1996 Issue # 5

8/12/2019 1996 Issue # 5

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ill Clinton loves to bragabout how he has cut the

budget deficit by $500 bil-lion. The amazing side-effect of theClinton Budget Deficit ReductionPlan is that nobody got hurt exceptbusiness and the rich. Still evenmore incredible is the fact that no-body in the media has dared to lookclosely at what Clintonomics is allabout. Why is it that if Republicanstry to cut spending, suddenly eve-ryone will die from pollution ortainted meat while children starveto death in the streets when spend-ing cuts of barely 50% of Clinton’s

savings are proposed?

To start with, Clintonomics in-volved two aspects. First, the obvi-ous approach was taken by pass-ing the largest tax increase in thehistory of our nation - $250 billion.The second part of Clintonomicswas to bring Arkansas financingschemes to Washington in an effortto save on interest expenditures.This Arkansas financing scheme

Issue #5 May 1996 Copyright Princeton Economic Institue all rights reserved214 Carnegie Center,Princeton NJ 08540 609-987-9522

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would "hopefully" generate an-other $250 billion in spending cutswithout ever having to reduce ac-tual program spending.

Some will argue that Clinton is

just a genius since he is the firstPresident who has ever manipu-lated the national debt. After all,many people have refinanced theirmortgages in an effort to save oninterest costs. So why shouldn’tClinton do the same for the nationif his scheme saves money? Tobegin with, Clintonomics has actu-ally reversed more than 40 years ofa concerted effort by all previousadministrations to extend the na-tional debt as long as possible.Long-term fixed debt eliminates

short-term risks where interestrates can rise sharply due to a hostof issues including geopolitical. In-stead of simply refinancing a mort-gage, Clinton got rid of the mort-gage and decided to allow our debtto float on the whim of short-terminterest rates. Ask any homeownerif that makes sense. As soon asinterest rates rise even slightly,your mortgage payments rise im-mediately. You never know what

your monthly payment will be fromone year to the next no less 10 or20 years from now. Over the past15 years alone, mortgage rateshave been everywhere from 25%down to 5.5%. Not exactly a steady

environment to bet your future onthese days.

So is there a problem? You bet!Within a few years, almost 20% ofevery dollar the federal govern-ment spends will go to make inter-est payments. What happens ifshort-term rates go up by only 2%?The answer is total chaos. Insteadof progressively moving toward abalanced budget, suddenly the in-terest expenditures explode wipingout any hope of ever achieving a

balanced budget. Spending cuts of$150 billion will have to be madeand forget about tax cuts. Mostlikely, a second term of Clin-tonomics will bring with it anotherround of tax increases. Its eitherthat, or cut medicare and socialsecurity.

Then there are those who willargue that short-term interest rateswould never go up again so there is

nothing to worry about. However,short-term rates rose 7 times sinceClintonomics began. The interestexpenditures for even 1994 were11.4% higher than 1993 while totalexpenditure rose only 4.7% for the

same period. At times, even over-night interest rates have risenabove 10 year treasury rates. Thisis what is commonly referred to asan "inverted" yield curve whenshort- term rates are higher thanlong-term.

Another casual ty of Cl in-tonomics is none other than theFederal Reserve. The way the Fedfights inflation is by raising short-term rates. At the peak in interestrates back in 1981, short-term rates

where nearly 5% points higher than30 year bond rates. What is inter-esting here, is that Clintonomicshas jeopardized the entire Keynes-ian economic models. If the Fedtries to raise interest rates to fightinflation, the excessive borrowingdemand is now emerging from gov-ernment -not the consumer. Anyrise in interest rates will now causethe deficit to explode immediately.By stacking all the government bor-

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rowing demand on the short-term(5 years or less), the treasury hasusurped the Fed’s most importanttool and in effect is causing short-term rates to rise faster than long-term - exactly the policy taken backin 1981 to slow the economy. In-deed, while the economy has been

recovering, it is in fact the weakestpostwar recovery in terms of thenumber of jobs created - less thanhalf of the Reagan period.

Cl in tonomics has indeedchanged not merely the politicallandscape, but also the economicstability of our economy. By simplymeasuring the rate of change inbond prices, volatility has morethan doubled in a few short years.By increasing volatility, we run therisk that the expected crisis years

for medicare and social security areno longer 2020 but can emerge assoon as 2003. What is really scaryis that 70% of our entire nationaldebt is now funded 5 years or lessand 33% is funded 1 year or less.This is simply nuts! It is as if thenation is financing everything on aVisa Card.

Interest expenditures are a dy-namic and major force that arereshaping politics itself while dis-torting our perception of the future.

For example, if we honestly reviewthe 8 years of the Reagan admini-stration, we find that the budgetwas actually balanced betweenspending and revenue. The na-tional debt doubled by $1 trilliondollars, which was exactly theamount of interest costs for the 8year term. Of course the Marxistsin this country would like us to be-lieve that the debt doubled becauseof "trickle down" or "voodoo"economics. Well, the national debthas since moved from $2 trillion to

$5 trillion and counting during aperiod of low inflation and risingtaxation. We better stop trying torewrite history in the eyes of politi-cal bias and realize that at 8%, youdouble your money in less than 10years in the bank. Our national debtwill continue to grow on a com-pound basis despite which partyholds the office. However, withClintonomics, our national debt willnow grow exponentially even if

spending and revenue are bal-anced.

The economic truth about ourdebt is just never discussed openly.Back in Reagan’s era, the nationaldebt was financed between 60-70% long-term. Like any 30 year

mortgage, change in short-term in-terest rates have no effect whenyou are locked in on a long-termbasis. Still, with 60-70% of our debtfunded long-term, the lag periodbetween a rise in interest rates anda rise in interest expenditures forthe government was about 4 years.The doubling of the national debtunder Reagan was actually set inmotion under Carter and so on.Every President reaped the benefitor suffered the pain due to the pre-vious administration when it came

to interest expenditures. With Clin-tonomics, that time lag has disap-peared and we have less than 2years between a rise in interestrates resulting in higher federaldeficits due to interest expenditure.

Clintonomics has not merelycreated the false illusion that the

deficit has been reduced due topainless spending cuts, it has alsoescalated the odds against anyhope of restoring sound finance tosave our future. By shortening thetime lag between changes in interest rates and a rise in governmenspending, the entire long-term pic

ture begins to change. What wouldhave taken 20 years can now beaccomplished in less than 10 yearsusing simple compound interesanalysis.

From the start, those of us unde55 would have had a greatechance of being abducted by aliensthan ever collecting our first sociasecurity check under the sameterms and conditions of todayNow, Clintonomics just may haveguaranteed that you will never see

that first check under any terms andconditions. If the polls hold trueone more political swing towardeconomic absurdity may be oupenance before a true conservativerevolution takes hold in the media where it seems to count while therest of us are still waiting to exhale

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epublicans often appearas though they are stupidand incompetent to the

point that they couldn’t sell a life-preserver on the deck of sinkingship. The Republican Party itselfhas always been an uneasy coali-tion of not always compatible con-servative views. What it boils downto is the sad fact that there are twotypes of conservatives - FISCAL

Conservatives and SOCIAL Con-servatives.

The elite within Republican cir-cles in Washington are predomi-nantly Social Conservatives.These are people who rant andrave over issues like gay mar-riages, abortions and school uni-forms. These are irrelavant is-sues because they are by nomeans the cause of social decaybut rather merely a symptom. Allsocial decay throughout history be-

gins by the slow and steady eco-nomic decay that ultimately causesthe family unit to break down andcrime to rise. Social Conservativeshave always failed to grasp thesepoints and prefer to rule the nationon issues of flag burning and moraldecay without ever bothering to lis-ten to economic issues of impor-tance.

Fiscal Conservatives are farfewer in number but seem to havea better understanding of what is

killing the patient. Here we find thatthe prevailing view is that the "EvilEmpire" does not reside in Mos-cow, but in Washington. SocialConservatives reject these notionsbecause they feel that this is alsodirected at them. Instead of review-ing the issues, it is far easier todemonize people like Ross Perotthan admit that 20% of voters arefed up with Washington regardless

of party affiliation. Perot did not be-gin this voter dissent, he just hap-pened to be at the right place at theright time. To vilify Perot, allowsthe Social Conservatives to jus-tify their own political agenda inWashington, which is merely the

opposite of the Social Liberalpolicies that currently dominatethe Democrats.

