad policies ("free trade, "freedom to farm," etc.) which have destroyed the agricultural economy—is expected to agree on some kind of relief.

Meanwhile, dramatic shifts are taking place in patterns of farm output, food-processing, and trade flows, connected to cartel repositioning and profiteering: The European Union is importing more and more grain from "cheap" non-EU sources; the world soybean production and export center is shifting to "cheaper" sources, such as Brazil and Argentina, and away from the USA; more U.S. meat and dairy supplies (not just fruits and vegetables) are coming from "cheaper" import sources.

*SOYBEAN PRICES AT 20-YEAR LOWS. As of 1990, the U.S. produced about 53 million tons of soybeans a year; and South America (mostly Brazil and Argentina) about 26 million tons. In 2001, the U.S. output had increased to 76 million tons, with South American output also reaching 75 million. Infrastructure has been built up accordingly for shipping, processing, and exporting. Soybean prices to the farmer have been hovering at 20-year lows (around $4.60 a bushel in the U.S.). To try to survive, some U.S. farmers are exploring plans to commute between cropping in Brazil and the United States.

Some Iowa farmers are cropping soybeans six months of the year at home, and six months in the U.S., as a way of "adjusting" to globalization. In recent years, U.S. "family-farm" operations, have grown tremendously, in order to become more "cost-effective," such that some farmers operate on acreage in several counties, and across state lines. Now, farm families are going even bigger: Reports from southeastern Iowa farm sources indicate that several big grain farmers cropping 2,200-5000 acres already, are exploring purchase and rental of farmland in Brazil, and will fly back and forth, spending six months in Brazil and six months at home, raising soybeans continuously.

*EU GRAIN IMPORTS SKYROCKET. The European Union (EU), the world's second-biggest grain producer, is now importing more grain than it is exporting, for the first time in decades. Just between August 2001 and April this year—nine months—imports were 6.5 million tons, compared to an average of 2.5 million tons per year in previous years—an increase of 260%. A speaker of the European Commission commented that farmers in member-states might be interested in higher prices, but "they must understand the Commission's interest in low prices." Farm organizations characterize the situation on the grain market as "a catastrophe"; prices are way below the minimum limit of 156 euros as defined in the GATT agreement, and the market is stuck.

*ARCHER DANIELS MIDLAND EARNINGS UP 26%. Revenue in the third quarter was up $5.33 billion for ADM, the largest soybean processor in the world.

*'OFF-SHORE' SOW FACTORIES. Smithfield of Virginia, the world's largest meatpacker, has set up "off-shore" sow factories in Brazil, Canada, Poland, and elswhere, for cheap sources of export product. Smithfield and the other cartel packers (Cargill, ConAgra, Tyson/IBP, ConAgra, etc.) have decreed that if Congress passes a farm law limiting their U.S. operations, they will move abroad. "Packers Set To Sail," was the title of the April Farm Journal article.

*FARMLAND NEAR BANKRUPTCY. Farmland Industries Inc., the biggest U.S. farm co-op, which operates through 1,700 local co-ops dealing in fertilizer, fuel (propane, diesel), grain, chemicals, etc., with an annual level of revenue in the range of $11.5 billion, is near bankruptcy. Farmland reported in its April 15 filing with the Securities and Exchange Commission (SEC), "Our liquidity is significantly limited. We could be required to seek protection from creditors in order to resolve our liquidity problems." In February this year, Farmland got a $150-million two-year loan, and a $350-million credit line, from a group of banks (Rabobank Nederland, U.S. Bancorp, Cobank ACB, Harris Trust and Savings—a unit of Bank of Montreal), led by Deutsche Bank AG. Farmland may not be able to make the first payment of $10 million, due on May 31, in which case, the co-op goes into default on both loans.

Since 1998, some 300 farm co-ops have been forced out of business by the worsening economy. Co-ops were first formed in the 1930s, when farmers set them up to share in profits from joint marketing and purchasing of goods.

Bloated Housing Market Set To Implode; Sink U.S. Economy

The imminent blowout of the huge U.S. real-estate bubble, could sink the U.S. economy and financial system virtually overnight. The bloated housing market has been built up, especially since 1995, by pyramiding mortages, and derivatives based on those mortgages, while liquidity came pouring in from the Federal National Mortgage Association, commonly known as Fannie Mae.

