In this issue:

Has Somebody in Washington Noticed the Elephant in the Room?

'Sell, Sell, Sell! Avoid the U.S. Depression!'

New Yorker: U.S. Dollar 'Going Down'

U.S. Textile Jobs Shredded by Corporate Vulture

Durable Goods Orders Decline in October

GM To Shut Historic N.J. Assembly Plant as Sales Slide

Social Security Privatization Is Bonanza for Wall Street

Would You Trust This Man to Invest Your Social Security?

No Recovery Here: Michigan Food Pantries Swamped

Aging Water Infrastructure Collapse Ruins Thanksgiving

From Volume 3, Issue Number 49 of EIR Online, Published Dec. 7, 2004

U.S. Economic/Financial News

Has Somebody in Washington Noticed the Elephant in the Room?

The possibility of a near-term dollar crash dominated discussion at a Nov. 29 Brookings Institution forum on the Bush Administration's domestic policy. The subject was broached by Bruce Bartlett, a columnist and senior fellow with the National Center for Policy Analysis who noted that if the Chinese, the Japanese, and other foreign investors were to stop buying dollar-denominated U.S. Treasury debt, "we could have a very significant market crash." No one disagreed with Bartlett, and former OMB director Alice Rivlin (infamous for forcing the shutdown of D.C. General Hospital in 2001) went so far as to talk about the possibility of a "dollar meltdown." They all see the problem, however, as stemming largely from the huge budget deficits that have been racked up by the Bush Administration over the last four years, and therefore the market reaction will be to put pressure on the White House to be more fiscally responsible (in other words, vicious austerity, though this was not said in quite that way). For Bartlett, this means instituting a value-added tax which, he claimed, could be imposed at only a small cost to the economy, yet provide another source of revenue for the Treasury.

At one point a questioner noted that up to that point, only foreign investors bailing out of the dollar had been considered, She wanted to know what would happen to the financial markets if American investors also began bailing out. William Niskanen, chairman of the Libertarian Cato Institute said, if that were to happen, "we could have a significant reduction in the foreign exchange value of the dollar," which could, among other things, bring an end to the housing bubble. Rivlin added that what is happening now is a reaction in the currency markets. "If people get the idea that the dollar is going down, people are going to bail out of dollar securities, including Americans." She added, in response to the next question, that a crisis would provoke a more rapid increase in interest rates, something the Federal Reserve has already started doing. "It's about all they can do," she said.

'Sell, Sell, Sell! Avoid the U.S. Depression!'

Bloomberg and Morgan Stanley advise Asians to dump their U.S. Treasury bills. "Asian central banks should ... sell some of their massive holdings in U.S. Treasuries," writes Bloomberg Asian correspondent William Pesek, in an Nov. 28 article titled, "Time Asia Pulled the Plug on U.S. Treasuries." He warns that the U.S. bond market is about to blow apart anyway, which will cost Asian economies a fortune on the $1.1 trillion they hold in T-bills. "U.S. Treasury Secretary John Snow recently pledged that the U.S. would get its imbalances under control," Pesek writes, "yet it is hard to keep a straight face when Snow's boss, U.S. President Bush, seems set on further cuts in U.S. taxes."

He adds: "Dumping U.S. debt might serve as a wake up call for the Bush Administration, which seems to think it can devalue the world's reserve currency to boost U.S. jobs without suffering the side effect of rising debt yields." He quotes Morgan Stanley's head Asian economist Andy Xie saying that Washington's allowing the slide in the dollar is "simply another way to get foreigners to subsidize U.S. spending," and "if Asian central banks sold Treasuries now, it would bring the issue to a head."

New Yorker: U.S. Dollar 'Going Down'

Damned if you do (dump dollars), damned if you don't, is the message in the New Yorker magazine's Dec. 6 "Talk of the Town" column, by John Cassidy. It situates the strength of the dollar as having come into existence "Near the end of" World War II, with the "Bretton Woods" conference "setting up a system of fixed exchange rates that survived for almost 30 years, and ushering in an age of unprecedented international prosperity."