These two primary groups ofconservatives are never happy witheach other. Each group feelsstrongly that their cause should beat the head table of discussion.When you try to talk to a SocialConservative about anything sub-stantive dealing with economics,taxes or government waste, theireyes glaze over and out comes thesilver cross, which is then held upin your face in hopes of scaring youoff. Such issues are viewed as toocomplicated to deal with. Gays, flagburning and abortion are simplyeasier to understand than the morepressing issue of property rights,taxation, declining standard of liv-ing and contradictory over-regula-tion.

Let’s face the facts. If abortionwere illegal, all children adorneduniforms, flag burners were inprison and gays were prohibitedfrom marriage, the basic standardof living for the middle class wouldnot be changed in the slightest. It

would still take two incomes to sup-port a family and it would still re-quire someone to earn 40% morethan welfare just to break-even inthe workplace. Unfortunately, thebasic core economic issues aresimply never discussed by the So-cial Conservatives because they just don’t get it or feel that youcannot portray it in 60 seconds orless. This attitude merely condemsus to a fate worse than hell - inabil-ity to discuss serious issues thatwill determine the course of oureconomic destiny.

The Republican Party itself hasnever been a real unified party tosay the least. This battle betweenSocial and Fiscal Conservativeshas been waged throughout thisentire century and remains the rea-son why the Republicans, when-ever possible, fail!

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Continental Dollar and the birth ofthe US dollar in 1792. It was the ageof high inflation and unsound fi-nance under the Silver Democratsof the 1880-1890s that led to thenear bankruptcy of the US govern-ment, which in turn ushered in theconservative Republican era be-

tween 1896 to 1908. Once again,we find ourselves dealing with whatmay appear to be a 90’s thing ofunsound finance and uncon-trollable budget deficits as the mostsignificant issue of all.

The election of 1896 was wagedsolely on the fiscal conservative is-sues versus liberalism spendthrifts.The London Daily Mail reportedthat the election of 1896 was foughtover two fiscal views that were asdifferent as "night and day." The

report went on to say "in every newspaper, in every cafe, in every street car, it is the dollar and the dollar alone, whose fate is discussed." Others called it the"Battle of Standards" with the Re-publicans backing the gold stand-ard and the Democrats backing aninflation policy with the silver stand-ard. It was at this convention wherethe impassioned speech of WilliamJennings Bryan was delivered."You shall not press down upon the brow of labor this crown of

thorns, you shall not crucify mankind upon a cross of gold." The votes were cast. The nationswung back to conservative fiscalpolicy ending one of our darkesteconomic periods in American his-tory.

It would appear that the onlyhope for the Republican Party in1996 would be again to highlightthe sound vs unsound economicpolicies that are still as differentin 1996 as they were in 1896. All

the polls show that the vast majorityof Americans do not believe thatthey will EVER see their first socialsecurity check. In a Time Magazinepoll, only 3% of respondents weresatisfied with the current tax sys-tem. These are core elements ofvoter dissatisfaction. If the Repub-licans do not adopt the fiscal con-servative issues and highlight thedangers of social liberalism to theeconomic stability of the nation,

then indeed the battle will be lost.In the final analysis, it is the eco-nomic decay that dictates the ul-timate fate of any nation. Justlook at Russia if you disagreewith that statement.

Social Conservatives fail to

realize that the majority of peo-ple do not want government todictate moral values. They do notwant liberals or conservatives toimpose their extreme views on thenation. If the Social Conservativeswithin the Republican Party do notgive way to the Fiscal Conservativeelements, our computer modelwarns that indeed a 3rd partymovement will emerge as it hasbefore on the back of fiscal conser-vative issues. The Democrats willbecome the party of gay rights,

the Republicans the party of re-ligious rights and morals, andthe 3rd Party movement willemerge as the fiscal conserva-tives who try to ease the eco-nomic burdens for the middleclass.

If history is any guide, the futurelooks very bleak indeed. The politi-cal fabric of the United States isslowly coming apart and Washing-ton is still trying to hold on to sym-bols of power while ignoring therising tide of fiscal conservatism. In

the end, the massive unfundedliabilities that have been accu-mulated over the years will beour undoing. The longer the so-cial debate grabs top billing, theworse the fall from grace at thehand of unsound finance.

There is little doubt that prom-ises of Washington cannot be kept.The only question that remains: Ifwe cannot trust Washington tosolve our problems, then can wetrust their forecast for a debt crisis

being held off until 2020? Our com-puter dares to differ with that opti-mistic vision of spend now andworry about it 30 years from tomor-row. For if you look closely at thefine print in Washington, tomorrow just never seems to come.

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stablished democraciesappear to be entering a pe-riod of increasing volatility

in the previously cozy structure of

their party systems; be it a con-victed murderess in India headingIndia’s first lower caste politicalparty, the former "King of the Rus-sian Gulag" dissident Natan Sha-ransky’s new immigrants party inIsrael or the Anglo-French financierSir James Goldsmith’s new Refer-endum Party in Britain. Is RPS(Ross Perot Syndrome) sweepingthe world?

While the first two examples canperhaps be explained as significant

groups previously unrepresentedby any established parties nowfinding a leader to voice theirneeds, the case of Sir James drawsimmediate comparison with RossPerot. Both are wealthy political"prophets" from beyond the es-tablished political system, bringingwith them the charisma of extraor-dinary financial success. Both havemade and continue to make a na-tional impact on domestic politicswhile drawing substantial supportfrom parties showing advanced

stages of sclerosis. Both have es-sentially one issue around whichthey spin a broader vision for thenation’s economic and political fu-ture. In the case of Perot it is taxa-tion and the attendant mismanage-ment of the government’s spend-ing. In the case of Goldsmith, it isBritain’s economic and political re-lationship with Europe.

As in times past, when peoplesee that the Ship of State is head-ing for the rocks, they become wor-ried. But when it becomes obviousthat no one on the bridge can reada chart and insist that the light-house is the glow at the end of thetunnel, someone will start winchingout a life boat and say "follow me."In a metaphorical sense we havethis parallel between Goldsmithand Perot. However, Perot wants to

be the new captain; he stood for thePresidency. Goldsmith just wantsto avoid the rocks; he is not a can-didate in his own party.

The Referendum Party hasmade it clear they will dissolve ifJohn Major’s government allows areferendum before the next generalelection on the political future ofBritain within Europe and the EMU(European Monetary Union). In-deed, prospective ReferendumParty candidates have said that

should the referendum not proceednow and they contest and areelected to parliament, they willcross the floor and join the Conser-vative Party after the referendumfinally takes place. Several Conser-vative Members of Parliament,largely those known to be "Euro-sceptics" have met with Goldsmith,ostensibly to point out to him thathis actions will make it more likelythe Pro-Europe Labour oppositionwill win the elections. Another viewreveals that those very same Con-

servatives were there to promisetheir support for a referendum onEurope and therefore would not liketo see a Referendum candidatecontesting their constituency!

It is clear the self-styled "New"Labour Party headed by Tony Blairwill most likely win the next Britishelections although their opinion polllead is narrowing. Despite achange of captain, the Ship of State

will continue to head for the rocksin the view of those gatheringaround the life raft. In parallel withthe political situation in the UnitedStates the mainly two party systemof the past 75 years will begin tofracture. And oh yes, Ross PeroSyndrome will be part of the transition to a new order.

Interest Rates Economics and Politicians

The Governor of the Bank oEngland, Eddie George, and theUK Chancellor, Kenneth Clarkmeet monthly to decide amongsother things whether or not to ad- just the current bank base ratesThis is the economic picture theysee at the moment.

Official statistics released showBritain’s February trade gap a£1.5bn seasonally adjusted withthe relatively strong domestic

economy pulling in imports and exporters struggling to achieve salesin depressed Continental EuropeThe deficit was eased by the highest oil trade surplus since 1986Adjusting for oil and erratic itemsthe February deficit was £2.0bnthe highest in six years. Export volumes declined within the EuropeanUnion but grew by 6% in other markets. House building figures showa revival in the market over the pasmonth. These are generally regarded as more forward looking

than the house loans statisticswhich seasonally adjusted remained fairly static. Retail salesvolume also rose on the latest figures for March, 2.2% higher than inMarch 1995. However, industriaoutput has slowed with orders inthe engineering industry down5.5% on a year earlier. Investmenfrom Europe, particularly from Germany continues to grow. The attraction is lower costs, greater so

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cial flexibility and the view that lowproductivity and poor industrial re-lations are things of the past.

