In this issue:

Sinking Dollar's Fate May Be Decided in Asia

Strategists Tell Bloomberg: Sell Dollars

Fed: Rich Get Richer and the Poor Get Poorer

Low Inflation? Not if You're Trying To Pay the Bills

Job Cuts Grow at Leading Firms, Despite Continuing Talk of 'Recovery'

State Budget Holes Grow; No End in Sight

League of Cities Looks for Band-Aid Solutions

U.S. Infrastructure Breakdown Hits All Sectors at Once

College Endowments Plunge—Along with Stock Market

Banks Make a Killing on Overdraft 'Protection'

U.S. Senate Approves Increase in Home Heating Aid


From Volume 2, Issue Number 4 of Electronic Intelligence Weekly, Published Jan. 27, 2003

U.S. Economic/Financial News

Sinking Dollar's Fate May Be Decided in Asia

The "sliding dollar's fate may be decided in Asia," as Far East countries begin to pull back from U.S. assets, warned the Wall Street Journal Jan. 20. Japanese, Chinese, and other Asians collectively, have become the largest overseas investors in U.S. securities, in terms of net new money pumped into stocks and bonds. Last year, Asians accounted for 40% of the foreign-investment flows into the U.S., counterbalancing Europe's pullback, and ensuring a gradual decline in the U.S. dollar.

Through October 2002, European investors bought a net $152 billion in U.S. securities—down 35% from the same period a year earlier. Moreover, they turned net sellers over the 10-month period, for the first time since 1993.

At the same time, Asian investors increased their purchases of U.S. securities, mainly Treasury and Federal agency bonds, to a net $156 billion (January-October 2002), from about $47 billion per year during the 1990s.

Now the concern is, how much longer can the Asian support last? Asian central bankers are beginning to move into other currencies, especially the euro—and into gold, whose price has jumped by 31% since Sept. 11, 2001. In November, Japanese investors, for example, bought $5.3 billion of U.S. securities and $9.1 billion of European securities—after having favored U.S. over European assets by nearly 6:1 during the first 10 months of 2002.

"If Asians pull back from investing in the U.S., there isn't much else to support the dollar," warns an economist at Morgan Stanley.

Strategists Tell Bloomberg: Sell Dollars

A majority of 30 strategists surveyed by Bloomberg News, recommended selling the dollar against the euro, yen, Swiss franc, British pound, and Australian dollar, citing grim U.S. economic data, a recommendation which could send the dollar lower for a seventh week in eight.

Moreover, foreign investors, notes Bloomberg, are reluctant to shift more money into U.S. assets.

"People are selling dollars and buying everything else," said an analyst at Pioneer Investment Management.

Fed: Rich Get Richer and the Poor Get Poorer

The "wealth gap" between the richest and poorest Americans, and between whites and minorities, widened further between 1998 and 2001, the Federal Reserve reported Jan. 22. The difference in median net worth between the 10% of families with the highest incomes and the 20% of families with the lowest incomes, jumped by a whopping 70% from the second half of 1998 through the second half of 2001, according to the Fed's Survey of Consumer Finances, a telephone survey of about 4,000 families, conducted every three years. The gap between whites and minorities grew by 21%.

Net worth is the difference between assets (such as bank accounts, stocks, bonds, retirement accounts, houses, vehicles, business equity) and debts (mortgages, credit-card debt, loans). Stated another way, the median net wealth of the top earners, which was about 12 times that of lower-middle-income families during the 1990s, in 2001 surged to 22 times as much as that of the lowest earners.

Specifically, the net worth of families in the top 10% of incomes, skyrocketed by 69%, to $833,600 in 2001 from $492,400 in 1998; while the net worth of families in the lowest 20% of income, according to the survey, rose by 24%, to $7,900. Median net worth for whites, rose 17% to $120,900, but fell 4.5% to $17,100 for minorities. The biggest gain in asset ownership, was in direct stock holdings.

While income for the top 10% of households jumped by 19.3% from 1998 to 2001, the survey claimed, income for the bottom 20% of households grew by 14.4%. For reasons that Fed officials had difficulty explaining to the New York Times, which carried the story Jan. 23, the median income for all non-white and Hispanic families barely increased.

At the same time, more people in the lowest income level had credit-card debt, and trouble paying bills. For the lowest 20% of income earners, the share of families with credit-card balances, increased 5.8% to 30.3%; while the percentage of low-income households at least 60 days past due on a debt, increased to 13.4% in 2001, from 12.9% in 1998.

Low Inflation? Not if You're Trying To Pay the Bills

A CBS Market Watch wire Jan. 20 poked holes in the financial gurus' mantra that the U.S. is enjoying a low inflation rate. "Only if you are an economist," Market Watch said, are you talking about deflation. But "the typical American household" is faced with higher prices for all sorts of basic goods and services: The price of fruits and vegetables increased 4.9% last year; energy costs zoomed 10.7%; transportation costs by 3.8%; and "gasoline costs were up a staggering 24.8% in 2002.... Housing costs were up 2.4%, and even water, sewer and trash collection service costs jumped 3.2%. Many families send their kids to private school and are trying to save for a college education. Education costs climbed 6.6%, including 6.2% in the category of 'tuition, other school fees and child care.'...

