Posted on Thu, Jan. 19, 2006

Peru endorsed Miami as site of free trade pact secretariat

By TYLER BRIDGES

tbridges@miamiherald.com

LIMA - President Alejandro Toledo on Thursday endorsed Miami as the headquarters for a proposed free trade secretariat as Florida Gov. Jeb Bush completed a two-day trade visit to Ecuador and Peru.

Bush's main goals on the trip were winning the support of Toledo and Ecuadorean President Alfredo Palacio for Miami, and promoting Florida trade and investment.

''It's the best location,'' Toledo said during a news conference Thursday, ``it has a strong economy and it has strong economic ties with the region.''

In an earlier speech, Toledo called Florida ``the port of entry for Latin America in the United States.''

Palacio on Wednesday gave a more qualified expression of support for Miami.

Efforts to create the hemispheric-wide trade agreement have stalled with opposition from Argentina, Brazil, Paraguay, Uruguay and Venezuela.

The other countries that have voiced support for making Miami the administrative hub of the Free Trade Area of the Americas include Uruguay, El Salvador, the Dominican Republic, Guatemala, Honduras and Nicaragua.

Peru was the 15th country that Bush has visited during his seven years in office as governor.

Bush found an enthusiastic Toledo in his call for free trade throughout Latin America.

Peru under Toledo recently signed a free trade agreement with the United States that will take effect upon ratification by the congresses of both countries.

Posted on Thu, Jan. 19, 2006

Bin Laden threatens attacks, offers truce

LEE KEATH

Associated Press

 

CAIRO, Egypt - Osama bin Laden warned in an audiotape aired Thursday that his fighters are preparing new attacks in the United States but offered the American people a "long-term truce" without specifying the conditions.

The tape, portions of which were aired on Al-Jazeera television, was the first from the al-Qaida leader in more than a year. It came only days after a U.S. airstrike in Pakistan that targeted bin Laden's deputy, Ayman al-Zawahri, and reportedly killed four leading al-Qaida figures, possibly including al-Zawahri's son-in-law.

There was no mention of that attack in the tape, which Al-Jazeera said was recorded in January. The network initially reported it believed the tape was made in December, but later corrected itself on the air. Editors at the station said they could not comment on how they knew when it was made.

The CIA has authenticated the voice on the tape as that of bin Laden, an agency official said. The al-Qaida leader is believed to be hiding in the border region between Afghanistan and Pakistan.

Beyond confirming that bin Laden remains alive, the tape could be aimed at projecting an image of strength to al-Qaida sympathizers and portray the group as still capable of launching attacks despite blows against it, analysts said.

The White House rejected the truce offer.

The United States will not let up in the war on terror despite bin Laden's latest threats, White House press secretary Scott McClellan said. "We do not negotiate with terrorists," McClellan said. "We put them out of business."

U.S. counterterror officials said Thursday they have seen no specific or credible intelligence to indicate an impending al-Qaida attack on the United States. The Homeland Security Department has no immediate plans to raise the national terror alert, spokesman Russ Knocke said.

In the tape, bin Laden spoke in a soft voice, as he has in previous recordings, but his tone was flatter than in the past and had an echo, as if recorded indoors. He presented his message with a combination of threats, vows his followers can fight forever and a tone of reconciliation, insisting he wants to offer a way to end the wars in Iraq and Afghanistan.

He even recommended a book for Americans to read - "The Rogue State," apparently a book of the same title by American author William Blum. He said it offers the path to peace - that America must apologize to victims of the wars and promise never to "interfere" in other nations - though it was not clear if these were conditions for the truce.

Bin Laden said he decided to make a statement to the American people because he said President Bush was pushing ahead despite polls which showed "an overwhelming majority of you want the withdrawal of American troops from Iraq."

He said the Bush administration was lying about victories in the Iraq war. Bin Laden insisted the insurgents will eventually win the conflict, which he said is only strengthening the cause of the "mujahedeen," or holy warriors.

But he said that even if the U.S. does prevail in the war, "the nights and days will not pass without us taking vengeance like on Sept. 11, God permitting."

He warned that security measures in the West and the United States could not prevent attacks there, citing the July 7 bombings in London that killed 56 people.