Whether Clark, who has the finaldecision, decrees a change de-pends on the traditional view of therisk of lower rates pushing up infla-

tion balanced against lower rateshelping industry. Clark of course isalso a politician and member of thegovernment. George is a bankerand civil servant but, is finding him-self more and more pulled into thepolitical arena. He recently an-nounced that the British economyhas a good chance of achieving lowinflation and stable interest rateseven if it does not join the singleEuropean currency - an anathemato the staunch pro-Europeans withwhom Clark counts himself.

Soap, Gold, Poverty and the IMF

What does Russia and Mexicohave in common apart from thepopularity of Latin American soapoperas? A recent forecast projectsthat together they will account forhalf of the International MonetaryFund’s outstanding credits by theend of 1997. At the last committeemeeting one national directorpointed out the six largest debtors

would represent 70% of credits bythe end of next year, the largest twobeing Russia and Mexico at 49%.

In the same meeting, the UKchancellor backed a proposal bythe Belgium finance minister tospecify an amount of the Fund’sgold to be sold to pay for the soft-loan facilities offered to the world’spoorest countries. The scheme isan attempt to reduce the resistanceto gold sales, particularly from Ger-many, who worries that IMF sales

might prompt calls back home tosell some of the Bundesbank’s re-serves. The IMF managing direc-tor, Michel Camdessus, thought5% of the Fund’s gold should besold and the proceeds invested (ingovernment bonds?) to providehalf of the $3bn subsidy needed tofinance the soft-loans over the nextfive years. The rest should comefrom government donations. Fi-nance ministers however, said the

Fund should use its own resourcesrather than calling on governmentsfor more money.

The German finance ministerthen criticised the IMF’s world eco-nomic outlook for being too lenienton countries such as Britain, Swe-

den and Italy who had devaluedagainst hard currencies such as theDeutschemark. Soap indeed.

The Welfare State and European Monetary Union

The IMF and some politicianshave stated that the only way to cutgovernment deficits is to cut publicspending. Many others suspectgrowing government deficits spelleventual economic disaster. Oth-ers appear entirely oblivious. Un-

fortunately, it is becoming difficultto avoid the fact that spending onthe welfare state is increasingthroughout Europe at an alarmingrate and has to be a target of cuts.The 19th century free traderFrederic Bastiat’s definition of thestate as "the great fictitious entityby which everyone seeks to live atthe expense of everyone else" isapproaching achievement.

Despite the "will" now shown bypoliticians in speeches, where is

the "way"? Here lies the sceptic’strue rationalisation for Europeanmonetary union. Not for the resultin itself. There is little evidence thatit will achieve the politicians pledgeof a land of milk and flowing honey,and structural problems will at leastdefer complete union, but after sell-ing the dream of European unity,the pain of spending cuts may thenbe blamed on the need to achievethat dream.

Spain’s new coalition govern-

ment, led by Jose Maria Aznar’sPopulist Party with support from re-gional parties, cites as over-ridinglyimportant the need to qualify for theEuropean single currency and an-nounced a 250bn Peseta cut inspending. In Belgium, Jean-LucDehaene’s government faces along running strike and dispute withteachers over government cutbacks. The government still needsto push through an additional 30bn

Belgium Francs of cuts to be ontarget. Chirac in France, a commit-ted unionist, must make savings ofover 60bn French Francs in thenext year by cutting the civil serviceand trimming the cradle to gravesocial security system. Portugal’scentral bank announced it was on

target for the 1999 convergencecriteria needed to join the singlecurrency. The bank forecasts lowereconomic growth this year than theprojections of the ruling socialistparty but being closer to the criteriathan any other southern Europeancountry is a source of nationalpride. In Italy, Prodi of the winningOlive Tree Alliance, does not takeover from the caretaker govern-ment till the end of May but hasconfirmed his pledge to take theLire back into the European ERM

(exchange rate mechanism). InGermany, the cause of union isfairly planted as the reason for theeconomic pain.

Whether governments in Europewill succeed with this opportunity tobreak expectations for welfare re-mains to be seen. It is all too easyto bow to populist pressure of dem-onstrations on the street and to re-duce spending cuts - then tax a bitmore and borrow a bit more.

PEI London SeminarJune 26th, 1996

Our forecasts for Europe, monetaryunion and the next big turn in curren-cies will be provided at our Londonseminar.

Special quest speaker will be AlanWalters, former economic advisor to

Lady Thatcher.

For tickets, please call our Londonoffice

Phone (44) 171-583-5556Fax (44) 171-583-0021

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n June 16th, Russia willmake a giant historicalstep by holding its sec-

ond freely contested presidentialelection. For a country that hasbarely developed political partiesand legislation to govern such anhistoric occasion, the quantity ofpolls that are being conducted isnoteworthy. Russian and interna-tional pollsters alike have gotteninto the game. Indeed, the opportu-nity to conduct polls, numbercrunch and analyze the 1991 Rus-sian Presidential elections was notpossible. However, 1996 now pre-sents the first opportunity in which

the Russian political psyche maybe poked, prodded, cajoled, andmanipulated in the all too familiarpoll.

The staple of American politicallife - the poll - has not been muchuse in predicting the outcome ofRussian politics. Less than fourweeks away from the elections andthe only clear opinion to emergefrom all these numbers is that any-thing is possible. In light of theuncertain outcome, several promi-nent western leaders gathered inMoscow to give Yeltsin a politicalboost. President Clinton wasamong the leaders affording Yelt-sin photo opportunities, handshakes, and invariably tips on howto tilt the polls. On one such occa-sion, BBN describes PresidentClinton’s April 21 encounter with an83 year old woman. Her concernwas that her son is an alcoholic butshe can not afford treatment forhim. President Clinton empathizedand told the woman, "In my family,I have many people with the same problem." He continued bytelling journalists that the cost oftreatment was driven up becauseof the lack of treatment centers. OnApril 22, a poll by CNN/MoscowTimes reported Yeltsin ahead ofZyuganov at 20.7% to 19.8%.

Polls are by no means a tell-allforecasting tool, but they can serveas an interesting tool for politicians.Over the past several weeks, Yelt-sin has rapidly ascended in the

polls so that the contest is neck andneck between Communist Partycandidate Gennady Zyuganov andPresident Boris Yeltsin. If no can-didate receives the majority of thevotes then the top two candidateswill contest a run-off scheduled forJuly 7th. A run-off is expectedsince Zyuganov and PresidentYeltsin stand to receive an equalshare of around 25-30% support.The other contenders - reformer

and Yabloko Party leader Yavlinsky - garners about 10% supportand former General Alexander Lebed - popularly liked for his opposi

tion to the Chechnyan War - alsoreceives 10%. Candidates Zhirinovsky, Fyodorov, and Gorbachevhave gathered negligible support.

Although Zyuganov has maintained the lead until recently andthe Communist victory in December presented a shift in directionthe electorate provided an ironicresponse in a Ramir poll. A largepercentage of Russians - 40% believe Yeltsin will win regardlessof Zyuganov’s lead and the public’s

distaste for the President. Meanwhile, Zyuganov was expected towin by only 26% of those questioned. It is not clear if this pohighlights the disbelief in the abilityof the political system to reflect thevoters concern; an underlying andreluctant support for Yeltsin; or jusan example of conducting a western-styled analysis of the Russianpolitical process at too early astage.

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Support for the top two candi-dates falls around 26%. WhileZyuganov has increased his rat-ings by only several percentagepoints, Yeltsin has more than tri-pled his since late Dec/early Janu-ary. Zyuganov has not publicly

changed his platform to any greatdegree. His intentions and politicalpositions have been divulged withlittle visible impact on the elector-ate’s support for the CommunistParty or their candidate. Thesenumbers could suggest thatZyuganov has reached a thresholdof popular support as his numbershave neither dramatically in-creased or decreased. Thiswould a lso ind icate thatZyuganov’s base of support is quitestrong and his numbers stand to

increase as he reaches out for abroader coalition to those uncom-mitted and apathetic voters.

On the other hand, revelationsregarding Zyuganov’s position maybe prompting voters to throw theirsupport behind Yeltsin and thus hisgrowing popularity. However, thisseems unlikely as the voters’ com-fort and security with the old com-munist system far exceeds that ofthe economic reforms of the pastfive years. By the same token, the

electorate does not appear to bereacting to what Zyuganov says butresponding to Yeltsin’s campaign-ing. Yeltsin has had to perform ex-tensive political maneuvering andcoalition building just to reach acompetitive polling number. In thisregard, it is more likely that Yeltsinhas reached his support thresholdthan Zyuganov.