On April 13, Democratic 2004 Presidential pre-candidate Lyndon LaRouche explained how this worked: "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.

Now, with their obsession to delay, if only by an hour, a day, a week, the inevitable crash, Wall Street and Federal Reserve chairman Alan Greenspan have turned what once was "the American Dream" of home ownership, into a mortgage-based instrumentality to make home prices and mortgages rise, to keep the bubble growing (see below). In 1995, the collective value of all U.S. households' homes stood at $7.630 trillion. This was escalated to $9.954 trillion in 1999, and to $12.038 trillion at the end of 2001. This represents an increase in the collective value since 1995, of $4.408 trillion. Nearly all of this increase is fictitious.

The housing bubble has also been the basis for the consumer-driven "recovery," as the inflation in home "values" has allowed households to leverage cash from the imputed value of their homes, in order to spend that cash on "consumer purchases." Homeowners spent more than half of all home equity loans not on home improvements, but on paying down credit cards, buying new cars, etc.

When this bubble bursts, and there are already indications that it is leaking, home prices will fall by 25-50%. Trillions of dollars in fake real-estate valuations, which Greenspan built up over years, will disappear, taking with them the U.S. financial system.

Greenspan Proclaims: Dereg, Derivatives Have All But Ended Business Cycles

Speaking to the Institute of International Finance (IFF) via videoconference, Federal Reserve Board chairman Alan Greenspan stated April 23, "If the indications that the contraction phase of this business cycle has drawn to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect.... The obvious questions are, what has changed in our economy in recent decades to produce such resilience, and will these changes persist into the future?"

After promoting "access to real-time information," Greenspan warmed to what he believes are the two main factors which effected the "positive" changes: deregulation and derivatives: "The apparent increased flexibility of the American economy arguably ... reflects the extent of deregulation over the past quarter of a century." Then, "Certainly, if the energy sector were still in the tight regulatory fetters of the 1970s, our flexibility today would be markedly less. That the relatively recently developed [deregulated] markets for natural gas and electric power endured the Enron collapse without significant disruption was encouraging." This stands reality on its head: Deregulation was the driving force of the Enron speculative bubble!

"I need hardly remind this audience, Green-Spin-Doctor continued, "that one especially potent force for enhancing economic flexibility and resilience arguably has been the combination of deregulation and innovation in the financial sector [derivatives].... [Due to derivatives,] shocks to the overall economic system are accordingly less likely to create cascading credit failure."

Greenspan heaped special praise on the securitized instruments in mortgage-based derivatives that Fannie Mae et al. are spreading to prop up the housing and credit-card bubbles: "A major contributor to the dispersion of risk has been the wide-ranging development of markets in securitized commercial and residential mortgages, banks loans, and credit card receivables."

Greenspan emphasizes that "as a consequence" of all the different derivatives products, economic "cyclical episodes overall should be less severe than they otherwise would be."

While the Chairman admits that the high level of leverage in the economy could pose a problem, he also attacks the policy of what he calls "subsidies" to government-sponsored enterprises, referring to Fannie Mae and Freddie Mac. By this he means that because Fannie Mae and Freddie Mac have an implied U.S. government backing, they can borrow more cheaply when they borrow funds. But Greenspan is in agreement with a group that includes the Wall Street Journal, which favors a policy of having Wall Street financial institutions, rather than Fannie Mae, issue the same speculative, mortgage-backed securities derivatives, but on a so-called "private basis."

"Bubbles" Greenspan concludes his speech by praising the Commodity Futures Modernization Act of 2000 and the Gramm-Leach-Bliley bill as models: The former exempted energy derivatives from regulation; the latter overthrew Roosevelt's landmark 1933 Glass-Steagall legislation regulating the banks.

Indonesia's De Facto Debt Moratorium Shows Global Financial Collapse

The international banking community could not openly admit it, but Standard & Poor's lowering of Indonesia's sovereign credit rating to "selective default" came after what was, in effect, a debt moratorium. The rating downgrade was expected, as a consequence of the news, reported last week, that the Paris Club of government creditors granted Indonesia a debt moratorium, although carefully avoiding the use of that term, and the additional news that Indonesia's private bank creditors are expected to follow suit. The "restructuring of both principal and interest" on over $5 billion in debt due over the next 18 months, granted with little publicity, is a clear decision by the IMF-centered interests to prevent Indonesia from undergoing an Argentina-style collapse at this time.