"The delay in similar operations happening in America has not been because of failure to break through your security measures," he said. "The operations are under preparation and you will see them in your homes the minute they are through (with preparations), with God's permission."

He offered a "long-term truce with fair conditions that we adhere to. ... Both sides can enjoy security and stability under this truce so we can build Iraq and Afghanistan, which have been destroyed in this war.

"There is no shame in this solution, which prevents the wasting of billions of dollars that have gone to those with influence and merchants of war in America," he said.

Bin Laden then made an oblique reference to how to prevent new attacks on the United States.

He told Americans that "if you are sincere in your desire for peace and security, we have answered you. And if Bush decides to carry on with his lies and oppression, then it would be useful for you to read the book 'The Rogue State.'"

He said the book reads in its introduction, "If I were president, I would stop the attacks on the United States: First I would give an apology to all the widows and orphans and those who were tortured. Then I would announce that American interference in the nations of the world has ended."

The Associated Press found a nearly identical passage in another book by Blum: "Freeing The World To Death: Essays on the American Empire," published in 2004. The passage could not, however, be found in the latest edition of "The Rogue State."

The tape ended the longest silence from bin Laden since the Sept. 11 attacks, a lull which had raised speculation over his fate.

The last audiotape purported to be from bin Laden was broadcast in December 2004 by Al-Jazeera. In that recording, he endorsed Abu-Musab al-Zarqawi as his deputy in Iraq and called for a boycott of Iraqi elections.

Previously, the longest period without a message from the al-Qaida leader was from December 2001 to November 2002. He issued numerous tapes in 2003 and 2004, calling for Muslims to attack U.S. interests and threatening attacks against the United States.

Bin Laden appeared in a video released October 2004, just ahead of U.S. presidential elections, saying the United States could avoid another Sept. 11 attack if it stops threatening the security of Muslims.

In an April 15, 2004, audiotape, he vowed revenge against the United States for Israel's assassination of Hamas founder Sheik Ahmed Yassin - and at the same time offered a truce to European countries.

Since December 2004, al-Zawahri, the al-Qaida Number 2, has issued a number of video and audiotapes, including one claiming responsibility for the London attacks, which he said came after Europe rejected the terms of bin Laden's truce offer.

Al-Jazeera's editor in chief Ahmed al-Sheik would not comment on when or where the latest tape was received.

Jeremy Bennie, a terrorism analyst for Jane's Defense Weekly, said bin Laden appeared to be "playing the peacemaker, the more statesmanlike character" with his offer of a truce.

"They want to promote the image that they can launch attacks if and when it suits them," he said. "They want us to believe they are in control," he said.

The mention of rebuilding Iraq and Afghanistan may be a recognition of divisions among the ranks of Islamic militants over the insurgency in Iraq by bin Laden's ally, al-Zarqawi, who has come under criticism by some radicals for attacks on Iraqi civilians.

Former White House anti-terrorism chief Richard A. Clarke said "the initial significance of this (tape) is that he's still alive."

Beyond that, he told the AP, "the only new element in his statement is that they are planning an attack soon on the United States.

"Would he say that and risk being proved wrong, if he can't pull it off in a month or so?" Clarke asked.

The truce offer may be aimed at making bin Laden "look more reasonable in Arab and Muslim eyes. He's a very sophisticated reader of world opinion and American opinion, and he obviously knows he can't affect American thinking. He's too reviled," he said.

---

Associated Press writers Charles J. Hanley and Tracee Herbaugh in New York, Lara Jakes Jordan in Washington and Mariam Sami in Cairo contributed to this report.

Posted on Thu, Jan. 19, 2006

OMS pide a farmacéutica no vender artemisina contra malaria

NESTOR IKEDA

Associated Press

WASHINGTON - La Organización Mundial de la Salud pidió el jueves a las corporaciones farmacéuticas no producir ni vender aisladamente "artemisina", el único medicamento que aisladamente es todavía efectivo contra la malaria, a fin de evitar que los parásitos de la enfermedad desarrollen una resistencia al tratamiento.

Según Lee Jong-wook, director general de la OMS, el uso de artemisina combinado correctamente con otras drogas antimalaria tiene una efectividad de casi 95% en la cura de la malaria y los parásitos, en vez de ser solamente debilitados con el tratamiento aislado, pierden potencialidad de desarrollar resistencia a la droga.