A recent admission by one ofYeltsin’s campaign advisors, Ana-toly Chubais, seemed to underline

this possibility by saying that thepolls reflect the need for Yeltsin’scampaign to be more aggressive.However, there are few places re-maining for Yeltsin to find support.Billions of dollars have been prom-ised to constituent groups, a call forthe cessation of violence in Chech-nya has been issued, and numer-ous western leaders have paidhomage to Yeltsin in the past cou-ple of weeks. These actions were

further aided by loans and creditsfrom world banking and lending in-stitutions. The Russian press alsohas not been slow to report on theachievements of Yeltsin. Thesemaneuvers have been sufficient tobring Yeltsin back into the race butby no means do they secure his

victory. This realization may bewhat prompted a close associate ofYeltsin to publicly state that post-ponement of the elections mightpossibly be needed in order toavoid bloodshed. Accordingly,Yeltsin refuted that statement andmade assurance that the pollingwould proceed as planned. Never-theless, Yeltsin’s campaign is un-der pressure.

A recent poll found that over halfof the participants thought that Yelt-

sin should resign while 20% voicedapproval of his bid for reelection.The poll also found that a largemajority of the participants laid faultfor the economic crisis on the cur-rent government while 36% identi-fied the former Communist govern-ment. Clearly, Yeltsin has largeobstacles to overcome. But thispoll is interesting in that the Com-munist victory in December and thecabinet changes did not shift blamefrom Yeltsin let alone his govern-ment. In fact, ideology or party af-

filiation does not yet appear to playa major role in the public’s opinionbut rather the tendency to person-alize. Even Gorbachev, who barelygets polled with 1% support, contin-ues to suffer from the public’sblame and political exile. Oddlyenough, this inclination to person-alize may be the reason behindYeltsin’s growing popularity as hecampaigns not on party affiliations,free-markets and democratic re-form but rather on political pork andthe President’s personal account-

ability to each constituent group.Yeltsin is feeling their pain and it ispaying off.

Yeltsin has recently attempted topull in endorsements from promi-nent politicians. At a recent MayDay celebration, popular MoscowMayor Luzhkov addressed thecrowd with words of support forYeltsin . Although Yeltsin hasgained the support of the well-liked

Chernomyrdin, he still faces criti-cism and challenges from otherpopular political figures. GregoryYavlinsky, reformer and leader ofthe second largest bloc in theDuma, receives around 10% sup-port in presidential polls. RetiredGeneral Alexander Lebed, a well-

liked military professional and anopponent of the Chechnyan war,also receives numbers around10%. Both men have so far re-fused to back Yeltsin or Zyuganov.The endorsement from these twocandidates would broaden Yelt-sin’s support and secure his vic-tory.

Headlines report Yavlinsky andLebed toying with the option tounite and form a coalition party tocontest the elections. In this sce-

nario, Yeltsin stands to lose in thegeneral election as moderate andreform votes would be split whileZyuganov’s base would remain un-touched. However, if the run-offwere to contest Zyuganov andYavlinsky, popular opinion holdsthat Yavlinsky would win. Thiswould suggest that the public is notso adverse to continued reform asit is to Yeltsin. However, the courseof Eastern European nations, for-mer Soviet nations, and the Balticcountries alike suggests that re-

formed Communists are preferredto reformers.

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Within the German car industrythe mood is changing. They get abit upset about the German Taxmodifications. Car costs are notany more just deductible as busi-ness expenses, but an employeehas to pay personal tax for his pri-

vate use of the company car. Thishas an affect especially at the topmanagement level.

Luxury car sales for the firstquarter 1996 confirm this. The Mer-cedes flagship, the “S” class salesplummeted by 31 percent, whileBMW’s 7 model sales decreasedby 27 percent and the Audi A8sales dropped by almost 14 per-cent.

The 1996 German tax law illus-trates an important point - that Ger-many is desperate for revenue. Re-cently Michael Jackson decided tocancel his German leg of his Euro-pean concert tour because underthe new tax law, the taxes owed tothe German government would bemore than 100% of his total reve-nue!

German tax law does not allowforeign entertainers to deduct ex-penses from locate taxation. Fol-lowing Michael Jackson’s decisionto write-off Germany as a place todo business, strong criticisim hassprung forth forcing perhaps a pol-icy change at the very top.

Theo Waigel, the German fi-nance minister, has written a letterto the entertainer begging him toreconsider his decision to cancel

the concert tour.

"Dear Michael Jackson:

...You should reconsider yourdecision to cancel concerts in Ger-many. At least you have no reasonto, from a tax point of view. if thecosts of your concerts are higherthan 50 per cent of your income,you will be able to file a normal taxdeclaration instead of paying alump-sum tax. This is precisely myproposal for a change in the tax

law."

It appears as though the offermade to michael Jackson is that hecan become a resident of Germanyfor tax purposes. Therefore, he willbe able to deduct part of his costsfrom income but he will also haveto share the same burden of theaverage German taxpayer. Thismeans that Jackson can contributeto the "solidarity" surcharge tax tohelp rebuild eastern germany ontop of on of the highest income tax

rates in Europe.

Why are the markets and politi-cians so sure that a single currencywill happen in Europe, even thoughthe Maastricht targets are clearlyout of reach? And why are theyequally confident that a near bank-rupt country like Belgium will be-come a founder-member, while It-aly (and Britain) will not?

The answer lies, as usual, in theGerman politics. The defeat of theanti-EMU campaign in Baden-Württemberg did not merely showthat the Germans were relativelyimmune to populist campaignsabout preserving the “strong mark.”It also showed something moresubtle - German public opinion no

longer sees EMU as a black andwhite issue.

First, the Germans have seen

the dark side of the old Bundesbank slogan “a strong mark is agood mark.” The Germans nowwant the mark to weaken, not onlyagainst the dollar and the yen, bualso against the lira, the pound andthe Swedish crown. The secondpoint: the German public hasgrasped the distinction between amonetary union embracing thewhole Europe and a German dominated hard core. Polls have shownthat a monetary union involvingonly Germany, France, Austria and

the Benelux countries enjoys 70percent public support. But if Italyor Spain is included in such an arrangement support immediatelydrops to 40 percent or less.

Anyhow, the man on the street isstill trying to figure out what positiveeffect the Euro might bring to himAt least it would reduce his hassleto change currencies when leavingfor the holiday. Politicians - HelmuKohl seated in the first row - soldhim successfully on the premise

that a single European currencywould secure his job, however, nobody has yet explained at whichlevel of pay he would need to accept.

One reason the Germans (nothe man on the street) are becoming more relaxed about EMU is thathere politicians, bankers and businessmen are quietly reassuringthem that improvident Mediterranean countries will not be allowedto join. The Maastricht criteria haveplenty of scope to achieve this re-sult. But the problem is that a singlecurrency without the “Club Med”would be almost pointless. One othe main functions of EMU from theGerman and French standpoint isto stop their neighbours from improving their competitiveness bydevaluing. This is the problem addressed by the new-style ERM demanded by France (with the usua

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German support). If Italy and otherperipheral countries can be forcedto tie their currencies to the euroand to cede control of domesticpolicies to the European CentralBank, then the threat of “competi-tive devaluation” after 1999 can beaverted without allowing them to

become founder-members ofEMU, and thereby forfeiting Ger-man public support.

The new Italian Government istalking of rejoining the ERM withinweeks - and if Italy does so, thenSweden and Finland, the two otherholdouts, may soon follow. Britainwill then be the only EU countrydetermined to stay outside bothEMU and ERM. As usual, Britainwill be in a minority of one.

The Siemens board memberKarl-Hermann Badman is full of ex-citement when talking about theEMU. He emphasises the impor-tance of a single currency forEurope whenever he speaks pub-l ic ly . “Siemens’ turnoveramounts to about 63 billion ($ 42billion) marks. If we will be ableto bill in a single currency we

would abolish currency risk forhundreds of millions”. Siemensplans to be able to have a Euro-bal-ance sheet in 1999.

Siemens is well ahead of thecrowd. Only 12 percent of all com-panies have started to preparethemselves for the Euro. That couldbe a mistake. The change will nothappen overnight but graduallyover the next several years and itwill be expensive.