The fact that there is still only a trickle of foreign investment, and a continuing flood of flight capital, would suggest that the Paris Club decision does not indicate any delusions that there is a solution to the massive debt crisis in Indonesia, but does indicate they are not willing to pull the plug at this time. Dorodjatun Kuntjoro-Jakti, the Coordinating Minister of Economic Affairs, released a statement saying that the Selective Default rating is "technical and temporary," and that Indonesia expects an upgrade as a matter of course in the near future.

Indonesia has accepted and implemented several IMF conditions, regarding privatization, cutting subsidies, and other matters, over the past year. Nonetheless, it is obvious to the rest of the world's indebted nations that the open declaration by Indonesia, ahead of the Paris Club meeting, that it could pay neither principal nor interest, led to the debt moratorium. This declaration leans in the direction of Lyndon LaRouche's advice to these nations, to use the debt weapon—i.e., that circumstances have reached the point where the impact of defaults by sovereign nations will be more devastating to the lending nations than to the debtors.

Indonesia Plans To Step Up 'People Exports'

Jakarta is planning on following the Philippines, by setting up a special agency to help export workers abroad, in an effort to increase foreign-exchange earnings annually, according to The Star of April 21. Foreign exchange earned last year from sending 738,000 workers abroad amounted to $1.1 billion. The target for 2005 is $5 billion.

The dimensions of "people exporting" could be several magnitudes greater than in the Philippines, however. Indonesia has a population of 215 million, with 35-40 million unemployed, and an additional 2 million entering the labor force annually. The Philippines' total population is approaching 70 million.

Disparity Grows Between Wealthiest 20% and Poorest 20%

Census Bureau data cited in reports from the Center on Budget and Policy Priorities and the Economic Policy Institute, both covered in the April 24 New York Times, show a growing disparity between the incomes of the wealthiest 20% of Americans and the poorest.

From the late 1970s to the late 1990s, the income disparity between the lowest 20% and the highest 20% of family income brackets, has increased in 44 of the 50 states. In five states—Arizona, California, New York, Ohio, and Wyoming—inflation-adjusted income among the bottom 20% of households actually fell over this period, while it rose rapidly among the top 20%.

In New York, for example, average income in the bottom 20% of households fell by about $800, or about 6%, over the 20 years, to about $12,600. During the same period, average income among the top 20% of households rose by about $57,000, or 54%, to about $162,000. This meant that by the late 1990s, the average income of the top fifth of households in New York was nearly 13 times that of the lowest fifth, up from eight times as much 20 years earlier.

Debt Levels Rising Sharply Among America's Elderly

For Americans ages 65 and older, the average debt per household has risen from $7,690 in 1992, to $20,302 in 2000, according to SRI Consulting Business Intelligence. While half of the $20,302 represents first-mortgage debt on primary homes, most elderly have already paid off their homes; the remaining half of the $20,302 in debt represents debt that the elderly have taken out to survive.

This corresponds to an increase in the number of bankruptcy filings by elderly Americans. In 1991, some 23,890 older Americans filed for bankruptcy; in 2001, some 82,207 older Americans filed for bankruptcy—an increase of 244%.

The deterioration in income, and the inability to cover medical expenses, is a combination that strikes senior citizens very hard. According to the Consumer Bankruptcy Project at Harvard University, nearly half of the elderly who filed for bankruptcy say they did so because of medical costs or reasons. Take the case of Duane Allen, 68, and his wife Linda: After four surgeries within three years, they racked up about $15,000 in medical bills. Unable to pay them outright, they put them on a credit card. Now they are seeking debt-counselling to see how they can handle the debt.

It should be recalled that for 44% of all elderly, Social Security is their primary source of income; for another 30% it is a major part of their income. And Social Security represents a very limited sum of money.

Further, out-of-pocket health-care expenses for the elderly increased nearly 50% from 1999 to 2001, according to a report by the Commonwealth Fund. The costs are likely to go up as more employers (like the steel companies) eliminate retiree health benefits, which typically provide supplemental drug coverage.

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