Lee explicó en una rueda de prensa que la OMS, que tiene su sede en Ginebra, ha enviado solicitudes a farmacéuticas principalmente en Europa, Asia y Africa, para que se "abstengan inmediatamente" de producir artemisina, que se comercializa en tabletas en las regiones tropicales del mundo.

La malaria es causada por el zancudo anofeles y la enfermedad, que produce deformaciones del bazo e hígado, está acompañada de escalofríos y fiebre. Es recurrente y muy común en Centro y Sudamérica, el Africa, los países del Mediterráneo, Asia y varias islas del Pacífico.

Hasta ahora no se ha documentado científicamente el fracaso de la artemisina en su tratamiento, pero la posibilidad de que los parásitos de la malaria desarrollen anticuerpos contra ese medicamento "es grande", dijo Arata Kochi, el nuevo director del departamento de malaria de la OMS.

Puso como ejemplo el caso de Tailandia, donde el tratamiento de la malaria con la droga sulfadoxina fue casi 100% efectiva al iniciarse en 1997, pero se ha reducido ahora a apenas el 10% debido a la resistencia a la droga.

Igualmente, dijo que la popular cloroquina ha perdido efectividad "en casi todo el mundo" en apenas cinco años de su uso que empezó en 1999, mientras que la resistencia a otra droga, la atovaquona, se generó en apenas un año.

Posted on Thu, Jan. 19, 2006

México y EEUU llegan a acuerdo sobre cementoAssociated Press

WASHINGTON - México y Estados Unidos llegaron a un acuerdo tentativo que acaba con 16 años de disputas bilaterales y que permitirá el ingreso de cemento mexicano al mercado estadounidense con menores barreras, informó el jueves el secretario de Comercio Carlos Gutiérrez.

El acuerdo es "un paso positivo" hacia la solución de la disputa y "subraya la firme relación comercial" entre ambos países, dijo Gutiérrez.

Gutiérrez no dio detalles del acuerdo, pero fuentes de la industria dijeron que Estados Unidos permitirá un mayor ingreso de cemento mexicano en los próximos tres años, aun cuando las imposiciones arancelarias serán drásticamente reducidas pero no eliminadas.

Indicó que con el acuerdo, las poblaciones de la costa del Golfo de México que han sufrido devastadores ataques de huracanes en los últimos cinco años, tendrán los recursos para reconstruir, al tiempo que se abre el acceso al mercado mexicano de los productores estadounidenses.

El secretario mexicano de Economía Sergio García de Alba, quien estuvo en Washington a comienzos de esta semana para hablar de temas comerciales pendientes, adelantó entonces que el acuerdo "será de gran beneficio para ambos países".

"Estados Unidos es deficitario en la producción de cemento", dijo García de Alba. "México es superavitario y tiene empresas competitivas que están en posibilidades de abastecer a este mercado".

Gutiérrez dijo en una declaración emitida en Nueva Orleáns, ciudad devastada por el huracán Katrina el año pasado, que el acuerdo incrementará también las posibilidades de construcción de nuevas viviendas en Estados Unidos.

"La liberalización del comercio del cemento entre Estados Unidos y México alentará a las empresas a construir y fomentará el empleo y nuevas oportunidades para nuestros trabajadores", afirmó Gutiérrez, funcionario de origen cubano que estudió y trabajó en México.

El gobierno mexicano había dicho anteriormente que un acuerdo con Estados Unidos triplicaría el volumen de exportación de cemento al mercado estadounidense y significaría mejores negocios para la empresa Cemex, la tercera planta más grande el mundo.

Estados Unidos, pese a que es socio de libre comercio con México, ha estado imponiendo desde 1990 altas tarifas al cemento mexicano respondiendo a quejas de productores estadounidenses de que México estaba inundando el mercado estadounidense con cemento barato.

Los informantes dijeron que las tarifas, que eran de alrededor de 26 dólares por tonelada, bajarían en adelante a 3 dólares, una penalidad que estaría vigente hasta 2009, cuando quedarían eliminadas todas las sanciones y cuotas si México cumplía su compromiso de abrir su mercado para una mayor participación estadounidense.