The change will cost, accordingto a poll for all German banks, ap-proximately four billion marks, nothaving taken into account the reve-nue loss of fees and commissionsfor the currency transactions. Deut-sche Bank is estimating the cost atabout 350 million marks, while Bay-erische Vereinsbank is calculatingonly 120 million marks. Non-bank-ing companies think more in double

digit millions, however, that will notbe enough.

Roland Berger & Partner, a man-agement consulting firm believesthat a single currency will undoubt-edly change the competition. Theyrecommend that corporations

should start now to examine theimpact of a single currency. Thefirm suggests that an internal taskforce should be created to conductanalyses, come up with a report,and a cost plan as well as a timeschedule for the operationalchanges. In the spring of 1998,when the politicians have finally de-cided upon the members of theEMU and when Germany alone willhave established a minimum of4,000 procedures and regulations,the operational changes will have

to take place.

The whole administra-tion requires not only a dou-ble bookkeeping systembut also technical adapta-tion in various fields. Kar-stadt, a department store inGermany, is for instanceforced to change more than10,000 cash registers inabout 165 shops. The Ger-man Telecom has to decideto change their 70,000 tele-

phone kiosks into cardphones or modify theirphones totally. BMW esti-mates the cost for changingtheir computer hard- andsoftware will be more than10 million marks. Their taskforce also examined the af-fect on the marketing andsales. “The Euro will leadto equal prices through-out Europe, but due to thefact of different tax-sys-tems and purchasing

power differentials wecan not afford to have thesame price for a car allover Europe.”

The schedule for theEuro is on first sight quiteeasy to accept but time isrunning out fast. The mem-bers shall not be decideduntil 1998. The currencyparities have to be deter-

mined and the Euro shall be intro-duced in 1999. By 2002, all of theold notes and coins shall be abol-ished. The middle and small corpo-rations still have a lot of doubtsabout the Euro.

"What do middle-sized organi-

sations think about the Euro?"

1) I expect comprehensivehelp from my bank.... 92%

2) I am not informed about theEuro...... 65%

3) I believe competition will in-crease..... 87%

4) I have not yet analysed theaffect of a single currency... 89%

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he return of Hong Kong toChinese sovereignty in1997 is now just over 400

days away. This issue has and willdominate events and sentiment un-til then. The world is watching tosee whether Beijing can managethe handover of Hong Kong intelli-gently and resist tampering with itsfree institutions. Some develop-ments so far have proved worrying.Beijing seems steadfast in its intentto dismantle Hong Kong’s legisla-ture and implant its own provisionallegislature. Continuity and neutral-ity of the Civil Service emerged asa controversial issue which encour-agingly Beijing appeared to guar-antee to Chief Secretary AnsonChan after a recent visit to Beijing.While British influence and cer-tainly Governor Patten’s influenceon Beijing is waning, the Prepara-tory Committee - a Beijing ap-pointed body set up to aid a smoothtransition - does have a close ear toChina. Comprised largely of keyHong Kong business figures it ishoped that their self interest willensure they will educate Beijingthat the one country two systems

must remain for Hong Kong’s suc-cess to continue. Pragmatism ap-pears to be the name of the day.Public opinion is generally ambiva-lent about the political maneuver-ing. More important is that the pros-perity Hong Kong people are usedto continues.

US/China relations have beenreaching new lows mired in mutualsuspicion and hostility. With lastmonth’s military stand-off in theTaiwan Straits behind us, trade dis-putes are back to the fore. Theannual MFN (most favored nations)tussle is again reaching its climax,but has been upstaged by a USultimatum to China to crack downon intellectual copyright piracy by

May 15th or it will take stiff sanc-tions. True to form China has re-taliated by threatening its own tit fortat actions. The US appears to beloosing patience with China that af-ter signing last year’s internationalproperty rights (IPR) agreement,the problem is still growing. For in-stance China’s CD piracy has infact increased to nearly 90 per centof China’s estimated output. Therehave even been reports that Chinahas managed to produce a copycar - an exact replica of an Audio

100. A last minute agreement is stillon the cards although the US hasleft itself little room for maneuver-ing. President Clinton may find itdifficult to climb down in an electionyear.

MFN(most favored nations) isexpected to be renewed. Republi-can presidential nominee Bob Dolehas added his support to that ofPresident Clinton’s. Congress’ssupport is still required and Con-gress has 60 days after July 3 todisapprove the President’s recom-mendation - disapproval based ona majority on both houses. If MFNwere not renewed the Hong Konggovernment estimates the effectwould be to slash 2.1-3.0 percent-age points off of Hong Kong’s GDP.

The main economic event inChina this month was the longawaited cut in interest rates aftethree years of austerity. Interesrates were cut by one per cent in amove designed to help China’s ailing state enterprise sector, stilplagued by debt levels averaging75 per cent. The cuts were slightlybigger for savings deposits than foloans in a move to ease the crisis

facing banks which had been triggered by a savings glut. China’sinflation fell to 7.7 per cent in thefirst quarter producing positive reainterest rates which had attractedsavings of 3.3 trillion yuan (abouHK$3.05 trillion) by the end oMarch. These cuts and a removaof the inflation index subsidy fomedium-term deposits will lift ahuge burden for China’s banksThe move should give a boost toChina’s fledgling stock markets asinvestors seek better returns fo

their savings. The outlook for HongKong’s economy will also improvewith the easing of monetary policyin China in the 2H96. Hong Konglisted H-shares which generally reported terrible results should alsobenefit from the cut in interesrates.

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The US share market is starting

to shift gears as we head into theMay the broader market is clearlyin first place taking the lead fromthe Dow Jones Industrials. This isoften the final sign that signals thata temporary top is starting to form.If the Dow should also break tonew highs reaching the 5800zone during the last two weeksof May, then look out, we couldsee a correction begin fromabout mid June on into as late asJan/Feb 1997. The US share mar-ket needs to hold on to its current

momentum beyond June in order toavoid such a correction period. Onekey area to watch will be the 647level on the S&P 500. A weeklyclosing beneath this area at any-time beyond May will confirm that asharp correction could be underway.

Here the luster is starting todwindle. Financial trouble at theIMF is starting to build. With 70% ofIMF outstanding loans currently ex-tended to Russia and Mexico, thedark clouds of uncertainty are gath-ering on the horizon. The IMF isstrapped for cash and in a politi-cal year like this, nobody wantsto pour more money into the IMFtreasury. Russia is simply notmaking payments and fear is start-ing to rise the closer we come to the

June/July Russian elections proc-ess. The fear is that Yeltsin mightlose and if so, it is widely expectedthat Russia will permanently de-fault on its loans - some $85 billiondollars.

While at first glance one mightthink this news to be bullish forgold. However, the pressure on theIMF is translating into potential goldsales out of desperation. This

means that we could see the met-als move down first, then reactpositively later.

There remains only two windowsin times left for a final low in themetals - May/June 1996 andJan/Feb 1997. We need to see golddecline at least under $387 basisspot NOW in order to raise anyhope of bringing this bear market toa conclusion. Silver must drop atleast below $5.12 before June 15thin order to qualify this period as amajor reaction low. To be better,silver should break below $5 toyield a better signal for a possiblelow. Thereafter, silver must close

above $5.80 before year-end orelse we could see silver drop to$2.90 for the first quarter of 1997.

The bond market is simply con-fused. Clinton’s shifting of the na-tional debt is distorting the view ofthis market in a very big way. Herethe bonds have fallen from 122back to 106 while the Fed has doneNOTHING! Talk about volatility andconfusion.

Rubin is expected to be flirtingwith the idea of issuing US treasurybonds INDEXED to in f la t ion.WARNING! These issues may beseriously hazardous to your finan-

cial survival. Although the schemesounds good on the surface, don’tforget it is another Wall Street brainstorm that has landed such firms asPrudential nearly in jail. Rubin, anold Wall Street banking schemer, isabout to give the nation a real shaft.These bonds, if indexed to inflation,will be tied to the CPI. The CPI isalready the most politically manipu-lated statistic ever invented. Be-sides 14 major revisions, there is

talk of cutting the CPI in half. Don’tforget, that while the CPI shows2.5% inflation, the PPI shows 7.5%.The difference between the two is

purely political manipulation. ThePPI is not used for anything withrespect to inflation. The CPI is usedfor automatically increasing entitle-ments. Therein lies the motive.