"Medical care is another staple of every household, and costs have increased here, as well," the report continued. "Somewhat surprisingly, the index for prescription drugs was virtually unchanged, though ... there are many that will dispute that. Hospital and related services led the charge, advancing 9.8%." While we hear a great deal about the specter of price deflation, "consumers can be understandably skeptical given the daily price escalation they face firsthand."

Job Cuts Grow at Leading Firms, Despite Continuing Talk of 'Recovery'

Among U.S. job cuts and layoffs announced last week:

*General Motors will halt production at a truck plant in Flint, Michigan for a total of eight weeks, before the end of September. Starting next week, GM's Flint commercial truck chassis plant will be shut for one week each month through September, in addition to the annual two-week shutdown in July, affecting 500 workers. The world's largest automaker, also will halt production for two weeks at its Wilmington, Delaware, Saturn plant.

*Union Pacific, the nation's biggest railroad, will cut up to 1,000 jobs this year, as it plans to slash costs by up to 20%, blaming rising fuel prices and soaring insurance costs. The company will lay off up to 300 people by March, and will not fill retire 700 additional positions through attrition. First-quarter profit is expected to drop as much as 23%, compared to last year.

State Budget Holes Grow; No End in Sight

New York: Governor George Pataki (R) announced that the state's deficit is now at $12 billion, up $2 billion since the beginning of January. The $12 billion represents $10 billion projected for the next fiscal year which in New York begins April 1, and $2 billion in this current FY. Pataki said, "We face a fiscal crisis today of a magnitude we have not confronted in our lifetime." He again made his "no new taxes" vow.

New Jersey: Governor James McGreevey (D) announced to a room full of mayors that a new $1.3-billion hole in the state's current FY budget will "force" him to order "severe cuts across state." In this context, he warned the mayors that, "due to the dramatic deterioration of the budget," it was "simply impossible" to extend aid for towns and cities. Revenue is down from three taxes—personal income, cigarettes, and inheritance—for the first six months of this fiscal year.

Another revenue hole New Jersey has to deal with is the $350 million in Federal Medicaid aid which has not been approved, on which it was counting for its health-care budget. It currently is projecting a $5-billion deficit for next FY.

Connecticut: Governor John Rowland (R) announced layoffs of 1,000 more state workers—on top of 2,800 cut in the last eight weeks—as he demanded labor unions get serious about negotiating concessions.

Wisconsin: News of a still bigger revenue shortfall prompted Gov. Jim Doyle (D) to announce he's calling a special legislative session to get approval for emergency spending cuts, initially in the range of $161.5 million. Miniscule in the face of the newly projected $452 million current fiscal year deficit and an upward-revised $3.2-billion shortfall for the next two-year budget cycle. Republican leaders scoffed at Doyle's approach, saying, "We've got a head wound, and he's putting a band-aid on it." Meanwhile, 31,000 state employee contracts are before the Legislature for renewal, inclusive of a 3% retroactive pay raise—an unlikely demand to be met.

Ohio: Governor Bob Taft (R) has taken aim at the state's poor, elderly, and disabled as an avenue to patch the growing budget hole, now over $1 billion. Some 30,000 low-income parents will lose medical benefits, while 800,000 poor and disabled Ohioans will be cut from coverage of dental, eye, psychologists, chiropractic and podiatric visits. The Medicaid freeze Taft is seeking legislative approval for will cost hospitals $180 million over two years, will force closure of many nursing homes, and will mean many people go without either food, heat or medical services.

Michigan: Governor Jennifer Granholm's (D) plan to cut $127 million from public-school budgets as part of her budget-deficit fixing, will add to the Lansing school district's crisis. In Lansing, the state's capital, school administrators expect to cut $4.7 million from this year's school budget, and may face teacher layoffs and school closings by next year.

League of Cities Looks for Band-Aid Solutions

Speaking at a national press conference, National League of Cities (NLC) president and New Haven, Conn. Mayor John DeStefano (D) described a nightmare week in his city, which went something like this: Tuesday, K-Mart closures and layoffs; Thursday, Pratt & Whitney closures and layoffs; and by Friday, the state of Connecticut laid off 1,200 state employees. And, for the first time in the history of New Haven, "I had to lay off nearly 100 city employees." The NLC has criticized the Bush "stimulus" plan as "doing little for cities," while its own plan, without changing the deregulation/anti-growth policy axioms, falls far short of addressing the hemorrhaging DeStefano described.

The NLC $145.5-billion plan has three parts.

1. Boost consumer spending by having a $75.5-billion Federal aid package to include such things as $500 million in cities and towns for "transitional job creation"; $10 billion for extension of unemployment benefits, etc.