Según los productores estadounidenses, México es un mercado prácticamente cerrado para el cemento extranjero, lo cual permitía a los productores mexicanos cobrar precios altos en el mercado nacional y más bajos cuando se trataba de exportar a Estados Unidos.

El grupo Contratistas Generales Asociados de Estados Unidos (Associated General Contractors of America) dijo que en agosto la escasez de cemento había sido aguda en 32 de los 50 estados de la nación, en el momento pico de la temporada de construcción en verano.

Estados Unidos impuso las tarifas punitivas luego que un fuerte incremento en el ingreso de cemento mexicano de 1986 a 1989 diera lugar al despido del 19% de la fuerza laboral en la industria y el cierre de seis plantas.

Posted on Thu, Jan. 19, 2006

Escultura española de 2.500 años regresará a pueblo de Elche

Associated Press

MADRID - Una escultura española, símbolo del avance de la cultura antigua en la costa del Mediterráneo, regresará en préstamo al poblado donde fue descubierta.

La Dama de Elche _un sorprendente busto de piedra que se remonta a entre el siglo cuarto y quinto antes de Cristo_ fue desenterrada en 1897 por agricultores que informaron a un médico local que también era conocedor de arte.

El hallazgo fue efectuado cerca a Elche en la costa este de España, en un sitio llamado Illici Augusta Colonia Julia durante el imperio romano, y Helike por las tribus ibéricas que dominaron la zona antes que Roma.

La importancia artística e histórica de la escultura eran evidentes y el busto fue vendido ese mismo año al museo del Louvre en París.

Durante la ocupación de Francia por la Alemania nazi en 1941, París devolvió la escultura a España, donde fue una pieza popular en el contenido del museo del Prado hasta 1971, cuando se le asignó un lugar permanente en el Museo Arqueológico Nacional de Madrid.

Después de exámenes exhaustivos que hallaron que la escultura estaba en muy buen estado estructural, el museo decidió prestarla a un museo en Elche, cerca de donde los expertos creen que fue esculpida hace unos 2.500 años.

Posted on Thu, Jan. 19, 2006

Kirchner y Lula refuerzan el Mercosur

YANA MARULL / AFP

BRASILIA

Los presidentes de Argentina, Néstor Kirchner, y Brasil, Luiz Inácio Lula da Silva, reforzaron ayer en Brasilia la alianza entre las dos naciones y reconocieron las crecientes críticas de sus socios Paraguay y Uruguay al Mercosur.

''En Paraguay, en Uruguay, se fortalecen posturas críticas al Mercosur'', dijo Kirchner, quien atribuyó el desacuerdo a la falta de atención del bloque regional hacia las asimetrías de esas economías menores. ''Es necesario que nos aboquemos en un ejercicio conjunto para atender esos reclamos, para tener una actitud solidaria'' en el bloque regional integrado por los cuatro países, dijo Kirchner en discurso ante la prensa.

A su lado, Lula también se comprometió a prestar más atención a Paraguay y Uruguay (donde aumenta el reclamo de un acuerdo bilateral con Estados Unidos), y también a Argentina.

El mandatario brasileño propuso una integración productiva vía consorcios en áreas punta como industria naval, bélica, aeronáutica y espacial en el Mercosur.

''Tenemos conciencia de nuestras responsabilidades en la integración regional'', dijo Lula.

Lula también prometió concesiones a Argentina, con quien Brasil alcanzó en el 2005 un superávit comercial récord de más de $3,600 millones, el doble del 2004.

''Reiteré al presidente Kirchner la intención de colaborar en la intensificación de medidas que ayuden a la reindustrialización ya en curso en Argentina. Estamos abiertos a propuestas para perfeccionar los acuerdos sectoriales que tenemos en áreas prioritarias, como la automotriz'', dijo Lula. A pedido de Argentina, brasileños y argentinos se han comprometido a aprobar antes del 31 de enero un sistema de salvaguardias (o cláusula de adaptación competitiva) que limite las exportaciones brasileñas en sectores fragilizados de argentina, pero la industria brasileña se opone.

''Creo como usted en la relación entre Brasil y Argentina y en la alianza estratégica del Mercosur'', le aseguró Kirchner a Lula.