The CPI does not include taxa-tion other than a retail sales tax.Taxation is up more than 200% inless than 10 years and in somestates it is up 700%. In 1983, thegovernment took real estate out ofthe CPI which used to be 40% ofthe statistic. It is now based on

rents while the real estate compo-nent is based upon FHA data,which limits the value of a propertyconsidered to $100,000.

These "Rubin Indexed JunkBonds" that you will be hearingabout in the press soon are theworse investment you could possi-bly make. The real risk is in interestrate exposure and as we can see,the price of bonds has fallen from122 to 106 over the last 3 monthson anticipation of what the Fed

might or might not do in the nearfuture. This index would still notshield you from that exposure andwould undoubtedly provide an un-derestimation of inflation in anyevent. RECOMMENDATION: Stayvery, very far away!

The US dollar is pressing highergoing into May and could reach apossible temporary top. The DMarkis a key currency to watch here.The dollar must move above158.40 to signal that the rally willcontinue. If we cannot accomplisha monthly closing ABOVE 158.40on the DMark by the end of July,then the dollar could fall back to onemore new low going into the firstquarter of 1997 against many con-tinental Europeans.

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The C$ remain in a very weakposition with a definite risk of drop-ping into the first quarter of 1997where a test of the 66 cent level islikely. There is also a risk the wecould see a decline at worse downto the 52 cent level against the USdollar. While major economic re-form is starting to take place at theprovincial level, the federal govern-ment of Canada is by no meansdealing with the issue of seriousdebt reform. Given this prospect,we see that a debt crisis in Can-ada is still likely and there is amajor risk of at least a temporarydefault developing going into thefirst quarter of 1997. Best adviseto Canadians - diversify out of $Cas much as possible. You mightalso want to look at gold since youcan buy it exempt from the GST.

The economy in the US is cer-tainly reaching a position where aminor downtrend is possible start-ing in the 3rd quarter moving intothe 1st quarter of 1997. We do see

the possibility that the Fed couldraise rates one more time duringMay, June or July. This is the lastwindow in time that we see for atemporary high in rates that aredirectly in control of the FederalReserve. Thereafter, the economywill remain relatively strong and wesee NO risk of a serious recessionuntil 1998 to 2003 t ime period.

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PURCHASING INDEX: The USpurchasing manager’s index edgedup in March, but continued to indi-cate depressed conditions in themanufacturing industry. The indexrose to 46.9% against 45.2% inFebruary, but remained below 50%- the threshold for expansion inmanufacturing - for the eighthmonth running. Mr. Ralph Kauf-mann, a spokesman for purchasingmanagers, said indices for produc-tion and new orders, althoughslightly stronger than in February,still pointed to a contraction inmanufacturing. If the overall indexmaintained March’s level for therest of the year, the economy waslikely to grow by only 0.9% in realterms this year, he said.

The purchasing index used to beregarded as an accurate guide tothe direction, if not magnitude, of

economic changes. But confidencehas been reduced recently be-cause it has been sending morepessimistic signals than other indi-cators.

SEMICONDUCTOR CHIPSALES: The US semiconductor in-dustry’s "book to bill ratio", a closelywatched indicator of market trends,dropped to a record low in March,signaling an industry-wide slow-down.

Chip sales during March in Northand South America were $4.16 bil-lion, down from 3% from Februarysales of $4.29 billion, according todata released by the Semiconduc-tor Industry Association. New or-ders booked during March droppedsharply to $3.33 billion, down12.5% from February.

The book to bill ratio, a measureof the value of chips sold against

new orders - fell to 0.80 from arevised February figure of 0.89. Aratio below 1.00 normally meansdemand for semiconductors is

slowing. Overall, the semiconduc-tor market growth for the year isnow expected to moderate to about15-20%, down from close to 40%last year, but in line with the indus-try’s long-term growth rate.

WHOLESALE PRICES: Ac-cording to the US Labor Depart-ment, US wholesale prices rose by0.5% in March. The figures weredifficult to interpret because of anunusually large rise in the food andenergy component of the index,

which was blamed on the coldweather during March.

Energy costs in March jumped2.4%. Fuel oil prices rose 10.5%,the largest rise in more than twoyears. Food prices rose 0.6%. Be-yond food and energy prices, the"core" index rose 0.1%, half of whatmarket analysts had expected.

Wholesale prices have beenfluctuating sharply, but the Marchincrease means the annual rate of

increase in the first quarter is 2.8%.March’s rise follows a 0.2% declinein February and a 0.3% rise inJanuary.

CONSUMER SPENDING: USconsumer spending and personalincomes grew vigorously in Febru-ary, confirming other evidence ofan economic rebound, according toofficial figures. Consumer spend-ing rose 0.9% in February in realterms, after a fall of 0.7% in Janu-ary.

TRADE GAP NARROWS: TheUS trade deficit in goods and serv-ices in February shrank by 17.1%from that of the previous month.Although t he deficit dropped from$9.9 billion in January to $8.2 billionin February, it was running at anannual rate of $108.4 billion for thefirst two months of the ear, onlymarginally better than the $111.5

billion in the equivalent period lastyear.

Aircraft, a big component in the

improvement but a volatile sector,accounted for most of a $700 mil-lion rise in exports. exports werealso boosted by sales of US to-bacco products and pharmaceuti-cals. Crude oil imports fell, mostlyas a result of reduced volumesrather than lower prices. The im-provement was also powered by asurge in trade in services, particu-larly foreign trade to the US.

The politically sensitive tradedeficit with Japan rose by 2.7% to

$3.89 million. The US bought morecomputers, electrical machineryand power generating machineryfrom Japan in February. Japanbought more fish, aircraft and com-puters from the US.

HOUSING STARTS: US hous-ing starts fell modestly in March butremained at levels that historicallyhave signaled solid economicgrowth, according to official figures.The Commerce Department saidstarts dropped 3.9% to a season-

ally adjusted annual rate of 1.447million, roughly in line with analysts’projections. Revised data showedstarts rose to 1.505 million in Feb-ruary, the highest level in more thana year. During the first quarterstarts were 12% higher than in thesame period of last year, providingfurther evidence of economic re-covery after sluggish growth latelast year.

Building permits - a guide tofuture construction activity - wereflat last month but 14% higher thanin March last year. Regionally, thebiggest improvement in housingmarkets was in the north-eastwhere starts rose 10% following alarge gain in February.

INDUSTRIAL PRODUCTIONOUTLOOK: The outlook for US in-dustrial production is improving,despite the impact of a strike at GM,

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which artificially depressed outputin March. The Federal Reservesaid that production had fallen by0.5% last month, following a re-vised gain of 1.3% in February.

During the first quarter as awhole, US production grew at an

annualized rate of 2.7% - up from0.6% in the final quarters of lastyear.

However the Fed said the under-lying picture for US manufacturerswas brighter than these figureswere suggesting. Production wouldhave risen by 0.3% last month butfor the 18-day strike at General Mo-tors which led to an erratic 15%decline in the output of motor vehi-cles and parts.

The outlook for industrial pro-duction has been obscured by aseries of distortions. The strike atGeneral Motors was preceded bysevere winter storms, which de-pressed output in January, and bya strike at Boeing, the aircraftmaker, which cut production in thefinal period of last year.

March’s fall in production leftoverall output 1.3% higher than inMarch 1995. Excluding cars, outputis up by 2.5%. Industrial capacity

utilization dropped by 0.7% inMarch to 82.5%.

HOME SALES: Sales of US ex-isting homes shot up in March tothe briskest rate in more than twoyears as buyers rushed to take ad-vantage of relatively low interestrates, according to the National As-sociation of Realtors. Sales jumped6.9% from February to a seasonallyadjusted annual rate of 4.21 millionunits - the highest rate since 4.35million in December 1993, accord-

ing to the real estate group.

March sales were 16% higherthan the rate a year earlier, whenused homes were selling at a rateof 3.63 million a year. The Marchfigure was well above Wall Streetexpectations of a 3.94 million rate.Every region in the US reportedhigher sales.

INDUSTRIAL PRODUCTION:There was further evidence of thestrengthening Japanese recoverywith the publication of figuresshowing a rise in industrial produc-tion and an easing of disinflationarypressures in the first three monthsof the year. Special statistical fac-tors were responsible for an unusu-ally large decline in industrial out-put in March, according to the min-istry of international trade and in-dustry. The index fell 4.3% be-tween February and March, the firstmonth-on-month decline for sixmonths, but the underlying trendremained positive. The more reli-able three-month moving averageof output growth showed a rise of1.3% in the first quarter of the yearcompared with the previous threemonths. The index stands at 7%above its trough in late 1993, al-though it is still 6% below its levelbefore the recession began in1991.

