World Economic News
German Daily Warns: 'Inflation Will Return'
"Inflation Will Return," reads an op-ed headline in the German daily Frankfurter Allgemeine Zeitung Jan. 20, by a Frankfurt-based Goldman Sachs economist Jan Hatzius. While just three months ago, investors were worried about the threat of deflation, he notes, "reflation" is now the word on everyone's mind. Traditional inflation indicators, such as money-supply growth and the gold price have been rising rapidly for several months. Furthermore, there is the "excessive private indebtedness," in particular in Japan and in the Anglo-Saxon economies. And, inasmuch as boosting inflation is always the easiest way to reduce the burden of nominal debt volumes, the long-term effect of this excessive debt is inflationary as well. Central bankers, such as Ben Bernanke of the U.S. Federal Reserve, have already signalled their commitment to use unconventional measures to stimulate the economy, even if interest rates have already been pushed down to zero.
France Challenges Maastricht Deficit Caps
Undermining the credibility of the Maastricht Treaty agreements of deficit limits, French Finance Minister Francis Mer abstained from the European Union vote warning France on its budget deficit, AFP reported Jan. 21. Fourteen European Union Finance Ministers voted to issue France an "early warning" on the size of its budget deficit, as close to the 3% limit of GDP set by the Maastricht Treaty, but Mer abstained, insisting that France would be unable to balance its budget by 2006. EU Economic Affairs Commissioner Pedro Solbes said forcing France to slash spending and reduce its deficit, "is essential for the credibility of the system."
Brazil Central Bank Raises Overnight Rates to Over 25%
Brazil's Central Bank raised overnight interest rates by a half-percent on Jan. 22, to 25.5%. This is the highest rate since April 1999, and the fourth time the SELIG, or benchmark rate, has been raised since October 2002, when it was 18%. Supposedly, the Central Bank, now headed by the former global chief of the Bank of Boston, Henrique Meirelles, decided this was necessary, to "signal" to the markets that "President Inacio Lula da Silva is prepared to sacrifice economic growth to fight inflation," as Bloomberg wire service put it. With 61% of Brazil's debt in the form of $300 billion worth of public debt pegged to the overnight rate, the interest-rate increase hikes the government's debt-service costs by some $550 million, were the rate to stay at 25.5% for 12 months.
Leaders of the National Industrial Confederation (CNI), the Sao Paulo Federation of Industrialists (FIESP), the National Agricultural Federation (CNA), and the National Producers Movement each individually protested that the interest-rate hike will heap new difficulties upon productive activity, by raising the cost of their capital, while also lowering domestic demand.
A general Brazilian financial crisis is once again rearing its head. The Brazilian real lost 8.3% of its value over the week of Jan. 20-24, to close the week back under 3.5 to the dollar (at 3.6225), despite the Central Bank selling dollars. The devaluation, too, adds to the government's debt load (half the government's real debt is indexed to the dollar), as does the fact that the yields on Brazil's benchmark bond rose as bonds lost over 4% of their value this week.
Venezuela Suspends Currency Trading; Begins Exchange Controls
After the bolivar dropped 1.6% in the first moments of trading on Jan. 22, hitting a record low in the official markets of 1,922 to the dollar, the Venezuelan government shut down all official trading of the dollar. Finance Minister Tobias Nobrega announced, in a midday nationwide broadcast, that sales would be suspended for five business days, until the government and the Central Bank decide upon a new currency regime to be adopted. Nobrega never used the word "controls," but said that these and further currency restrictions may last for several months.
Nobrega said the government acted to answer the growing discussion in "the markets," of the likelihood of a Venezuelan default. Capital flight out of the bolivar was accelerating: On Jan. 21 the bolivar was trading on the street for as much as 2,200 to the dollar, heading towards 2,500 by the end of the week. The currency had lost about a third of its value since the national strike began on Dec. 2, even though the government was spending some $70 million a day to keep the currency from dropping, at the same time that its revenues collapsed, due to the oil strike. Bloomberg estimates that foreign reserves (including a special oil-revenues fund) had dropped by more than 12% since Dec. 2, to $11.3 billion.
The measures also reveal the "growing fragility of the banking system," one of the top people at Pacific Investment Management Co. (PIMCO) pointed out to Bloomberg.
The head of the Congressional Finance Committee, Rodrigo Cabezas, said the government may fix the bolivar at 1,500 to the dollar, until the state oil company returns production to pre-strike levels of 3 million barrels a day. That's months away, even were the strike to end tomorrow. Restarting production at oil fields and refineries is not instantaneous, and there are reportswhich EIR can't vouch for, one way or the otherthat up to 20% of Venezuela's fields have been permanently damaged, by being shut down for so long.
Ibero-American Currencies Diving
Ibero-American currencies are generally falling even faster than the U.S. dollar. The Chilean peso hit a record low on Jan. 21, as did the Mexican peso on Jan. 24, both falling to below 10.8 to the dollar. Colombia's currency also fell, if not to a new record. An intelligent person, looking at the across-the-board pattern of currency crises in Venezuela, Brazil, Mexico, Chile, Colombia, etc., would conclude these are not a series of isolated events.
World Food Program Warns Millions in Africa Suffer Hunger
The United Nations World Food Program warned that more than 38 million people in Africa suffer from food scarcity, according to the latest counts shown on their website "Hunger Alert" map. On Jan. 22, the U.S. Ambassador to Zimbabwe announced a $20-million food-aid package for Zimbabwe; the UN estimates that only 30% of the farmland there is under cultivation.
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