World Economic News
Guardian: U.S. Deficit Threatens Global Fallout
The global financial system is rotten and might soon collapse, states Guardian economics editor Larry Elliott in an extended piece July 21, headlined "American Deficit Dependency: Kill or Cure, The Fallout Is Global." The U.S. today is running a giant trade deficit, presently amounting to $50 million every single hour. One contributing factor for this growing imbalance, Elliott writes, is "the break-up of the Bretton Woods fixed-exchange-rate system.... The breakdown of Bretton Woods, following Richard Nixon's decision [in August 1971ed.] to sustain convertibility of dollars into gold, means there is no longer an adjustment mechanism. The U.S. has permitted itself to run bigger and bigger trade deficits, a cumulative $3 trillion since the early 1970s, financing them by printing dollars."
The result of all of this, he says, has been the creation of "a reservoir of global liquidity, growing bigger and bigger all the time. The extra liquidity sloshing around in the global financial system lay behind the explosion of credit, not only in those countries running trade surpluses but in the U.S. as well, because that was where the creditor countries reinvested their dollars." Elliott quotes Richard Duncan's book Dollar Crisis, to the effect that the current international monetary system has inherent flaws "that will eventually cause it to collapse in crisis."
Elliott also cites "American analyst" Kurt Richebaecher saying that "for the first time ever in the postwar period, many countries around the world, not only in America, are experiencing a prolonged economic downturn in the absence of any monetary tightening." Particularly the U.S. economy has reached the stage "where it requires permanent, massive monetary and fiscal stimulus to garner just a tepid economic responseand to prevent the bubbles from deflating."
"The dangers should be obvious," Elliott concludes. The dollar could go down gradually, but is "more likely to come down with a crash.... The plunging dollar will spread America's recession to the rest of the world. There is no global financial system worthy of the name, merely a Potemkin village. Could this be the big one? You bet."
Gold Share Market: A New Scheme To Loot Investors?
According to a report in the London Times on July 21, the Financial Services Authority (FSA) in Britain and the Securities and Exchange Commission (SEC) in the U.S. are now considering a proposal by the World Gold Council to set up the trading of "gold shares" in London and New York. While the buying of physical gold is, presently, quite a cumbersome process, the establishment of gold-share trading would allow investors to sell and buy gold as easily as trading corporate stocks. Dealing in gold shares is already underway on the Australian stock exchange, where Gold Bullion, a company linked to the World Gold Council, created a market backed by 3.5 tons of gold four months ago. Gold Bullion chairman Graham Tuckwell is quoted saying, "The plan is to create a platform on which anyone, anywhere can buy gold, and the cost of entry is like any other share." As the Times explains, each gold share traded in London would represent one-tenth of a troy ounce of actual gold, which can be traced back to a specific bar of metal, located at a secret HSBC gold depository somewhere in the City of London.
The plans for establishing a gold-share market are coming at a time where there is very strong demand for gold, including by investors who have lost any confidence in paper money, due to unprecedented liquidity-pumping by central banks. The new scheme would absorb some of that demand. However, the investors will not receive any physical gold for their money, just pieces of paper claiming ownership of gold deposited in a hidden bunker of a private financial institution.
Brazil Gouges Living Standards To Pay Foreign Debt
Between January and April of this year, Brazil's primary budge surplus was 6.5% of GDPfar above the 4.5% figure on which the Lula government had agreed with the International Monetary Fund. This means that they have been working overtime gouging living standards, and whatever else can be found to gouge, to ensure the foreign debt is paid. On July 21, Clarin's Sao Paulo correspondent asked: If Finance Minister Antonio Palocci doesn't start to loosen up on spending, doesn't this imply that the government actually promised the IMF a higher surplus than the 4.5% officially announced? That agreement also includes the insane notion that public-sector investments are to be considered as deficits!
There are daily reports on the depth of economic decline. Volkswagen announced July 21 that it would cut 4,000 jobs in Brazil, due to weak demand. In the first half of this year, domestic car sales fell 37.6% compared to the same period of 2002, while electronics sales stand at pre-1994 levels. General Motors is also laying off workers in Brazil. The IBGE statistical institute reported July 18 industrial employment dropped 0.1% between April and May, the fourth monthly decline in a row. Between Jan. and May, the total drop was 1.1%. On July 23, the government released figures showing that unemployment had increased from 12.8% to 13% in June, a record high.
As expected, the Central Bank's Monetary Policy Committee lowered the benchmark interest rate (known as the SELIC rate) when it met on July 23, from 26%, to 24.5%. Such a small cut isn't expected to have any major impact on the worsening Brazilian economy, or on credit availability. Right now, the average rate for a business loan is 80.9%, and 98.1% for a personal loan!
Pressure on President Lula da Silva to make some significant policy changes is intensifying. Thus, the statements by Finance Minister Antonio Palocci to TV Globo as the interest-rate decision was being made, that there is "no date set" for growth to commence, and that the priority for Brazil is to control inflation, only fuelled anger among the population and business sectors.
Mexico's Trade Is CollapsingWith U.S. Economy
Mexico is losing its stature as the model free-trade economy: Its overall trade dropped by 3.5% in April 2003, over April 2002, and was 4.3% less, year on year, in May 2003. Ninety percent of the country's trade is with the collapsing U.S. economy.
The International Consultants firm reports that nearly 370,000 jobs were lost between January and May. Unemployment hit its highest level in nearly five years in June, the government reported. But, the government's statistics are worthless. It claims unemployment stood at 3.17% in June (up from 2.72% in May), but the government calculates unemployment as anyone over 12 [!] years of age who looked for work, but didn't work for more than one hour a month! If someone works for more than one hour a month, they're considered "employed."
While the Roman Catholic Church in Mexico says 75 million of Mexico's 100 million people live in poverty, the government claims that "only" 53.7 million peoplei.e., more than halfare poor. Yet, the IMF is again demanding that the government impose a Value Added Tax on food and medicine. When the Vicente Fox Administration tried to ram through a 15% VAT tax on food and medicine in 2001, Mexico's Congress refused. Now, the Treasury Secretary is considering trying to get Congress to cave in, and accept a tax of 5-6% on the basics needed by the population to survive.
HIV/AIDS Could Turn South Africa into an Economic Catastrophe
A study just released by the World Bank and Heidelberg University in Germany, "The Long-Run Economic Costs of AIDS: Theory and an Application to South Africa," projects that if nothing dramatic is done to stem the spread of HIV/AIDS, South Africa faces an inescapable descent into the economic backwardness of past centuries, dependent upon child labor, with no infrastructure,
Professor Hans Gersbach, one of the authors, writes, "The real economic threat of AIDS is its potential to kill young adults. By doing that, it prevents the transfer of human capital from one generation to another." As young adults die off, more children will be taken out of school and pushed into the workforce; the nation's intellectual capacity will rapidly erode, as the children of engineers are forced to become subsistence farmers. There are signs, they say, that this is already happening in some sub-Saharan countries, where the phone system is deteriorating because of the AIDS-related shortage of qualified technicians.
The report is available from www1.worldbank.org/hiv_aids.
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