Then it argues the depreciation of the dollar is due to "intractable, and related, problems" which are 1) the trade balance due to shifting our manufacturing and production out of the country, and 2) that we've become the "world's biggest debtor." To deal with these "would probably require a recession. The only other option is to devalue the currency, which makes imports more expensive and exports cheaper." But, "debasing the dollar is a high-risk strategy. Currency movements tend to be self-reinforcing. If traders come to see the dollar as a one-way bet, its slide could turn into a rout." As examples of what can happen if foreign investors rush to get their money out of the stricken countries, Cassidy cites the Mexico, Russia, Brazil financial crises over the last decade. If such a rush out "were to occur here, the Federal Reserve would be forced to raise interest rates in order to stop the panic selling, which, in turn, would torpedo the stock and the real-estate markets. The economy would be plunged into a deep recession."

The column concludes with a swipe at Bush and his Administration's folly as likely leading to no relief.

U.S. Textile Jobs Shredded by Corporate Vulture

Under Bush, the U.S. textile industry is being sucked back to Hoover, as corporate vulture Wilbur Ross breaks up the textile industry front for import limitation; mass layoffs are come. Forecasts of textile job losses after international quotas expire at the end of this month, range up to half a million of the 700,000 jobs still existing in the United States (textiles employment was 2.5 million 20 years ago). China's textile exports are universally blamed, but the actions of billionaire Ross show the actual process. Ross, who bought up bankrupt steel companies just before President Bush imposed steel quotas in 2001, has since bought bankrupt coal companies, and recently, bought the textile industry's large and failing companies, Burlington Industries and Cone Mills, eliminated their pension plans and cut their work forces by 33%. Pushing this as "the competitive way to go in textiles," Ross, with the backing of Wall Street "industry analysts," is calling on Bush to allow complete free trade, and use no import limits at all. Ross plans to relocate the production facilities—both textile and apparel-making—of his new "Burlington Worldwide" in Guatemala, India, China, and elsewhere, while the U.S. workforce melts away.

Durable Goods Orders Decline in October

Orders for durable goods, including autos and construction machinery, declined in October, despite the fact that orders to U.S. factories rose by 0.5%, AP reported Dec. 2. The improvement was allegedly in such non-durable goods as food and chemicals. The rise will undoubtedly also not be durable. At the same time the Labor Department reported that new filings for unemployment insurance increased by a seasonally adjusted 25,000, to 349,000 for the week ending Nov. 27.

GM To Shut Historic N.J. Assembly Plant as Sales Slide

General Motors, the world's largest auto-maker has told employees that it is ceasing production at its SUV plant in Linden, N.J., earlier than expected because of falling sales, the Detroit News reported Nov. 30. Production will end some time between February and June, instead of during the summer, resulting in the layoff of some 900-950 hourly employees, and 110 salaried workers. The Linden plant, which opened in 1937, was converted during World War II into an airplane assembly plant.

GM announced that its domestic sales plunged 16.7% in November, compared to a year earlier; prompting the car maker to cut first-quarter production by 7%. GM is closing five plants for at least one week in early January.

Meanwhile, Ford said its U.S. sales fell 7.3% in November—with a 14% decline for cars. Production levels, as a result, will be cut by 7.7% in the first quarter of 2005.

Social Security Privatization Is Bonanza for Wall Street

Dr. Austan Goolsbee of the University of Chicago Graduate Business School released a study in September that shows the enormous amount of money that Wall Street would scoop up in fee income alone, were the Bush Administration's proposed privatization of Social Security to be adopted. Goolsbee used as his starting point, the report, "Strengthening Social Security and Creating Personal Wealth for All Americans," which was issued in December 2001 by the "President's Commission on Social Security," co-chaired by Richard Parsons, the head of AOL, and by former Senator and British Empire worshipper Daniel Patrick Moynihan (now deceased).

Goolsbee's study punctures the myth surrounding Bush's call to privatize Social Security: "Rather than using money to close the Social Security gap, the plan would transfer this money to private financial managers and mutual fund companies." Goolsbee considers three "administrative-management fee" levels that Wall Street firms would charge, to manage workers' individual Social Security accounts, which replace traditional Social Security under the Bush plan: 0.3%; 0.8%, and 1.1%. Were Wall Street money managers to charge annual fees of only 0.3%, then between 2004 and 2079, Wall Street would earn $424 billion in fees. Were Wall Street to charge an 0.8% fee—which Goolsbee considers most likely—they would rip off $940 billion in fee income during those 75 years. A 1.1% fee would earn $1.16 trillion in fee income during the same period.