2. Alleviate states' budget deficits with $50 billion, for school repairs and renovation; unmet homeland security and infrastructure such as airport and port security, bioterrorism response, etc.; a one-time, one-year increase of Federal Medicaid payments, etc.

3. Buttress investments in current and future public infrastructure and service needs with $20 billion for: first responders (police, fire, health workers); the nation's aging water infrastructure; transportation, housing, etc.

U.S. Infrastructure Breakdown Hits All Sectors at Once

Fuelled by Federal and state budget-cutting frenzy, U.S. infrastructure is crumbling ever faster. Some updates, by sector, not including aviation and rail, which are in extremis:

Housing: This week the Federal Department of Housing and Urban Development announced without warning, that they were implementing budget cuts of 30% to 50% to local programs—low-income housing, after-school childcare for the working poor, etc. For example, in Columbus, Georgia, the local Phoenix City Housing Authority will see a 46% cut in Federal aid. Add to this, that rates for sewer and water in Columbus, just went up by 30%!

The Springfield, Ohio Metropolitan Housing Authority was just notified it will see a 46% cut in Fed funds. It will lose $850,000 this year, a quarter of its budget. These situations are typical.

In the District of Columbia, where there is a major increase of homelessness, 30% of the homeless are employed.

Water: Urban water mains are now cracking in the frigid cold, reflecting not simply bad weather, but decades of non-replacement, and poor maintenance.

Water supply shortages in Southwestern states have caused a major wrangle over which states will get scarce water from the Colorado River system, and other, very limited sources.

Drought-stricken agriculture counties, appealing for Federal aid, were snubbed by the Jan. 22 Senate vote of $3.1 billion in disaster aid, instead of the requested $6 billion plus, in line with past years' relief levels.

Social Services: Dislocation from joblessness and penury is proceeding way beyond any semblance of life-as-usual. In Denver recently, a mass of 8,200 people showed up for a job fair—the largest ever, since these occasions started in 1997.

Education: States are peremptorily hiking college tuition. This month Maryland decreed that a University Maryland out-of-state student must pay $300 more for spring semester; $100 more for in-state. Already, a year for an out-of-stater means $14,000.

College Endowments Plunge—Along with Stock Market

Last year, college endowments suffered their biggest drop since 1974, due to the stock-market collapse. The average college and university endowment, invested overwhelmingly in stocks and bonds, lost 6.0%, while overall losses were $14 billion in value during the 2002 fiscal year—the worst performance since 1974—on top of losing 3.6% during FY 2001, according to an annual survey of 654 higher education institutions by the National Association of College and University Business Officers (NACUBO). The two-year decline in endowment holdings—the first since NACUBO began its survey in 1971—has contributed to faculty layoffs, staff reductions, and a freeze on scholarship aid, new facilities and new programs. Through investment income, endowments (stocks, bonds, cash and real estate received as gifts) provide funds for financial aid, faculty salaries and other operating costs.

Banks Make a Killing on Overdraft 'Protection'

In a new version of the old "protection" racket, banks are aggressively encouraging customers with low balances to overdraw checking accounts, skirting credit laws, and reaping huge fees for the banks. Overdrafts have become a source of profit for the banks, who have put ATMs in supermarkets, especially in low- and moderate-income neighborhoods, as they move to depend more on fees than on interest from loans. Unlike traditional overdraft lines of credit for clients who have big balances, which usually charge an annual interest rate of up to 20%, the new programs (covering checks that would otherwise bounce) charge fixed fees of up to $35 for each overdraft—representing an annual rate of 1,000% or more! Moreover, these overdraft programs require customers to re-balance their accounts in only a few days, and have limits of $100-300. And the new programs automatically enroll almost every checking-account customer who does not have a traditional overdraft line.

The office of the Comptroller of the Currency, and the Indiana state banking department, have warned banks about the programs, since the overdraft fees translate into an annual interest rate that far exceeds the rates permitted by state anti-usury laws. The Federal Reserve is considering whether the programs should be made subject to "truth-in-lending" rules that require banks to disclose interest rates, fees, and other information to customers.

"The purpose of this is not, in my opinion, to help the consumer," said J. Philip Goddard, deputy director of the Indiana Department of Financial Institutions. "These programs are only to increase fee income."

Overall, banks will charge $30 billion in ATM, bounced-check and overdraft fees in 2003—about 30% of their operating profits—and an increase of 14% from 2001, according to the Federal Deposit Insurance Corporation. Banks raised their overdraft fees by 24% from 1997 to 2001, according to the Federal Reserve.

U.S. Senate Approves Increase in Home Heating Aid

The Senate approved an amendment adding $300 million in home-heating aid for the poor, which President Bush had proposed cutting. The amendment, sponsored by Sen. Jack Reed (D-R.I.), Sen. Susan Collins (R-Me.), and others, as part of the Federal government spending bill, brings the funding for the Low-Income Home Energy Assistance Program (LIHEAP) this year to almost $2 billion, while Bush had sought a level of $1.4 billion, $300 million less than last year.

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