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http://www.granma.cu/ingles/abril02-4/17econeu-i.html April 22, 2002 U.S. ECONOMY A time bomb waiting to go off BY RAISA PAGES (Granma International staff writer) FACED with the need to promote an optimistic image to the world, U.S. pragmatism has given ground. Most U.S. economists believe that the recession will be reversed this year, but neither the war industry’s revitalization, nor increased Pentagon spending have been able to counteract the ravages brought about by a sustained hike in oil prices and the chain reaction unleashed by the Enron energy company scandal. U.S. consultant Isaac Cohen has warned that rising energy prices could halt the reactivation. When fuel prices go up, he explained, the central banks increase interest rates, thereby deterring economic expansion. Assistant Secretary of the Treasury Richard Clarida feels that the government is hoping for a reactivation in business investment, but investment has been declining for four successive quarters, something that had not occurred since 1992, when that indicator fell over a period of 18 months. Business Sector Results Reaffirm Wall Street Pessimism was the title of a CNN commentary based on statements appearing in The Wall Street Journal. James Paulsen, investment director of Wells Capital Management, wonders if we are experiencing a prolonged period of stagnation, or at least mediocre yields. Charles Hill, research director of First Call, commented that there was a lot of uncertainty over developments in the second half of the year. Loss of confidence among investors, resulting from illicit maneuvers to cover up the Enron bankruptcy, are negatively influencing the return of economic expansion. SPECULATIVE IRRATIONALITY The world superpower’s economy has turned into a huge speculative bubble, as a result of irrational speculation on the stock market. Finance capital in the United States consists of a colossal amount of money, vastly exceeding the value of goods and services produced in the country. In real terms, the underlying causes of the U.S. recession have not been sufficiently investigated, and it does not suit the majority of experts to go into the motives too deeply. In search of expert opinions, Granma International interviewed Francisco Covarrubias, doctor in economic science and a researcher at Cuba’s Center for Studies of the World Economy (CIEM), who stated that the large expansion experienced by the U.S. economy in the ’90s left the heavy burden of a series of economic and financial imbalances in its wake. The economic expansion of the world’s largest economy has basically been supported by financial resources from abroad, he stressed. In 2001 these flows represented around 26% of total U.S. investment, more than triple the proportion recorded in 1995. “The search for easy and quick high-profit margins — favored by technological advances, institutional changes and the abundant entry of foreign capital — intensified the virtually mass transfer of U.S. companies and consumers to the financial markets, above all towards the buying and selling of stock, which created a huge gap between this market’s high dynamism and other economic activity.” The loss of income due to the depreciation of stocks and bonds over 18 months – up until September 2001 – was equivalent to 75% of the United States’ GDP, a proportion higher than that recorded since the 1929 stock market crash. The unchecked indebtedness of U.S. families and companies exceeds their real capacity to pay, compounded by the fact that their principal guarantee is the artificial value of the stocks they own, Covarrubias argued. At the end of 2001, debt absorbed more than 92% of the disposable income in U.S. homes. In the case of companies, debt obligations contracted were in excess of 100% of the country’s GDP, more than $10 trillion USD. LOSS OF BANK CREDIBILITY The Cuban expert stated that the shady side of this debt spiral is the irresponsible conduct assumed by U.S. and foreign banks, which have granted credits extravagantly, violating the most elemental rules and accepting stock as the only guarantee, he stressed. The U.S. financial agencies have gone to the extreme of granting loans to people with poor credit ratings and unable to obtain funding anywhere. They do this because they can charge high interest rates and even higher commissions, he explained. Those credits, referred to as subprimes, have grown from $27 billion USD in the early ’90s to a current total of more than $430 billion USD, equivalent to 10% of all U.S. mortgages. Confidence in U.S. banks is endangered. Eight of the 22 banks that have folded since 1997 had granted a large number of subprime loans. A further economic imbalance is associated with the gradual reduction in the U.S. families’ savings rate, which has fallen to its lowest level in the country’s economic history. The most disturbing aspect of this is that more than 60% of U.S. citizens’ personal savings is staked on the casino economy roulette. STRATAGEMS AND HIGHER UNEMPLOYMENT The moderate change recorded — on which the optimists are basing their view that the worst of the recession is behind us — is sustained by an increased consumption of durable goods reported in the final quarter of 2001, the largest in 15 years. However, that trend was brought about by sales campaigns featuring interest-free loans on car purchases launched by the “Big Three” U.S. car manufacturers (General Motors, Ford and Chrysler), which generated record sales between October and December. The war against Afghanistan and expenditures to reinforce the country’s internal security reactivated the military-industrial complex, not only as a result of increased Pentagon spending, which grew by 9% after the events of September 11, but on sales derived from the arms build-up of allies in the anti-terrorist crusade launched by Washington. All of that contributed to higher public spending. Some analysts base their optimistic forecasts on the reputed lower unemployment rate. However, this is only the result of a statistics trick, given that it only covers those who report they are looking for work, and not those who have given up the search and those who have opted for early retirement, given the lack of jobs. Labor market studies indicate that unemployment in the United States will grow to 6.5%, no matter how the GDP progresses, affirmed the CIEM expert. INDUSTRY NOSEDIVES So prolonged a fall in the industrial sector, which has reduced its labor force by 1.3 million persons, or 7% of its employees, has not been recorded since the 15-month recession in the World War II era. Automobile sales recorded a significant drop and unprecedented bankruptcies have shaken the U.S. stock market. The Enron case sparks new fears. Alan Greenspan head of the Federal Reserve Bank, has acknowledged that the strength levels of capital investment and domestic spending remain uncertain. Indebtedness and speculation, the stimulants of the U.S. consumer economy, constitute a time bomb waiting to go off. Not even invented wars will be able to deactivate it. ===== Lake Merritt Neighbors Organized for Peace. Weekly peace walks around Lake Merritt in Oakland. Starts & ends at the colonnade between Grand & Lakeshore Avenues, 3 P.M., every Sunday. 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