- "World On Verge of Depression," the Nikkei
Press headline for Oct. 7, was a dramatic statement for the financial press,
but already out of date. That weekend the Group of Seven Finance Ministers
met in Washington under strong, public pressure from the International
Monetary Fund and Federal Reserve to cut, cut, cut interest rates, pump
new liquidity from every central bank, and buy dollars in desperation to
hold off collapse of the world's reserve currency.
In earlier times, the cut of interest rates by a leading central bank was
somehow an extraordinary event. On the stock markets, it would be celebrated
with frenetic buying. And businessmen were expected to take advantage of
the lower financing costs, and crank up their investment plans, creating
new jobs. Within one or at most two quarters, according to the rule of
thumb, a cut in interest rates was supposed to lend the economy new impetus.
This time, everything seems to be quite different. On Oct. 2, the Federal
Reserve, for the ninth time this year, lowered its key interest rates.
Almost all of these interest rate cuts were "double portions,"
in that they were a half-percent, not just a quarter. Thereby, the interbank
overnight rate dropped to the lowest level since the Cuban missile crisis
of 1962, and the Fed's discount rate for emergency credits to commercial
banks was down to 2%, the lowest level in 43 years.
Nine months have passed since this unprecedented round of interest-rate
lowering was introduced. On top of this, the U.S. administration promised
huge tax cuts and already paid out $40 billion in refunds to households.
Regardless, the downward spiral of the economy has only gained in speed.
Even prior to the Sept. 11 attacks, U.S. consumer confidence had hit its
lowest point in 11 years. Industrial capacity in August reached its lowest
point in 18 years. And there have never been so many employees laid off
in nine years, as in the month of September. The dynamic of worldwide economic
decline leaves only one conclusion to be drawn: We are not dealing this
time with a cycical recession, but with a self-aggravating crash dynamic.
For the first time in more than 70 years, the world economy is tumbling
into a depression.
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- U.S. 'Stimulus' Failed in Japan
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- Now, the new stimulus packages in the United States are
supposed to breathe new life into the economy. On Oct. 3, President Bush
reckoned the dimensions of the first such package at $60-75 billion, in
addition to the $40 billion voted up after Sept. 11 for fighting terrorism,
and for rescue and cleanup operations, as well as the $15 billion for the
airline industry. The expected, drastic increase in defense expenditures
is not contained in these figures. And in addition, there are the $110
billion in planned tax cuts for the fiscal year which has just begun.
Good evidence, to show how ineffective even a dozen such stimulus packages
of this type are, in the absence of a thorough "Chapter 11" bankruptcy
reform of the rotten financial substructures, is provided by the example
of Japan. Eleven years have passed since the speculative bubble burst there,
in which the government and the Bank of Japan, the central bank, pumped
trillion-dollar figures into banks and the economy. Despite this, the Japanese
banks are more bankrupt today than they were 11 years ago, even though
they are not allowed to formally announce it.
According to the Tankan report issued by the Bank of Japan on Sept. 28,
the collapse of the economy, officially characterized as "recession,"
was further aggravated in the last quarter. An analyst at the Japan department
of the British bank HSBC commented: "This is no longer a recession,
it is a depression." The Japanese stock market, after 11 years, is
still falling further, and market values have reached one-fourth what they
were in 1990.
In Western Europe as well, the direction is downhill, and not only on the
stock markets. In the first 8 months of the year, 270,000 jobs have been
lost in big companies in the European Union. The indices for business climate
in Germany, France, Great Britain and Italy are at their lowest levels
in 3-5 years. In September, the Reuters purchasing managers index, which
measures industrial activity in the euro-zone, the countries using the
single European currency, fell for the sixth month in a row. Particularly
hard hit were Germany, Spain, France, and Italy, where the index reached
its lowest point since it was established in June 1997. Indicative of the
economic activity in all of Europe, are also the new orders for the German
machine-building sector: Orders have been falling since February, and in
August they dropped by 21%, with an 11% fall in domestic orders, and 28%,
from abroad.