A ministry official said the sharpdecline in March was the result oquirks in the calendar - February’soutput had been especially strongbecause of the extra day in leapyear, while March had two fewedays than normal. The ministry saidthe overall outlook for factory out

put this year remained good. It expects increases of more than 4%this month and 2% in May.

CURRENT ACCOUNT SURPLUS: Japan’s current accounsurplus fell 38.8% in Februarycompared with a year earlier. Thedecline in the surplus to Y745.9billion ($6.88 billion), announced bythe finance ministry, means Japanis now likely to report a smallecurrent account gap in the fiscayear to March for the third yea

running.

It brings the surplus for the firs11 months of the fiscal year toY8,202 billion, down a quarter onthe same period of the previousyear. On the financial account

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there was Y1,349 billion net capitalinflow to Japan in February, thesecond month running in whichmoney flowed in, as foreignersrushed to buy Japanese equities.

Japan’s surplus in goods andservices, excluding financial trans-

fers, fell 55.7% to Y390 billion inFebruary, the 15th monthly declineand smallest trade gap in fiveyears. Exports rose 16.6%, whileimports were up 46%, completing a19-month run of rises. Within this,Japan’s services account deficitrose 22.4%, chiefly due to growthin foreign travel.

HOUSEHOLD SPENDING:Further evidence of a modest re-covery in Japanese consumer con-fidence emerged with a 3.2% year-

on-year rise in household spendingin February, the second monthlyincrease in row. The improvement,announced by the government’smanagement and coordinationagency, marks only a gradual re-covery, because it comes from anunusually low base, said officials.Spending early last year declinedafter the Kobe earthquake in Janu-ary.

The latest result marks a 2.4%decline compared with January

1994, the year before the earth-quake, when consumer confidencewas more comparable. However,officials see this as evidence of asustainable turnaround from theseven-month run of declines to theend of last December.

WHOLESALE PRICES: Ja-pan’s overall wholesale prices fell0.1% month-on-month in March,after being unchanged in February,according to the Bank of Japan.Compared with a year earlier, the

overall wholesale price index wasdown 0.6% in March, after fallingo.1% in February.

The import price index was down0.4% after rising 0.4% in February,while the export price index wasunchanged after declining 0.1% inFebruary. The central bank saidprices of oil related products rose,reflecting international price move-ments. Electric equipment and mi-

crochip prices fell due to the yen’sdecline. The BOJ said the declinein March domestic wholesaleprices was due mainly to a fall incomputer prices, stemming fromthe downturn in semiconductor de-mand in the US.

VEHICLE EXPORTS: Japan’svehicle exports last fiscal yearshrank to their lowest level in 20years, as the strong yen forcedJapanese makers to move Moreoutput overseas. Japan’s vehicleexports in fiscal year ending March1996 fell 16.7% from the previousyear to 3.62 million, the fourthstraight year of decline, the Japan

Automobile Manufacturers Asso-ciation said.

The 1995/96 export figure was just under the 3.82 million vehiclesexported in 1976/77, but above the2.99 million in 1975/76.

CAR OUTPUT: The JapanAutomobile Manufacturers Asso-ciation said that last year vehicleproduction in Japan dropped 5% to10.1% units. This is the first time inthe industry’s history that produc-tion has fallen five years in a row.Production in March was down11% month-on-month to 963,245units, the association noted.

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INTEREST RATE CUT: TheBundesbank cut German short-term interest rates by a further halfpercentage point, in a move thatcame sooner than expected. Thereductions in the discount andLombard rates to 2.5% and 4.5%respectively came a day after theIMF urged the German centralbank to cut rates.

The reductions brought the dis-count and Lombard rates - the f loorand ceiling for money market rates- back to record lows last reachedmore than eight years ago. Manyeconomists expect them to stay atthese levels until 1997 in spite offresh indications of very highmoney supply growth.

Reaffirming the Bundesbank’scommitment to the M3 money sup-ply indicator as its monetary yard-stick, Mr. Hans Tietmeyer, presi-dent of the Bundesbank, said re-cent overshooting of the 1996 tar-get did not invalidate this. M3 wasexpected to grow more slowly incoming months.

M3 MONEY SUPPLY: M3 grewat an annualized rate of 12.2% in

March after 12.8% in February,based on the level in the fourthquarter of 1995. This compareswith a 1996 target range of 4-7%.However, based on the 1994 fourthquarter level, the M3 rise was 4.6%against February’s 4.2%.

INFLATION: Inflation in Ger-many moved up a tick in March asthe year-on-year increase in thecost of living index advanced to1.7% from 1.6% in February. Priceswere 0.1% higher in March than in

February and the annual rate ofinflation was also stable at 1.4%.

In eastern Germany, the , thecost of living index rose 0.1% be-tween February and March whilethe annual rate of price increasesrose to 2.7% from 2.6%. EasternGermany’s inflation is nearly dou-ble the western rate as a result ofsharp rent increases

Preliminary inflation figures forApril, based on results from the fourbiggest west German states,showed the annualized inflationrate in April had dropped to 1.3%from the 1.4% a month earlier.

INDUSTRIAL PRODUCTION:

Industrial production in Februarydropped by 2.8% compared with amonth earlier. This was a muchsharper drop than the 1.65 reportedwhen the preliminary figures werereleased. While the downward revi-sion was largely driven by poor re-sults in the construction industry -where production fell 11.6% - therewas also a 2.1% fall in industrialproduction.

New orders for February werealso revised downwards in the final,

seasonally adjusted February fig-ures released by the Bundesbank.

SLOWDOWN SEEN BYBONN: The German governmentforecast a sharp slowdown in eco-nomic growth to 0.75% this year,from 1.9% in 1995, but insistedthere would be no recession.

Chancellor Helmut Kohl said theeconomy would not grow by 1.5%as forecast by the governmentthree months ago. Although he told

parliament that most German andinternational experts expected ac-tivity to pick up in the second half,the recovery would only have apositive impact on statistics nextyear.

Mr. Kohl said the plannedspending cuts, welfare reductions,tax reforms and deregulation cre-ated scope for Germany to adapt tochanges in the world economy

UNEMPLOYMENT: German

unemployment continued to hoveraround record levels in March,prompting the main opposition So-cial Democrats to urge the govern-ment to abandon budget consolida-tion and borrow more to boost theeconomy.

The federal labor office reporteda "disappointing" drop in March. Al-though the unadjusted figure fell by129,000 to 4.14 million, from Feb-

ruary’s record 4.27 million, seasonally adjusted unemployment rosefor the eighth month in a row - by26,000 to a new high of just unde4 million.

The latest "headline" total wasthe highest for March in the history

of the federal republic and was467,000 up on a year earlier. According to the unadjusted figures10.8% of the labor force were without work last month compared with11.1% in February and 9.6% inMarch last year.

The figures showed that 2.87million or 9.3% of the labor forcewere unemployed in western Germany in March compared with 1.27million or 17% in the former Communist eastern Lander (states).

BUILDING INDUSTRY RECESSION AND JOB LOSS: Germany’s building industry is in its firsrecession since unification and facing the loss of 80,000-100,000 jobsthis year, according to the Munichbased Ifo economic research institute. Investment in construction isexpected to fall nationwide by 2-3%in 1996 after a sharp decelerationin growth last year to only 1.2%from 7.8% in 1994.

Ifo expects a moderate 4% expansion in construction output ineastern Germany this year aftegrowth of roughly 10% last yeaand 21% in 1994. However, eastern Germany growth will not be sufficient to offset the anticipated 5%fall in Western output.

The institute forecast that thebuilding industry recession wouldreach eastern Germany next yearwith output in the new Lander de

clining more sharply than in thewest so that overall investment inconstruction would fall by anothe2-3% in 1997. Ifo said that the completion of new homes would fall to595,000 in the whole of Germanythis year from an estimated615,000 in 1995, with demand inthe western Lander bottoming ouin the course of the year.

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The outlook for commercialproperty development in the westwas bleak because of oversupplyof offices and hotels and the grow-ing tendency of manufacturing in-dustry to invest abroad.

MINIMUM WAGE ACCORD:

German construction workers andemployers agreed on a minimumwage for the building industry, amove aimed at pricing foreign con-struction workers out of the market.The two sides agreed to introducea minimum wage of DM15.3($10.20) an hour in western Ger-many, rising to DM18.60 in Decem-ber. In eastern Germany, the mini-mum wage will start at DM14.08,rising to DM17.11 by next April.