Dr. Goolsbee compares the fee income to various standards, to show how large it is:

First, the upper two levels of fee income ($940 billion and $1.16 trillion), would consume between 20% and 26% of the worker's earnings in his individual Social Security account. Put another way, the worker's Social Security payments would be cut between 20% and 26% just to pay for Wall Street's fees.

Second, Goolsbee implicitly shows how the fees are designed to make up for Wall Street's losses when the IT bubble collapsed. He states that between 2000 and 2002, the IT bubble collapse "reduced [Wall Street's] revenues by $117 billion. The increase in revenue from the individual [Social Security] accounts would have a positive net present value more than eight times larger than this collapse."

Third, Goolsbee calculates the amount that Wall Street would stand to earn in administrative-management fees from "normal" business (other than Social Security privatization) over the next 75 years. He concludes, "The fees generated from individual [Social Security] accounts under Model II of the Commission for Strengthening Social Security would be worth something like one quarter of all the revenue expected in the financial sector over the next 75 years."

But this is just the start. In addition to the fee bonanza, Wall Street plans to divert trillions of dollars from the Social Security Trust Fund into the stock market, to prop up the market, and make further profits by speculating in stocks.

Would You Trust This Man to Invest Your Social Security?

A campaign fund controlled by Senate Majority leader Bill Frist (R-Tenn) has lost almost $460,000 in stock market investments since 2000, and now does not have enough money to cover a sizeable bank loan, according to both Federal Election records and the manager of the Frist campaign. Frist, a close friend of Bush, strongly supports Social Security privatization.

The obvious point was not lost on Todd Webster, spokesman for outgoing Senate Minority Leader Tom Daschle (D-SD)—whom Frist helped defeat by personally campaigning against Daschle in South Dakota—who issued an e-mail stating that Frist's losses raised questions about Republican plans to invest Social Security funds in the stock market. Webster states about Frist's embarrassment, "[Frist] still thinks we should put seniors' Social Security funds in the stock market?"

No Recovery Here: Michigan Food Pantries Swamped

The Food Bank Council of Michigan reports there's been a 20% increase, over last year, in people seeking food assistance, according to the Detroit News Nov. 28. At the same time, with the downturn in the real economy, the charities attempting to provide food and supplies to the pantries have experienced a 10% drop in donations. One of the biggest factors in the increased need is the continuing job layoffs in the state.

The 2005 outlook is bleak, too. Michigan is expecting to have another $1 billion budget shortfall, and this assessment comes after less than five weeks into the state's new budget year which began Oct. 1. The state's budget director reports that income and business tax receipts have fallen 20% since 2000—something not too hard to figure out why, if one recalls that the state lost more than 300,000 jobs, nearly half of them high-wage manufacturing jobs, over the last four years. As more people joined the ranks of unemployed, the state's Medicaid program grew by 323,000 in the same period. If the state's legislative leaders opt for more austerity, and more programs and services are cut, more and more families will be lining up at the already-overstretched food banks.

Aging Water Infrastructure Collapse Ruins Thanksgiving

In Ann Arbor, Mich. where over 75% of the city's water system was installed prior to 1960, a water-main break just weeks before Thanksgiving brought raw sewage spewing into the home of one resident, resulting in $40,000 in damages and a $24,000 cleaning bill. Cleaning, in this case, meant stripping down the house to its bare shell, ripping out drywall, carpets, etc. The city paid the cleaning bill, but is not liable under the law for the damages.

Ann Arbor has 450 miles of underground pipes, of which 250 miles are 50 years old or older. The Utilities Department estimates it will cost $200 million to replace just these 250 miles. The director Sue McCormick, who took over in 2001, said that from the sparse records she could find, the pipes went unchecked for decades, and that very little investment had been made. In 2002, alone, the city had 118 water-main breaks, double the previous year. Overall, she said, the city has averaged 88 water-main breaks a year since 2001.

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