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- Entire Economic Sectors Crumble
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- What is characteristic for the worldwide downward economic
spiral, is that, with every new wave of disaster, another sector starts
to disintegrate, and is hit by mass layoffs or bankruptcies. In the beginning,
in Spring last year, it was the highly praised "tech" sectors,
which dropped from one day to the next, from euphoria into depression.
The telecom sector played a leading role in this, once the New Economy
illusions vaporized and the incredible telecom debt mountains were suddenly
recognized as a problem.
The ensuing dramatic breakdown of investment activity of the biggest telecom
companies terribly hit the telecom equipment producers. John Chambers,
head of the market leader Cisco, described it as a "flood of the century,"
and the biggest crisis "that we have ever seen." The meltdown
in this sector continues unabated. On Oct. 2, Nortel Networks announced,
that, in addition to the 30,000 layoffs decided in Spring, that it would
fire another 20,000, thus halving its workforce since the beginning of
the year. The formerly showcase company Lucent Technologies, has also eliminated
50,000 of its 100,000 jobs this year.
The chip sector is also going through the greatest crisis of its existence.
New horror announcements were regular agenda items in August and September,
particularly with memory chips.
Infineon fired 5,000 workers, cut investments and announced short work.
As a result of the collapse in demand, prices for 128-megabyte DRAM chips
fell to less than $2, whereas production costs at Infineon were $7. Infineon
stocks, since July, have lost further two-thirds of their value, and there
is no relief in sight; the specter of insolvency is on the horizon for
next year. Competitor Micron Technology in the United States, reported
a drop in sales for the third quarter, in the order of 79% compared to
last year. Hynix in South Korea, another leading representative of the
sector, would have declared bankruptcy long ago, had the government and
banks not rushed in with a bailout package.
In August, worldwide, chip turnover was 42% below that of the previous
year, and the collapse was even worse in the memory chip segment.
Now, it is the airline industry that is being hit. The crisis in the U.S.
airline industry had begun quite a while ago, but since Sept. 11, the sector
is in free fall. Within two weeks U.S. airline companies announced 100,000
layoffs. In Europe and Asia, the same game is starting: British Air lays
off 5,000, Dutch KLM fires 2,500 and puts another 12,000 employees on short
work. From the United States, to New Zealand, Switzerland, South Korea,
and Belgium, governments are being forced to come to the aid of their threatened
airlines, something which at least in the case of the first three nations,
would have been unthinkable.
Despite this, a wave of bankruptcies is inevitable. The London Financial
Times is calling for the "culling" of the European airline industry,
whereby only a handful would survive of the three dozen or so that now
exist. The bankruptcy of SwissAir unleashed a chain reaction among branches
in Belgium, France, and Germany.
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- SwissAir: Is Anything Too Big to Fail?
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- From another point of view, as well, the collapse of
SwissAir is very important. It is not only, as the Swiss media say, a matter
of "the biggest bankruptcy case in Swiss financial history,"
but also the first case of state intervention in favor of a Swiss private
company, since the Second World War.
The banks, UBS and CrÈdit Suisse, had declared their willingness
to take over two-thirds of the airline operations of SwissAir, but they
did not want to have anything to do with the mountain of debt which has
built up, through SwissAir's international takeovers of the past years.
Thus, SwissAir had to declare a debt moratorium on most of its 17 billion
Swiss francs debt. From then on, SwissAir had to pre-pay for all of its
jet fuel. When the banks stubbornly refused to approve a bridge loan for
these purchases, the government had to advance the fuel money.
Innumerable shareholders or bondholders of SwissAir have lost a fortune
in the bankruptcy. Once above SFr 500, SwissAir stocks were trading for
SFr 41 on Friday, Sept. 28; then, after trading in the firm re-opened on
Oct. 3, they crash-landed at a bit more than one Swiss franc.
The depression, meanwhile, is moving ahead, looking for new victims. Leading
candidates are insurance companies, banks, and the automobile sector. If
the flagship airline of the most serious financial center of the world
bites the dust, is there any bankruptcy of any firm that still seems impossible?
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