The new minimum wages com-

pare with going rates of betweenDM10 and DM15 currently paid bymany construction companies toworkers from other EU countries.The minimum wage is designed toreduce their competitive advantageover German workers who havebeen bound to a "de facto" mini-mum wage of more than DM20.

The number of foreign workerson German building sites is esti-mated at around 200,000. Unem-ployment among German con-

struction workers runs at 20%.

CORPORATE INSOLVEN-CIES: The number of corporate in-solvencies in Germany in Januaryrose 13.3% from a year earlier.Germany’s federal statistics officereported that insolvencies rose to atotal of 1,868, following Decem-ber’s 10% year-on-year rise in cor-porate insolvancies to 2,174.

CAPACITY UTILIZATION: Ifosaid in its March economic survey

that capacity utilization fell to81.9% in the first quarter from 84%at the end of December. But Ifo saidthere was an increase in the num-ber of companies which regard thelevel of outstanding orders too low.

Companies were more pessi-mistic about the general outlook forthe next six months and less confi-dent about export prospects. Com-panies in some sectors remain just

as skeptical about business pros-pects as February, the research in-stitute said

HOUSE PRICES: A sharp in-crease in UK house prices haspushed the number of householdsin negative equity below 1 millionfor the first time since 1992 andraised hopes of a sustained hous-ing market recovery. House pricesincreased by a seasonally adjusted1.2% in March following a 1% ad-vance in February, according toHalifax Building Society, the UK’slargest mortgage lender. Houseprices increased in 9 out of 12 UK

regions.

MONEY SUPPLY: The Bank ofEngland, the UK central bank, saidthat M4, the broad measure of themoney supply, grew a seasonallyadjusted 10.1% in the year toMarch, the fifth successive monththat growth has exceeded the gov-ernment’s monitoring range of be-tween 3 and 9%. Between Febru-ary and March, it grew 1.2%, morethan double February’s growthrate.

Lending by banks and buildingsocieties grew a seasonally adjusted BP5.9 bil lion in March,slightly below City expectations.The 12-month growth rate fell to9.3% from 9.8% in February

March’s M4 figures represents aslight slowdown from the revisedannual growth rate of 10.2% in Feb-ruary and the peak of 10.6% inJanuary. But economists said itwould still add to the authorities’

worries that pressures may bebuilding that could lead to resur-gence in inflation and higher inter-est rates.

RETAIL SALES: The Office forNational Statistics said retail salesvolumes grew by a seasonally adjusted 0.2% between February andMarch and were 2.2% higher thanthe same month a year earlier.

Sales in the three months to March- considered a better measure ofthe trend - were 2.1% higher thanthe same period a year earlier, thebiggest rise since February 1995.

The figures disappointed the cityafter recent consumer surveys sug-

gested activity in town centers werebuoyant last month. But the ONSrevised upwards its February salesfigure which meant the growth be-tween February and March ap-peared smaller, while the ONS lsoadjusted for the Easter period.

Unadjusted data showed salesvalues in March were 7.1% higherthan the same month a year earlier,the biggest rise for five years and inline with survey evidence. Non-food retailers enjoyed the most ro-

bust growth in March, with sales ofclothing, footwear and householdgoods rising strongly.

TRADE SURPLUS: France’strade surplus continued to grow inFebruary in spite of a decline in thevalue of the country’s exports. Cus-toms off ice f igures releasedshowed a seasonally adjusted sur-plus for the month of FFr10.21 bil-

lion ($1.9 billion), up from FFr8.26billion in January. This gave a sur-plus of FFr18.47 billion for the firsttwo months of 1996 - a 15% in-crease over the FFr16.05 billionrecorded in the 1995 correspond-ing period. Exports and importsboth fell in February to FFr117.6billion and FFr107.4 billion respec-tively.

WHOLESALE ORDERS:French wholesalers do not expectto have to reduce their orders fur-

ther, according to a survey by theInsee national statistics bureau..However, orders in the construc-tion and semi-finished goods willprobably weaken, the study indi-cated.

Overall, inventories during Janu-ary and February continued toshrink, particularly for consumergoods. They are now viewed as

8/12/2019 1996 Issue # 5


being at normal levels. Wholesal-ers also said their sales during that2-month period improved slightlyafter having fallen in the previoussix months. Sales improved in theconsumer goods and food sectors,but continued to fall in the equip-ment and semi-finished agriculturalgoods sectors.

GDP: France’s gross domesticproduct in 1995 grew 2.2%, revised

down from a preliminary estimateof 2.4%, according to Insee. Thecountry’s fourth quarter GDPshrank 0.4%, a steeper declinethan the 0.3% estimated earlier. In-see also revised second- and third-quarter 1995 growth to 0.1% foreach quarter, from 0.2%. Firstquarter growth was left unchangedat 0.7%. Mr. Alain Lamassoure,budget minister, blamed the down-

ward revisions on the nationastrikes late last year.

NEW CAR SALES: New casales in France rose 3.3% in Marchto 192,000 from 186,000 a yeaearlier, according to the Frenchcarmakers association. During the

first three months of the year, salesof new cars rose 12.2% comparedwith the same period a year earlieto 553,000. The quarterly figurewas boosted in part by very strongJanuary sales, which included carsthat couldn’t be delivered in December because of nationwidestrikes.

French carmakers took 57.8% othe domestic market in March andhad 57.2% for the three-month period.

RATE CUT: The Bank of Francetook advantage of a strong Frenchfranc to cut another 0.1% of a percentage point off its base intervention rate, bringing it down to 3.70%in the 11th rate reduction since November.

The government recently cut itsofficial estimate of growth this yeafrom 2.8% to 1.3%, and has pinnedhopes of an upswing later this yealargely on the effect of lower inter

est rates feeding through to industrialists and consumers.

INFLATION: France experienced its biggest rise in monthlyinflation for five years in March, buconsumer spending on manufactured goods dipped for the secondmonth running. The national statistics bureau reported the monthlyincrease in consumer pricesreached 0.6% in March, taking annual inflation to 2.3%.

It said three factors were principally responsible: a 5.9% increasein the price of fresh productshigher energy prices; and an increase in the cost of summer clothing after last year’s rise in sales tax

Consumer spending dropped1.2% in March. The surge in consumer spending in January, as thecountry emerged from a wave ostrikes, meant that French con

8/12/2019 1996 Issue # 5


sumption of manufactured goodsrose by 4.9% in the first quarter.

JOBLESS RATE: The March jobless rate of 8.5% was only mar-

ginally higher than the 8.4% re-corded in February, but was notice-ably worse than most private-sec-tor economists had forecast (about8.3%).

During the month, the number of jobs fell by 55,300, with both thefull-time and the part-time sectorsregistering a decline. Again, fore-casters had expected a brighterpicture with most predicting a10,000 gain in jobs.

PRIVATE-SECTOR ECONO-MISTS OUTLOOK: Private sectoreconomists have raised their ex-pectations for Australian growth af-ter the country’s recent election,according to Consensus Econom-ics’, which monitors forecasts fromleading banks and other financialinstitutions.

The mean expectation for 1996growth has risen to 2.9% from 2.7%in March. Expectations have beenbolstered by the publication of offi-

cial statistics showing strong pri-vate-sector consumption in the fi-nal quarter of 1995. Consumer sen-timent was lifted with the removaluncertainty following the election,Consensus said.

Private consumption is still ex-pected to moderate in comingmonths, but last year’s strong pri-vate consumption figures have en-couraged economists to raise theirforecasts for the economy as awhole.

The mean forecast for 1997 hasalso been raised to 3.4% from 3.3%in March.

INFLATION RATE: Australia’sannual inflation rate slowed to3.7% during the March quarter, thelowest level for more than a yearand a sharp reduction from the pre-vious quarter’s 5.1%. The con-

sumer price index rose 0.4% in theMarch quarter, compared with mar-ket forecasts of 0.6-0.7%. The rateof "underlying" inflation, which at-tempts to exclude one-off influ-ences, also rose 0.4%, to give anannual rise of 3.3% in the quarter.In the December quarter, underly-

ing inflation rose 0.7%

The latest figures are seen asparticularly significant becausethey come when wage pressuresare threatening to push the Austra-lian economy off course.

Documents

1996 Issue # 5