Kirchner abogó por una mayor integración al Mercosur de Chile, tras la victoria de la presidenta electa socialista Michelle Bachellet, y ''por la incorporación plena de Bolivia'', que también acaba de elegir al izquierdista Evo Morales.

Bolivia y Chile son miembros asociados del Mercosur.

In late November, the museum broke ground on its new home on a decrepit strip of the Bowery on the Lower East Side. And while some of the design details are still being tweaked, it is now razor-clear that the building will do more to freshen the bond between Manhattan's art and architecture communities than any building since Marcel Breuer's Whitney Museum of American Art opened on Madison Avenue four decades ago.

The aluminum-clad building, designed by Kazuyo Sejima and Ryue Nishizawa, founders of the Tokyo architectural firm Sanaa, evokes a stack of mismatched boxes on the verge of toppling over. Firmly rooted in the present, it is a remarkably sensitive exploration of the relationship between art, architecture and the human beings who animate them.

The project, scheduled for completion in the fall of 2007, could not come at a better time. In recent years, it has become dismally clear that the art institutions that redefined New York culture in the 20th century are no longer invested in propelling it forward in the 21st. Despite its elegance, the recent $850 million expansion of the Museum of Modern Art had more to do with consolidating the museum's position as an arbiter of high taste than with engaging in the messy, ever-shifting realities of the art and cultural scenes.

In 2003 the Whitney Museum signaled that it valued security over experimentation when it dropped a radical design for an addition by Rem Koolhaas, eventually replacing it with a conservative proposal by Renzo Piano.

It would be unfair to expect the Modern to play the same cultural role it did in the 1930's, when it was probably the single most powerful force in introducing Americans to European Modernism. Yet as these institutions have quietly receded into middle age, they have left a void in the heart of the city. The New Museum is one of the few New York art institutions with the courage to fill it.

Rising seven stories at a choice site where Prince Street ends at the Bowery, the museum clearly sought to bind itself to what's left of the youthful downtown scene. Its position at the end of Prince, one of SoHo's main axes, suggests a link to the SoHo art scene of the 1960's and 1970's - a nod to the creative fervor that reigned in the neighborhood before it was transformed into a glorified shopping mall.

The ghosts of SoHo drift in and out of the design. Wrapped in a woven aluminum mesh skin, the stacked forms give the composition a mysterious quality, suggesting a culture in constant flux.

They are also tough enough to stand up to the Bowery's mix of restaurant supply stores, dying single-room-occupancy hotels and shiny new residential towers. Amid the crush of commercial traffic from the Manhattan Bridge, the building will seem solid and industrial. At night, when the streets are barren, it is apt to be more ethereal and moody.

Sanaa is known for both the clean precision of its forms and a knack for unearthing the softer qualities of glass. The layering of transparent and reflective surfaces in the marvelous Christian Dior building in Tokyo, for example, give the interiors a luxurious milky quality, like layers of veils.

But the New Museum's design is intended as more than a metaphor; it is also to be a concrete realization of the museum's values. The street-level façade will be entirely transparent, like a shop window. The idea is to bring the experience of viewing art to the street, reaffirming the institution's role as a public forum. The main floor is divided lengthwise into a lobby and a loading dock that will be visible from the street, so that the process of transporting art is open to public view.

The lobby, echoing the proportions of an old downtown loft, is divided into a series of lively public zones, beginning with a ticket counter and cafe and culminating in a large glass-enclosed gallery - a fish bowl of the art world.

The informality of the arrangement reflects how the contemporary art world is changing as barriers between the various arts dissolve. Creation is a collaborative act in which the audience plays a role: at the New Museum, art, architecture, graphic design, film and the public will all jostle for attention.

That embracing vision extends to the very top of the museum, where a 3,000-square-foot multipurpose space will offer sweeping views over the area's old tenement blocks to the dense cluster of towers on Wall Street.

The quiet simplicity of the galleries, sandwiched in the middle floors, offers a momentary repose. The beauty of the shifting setbacks on each floor is that it allowed the architects to create skylights on every level, illuminating them with a blend of natural and artificial light.

In the fourth-floor gallery, for example, natural light will wash down the south wall through a long slotlike skylight while the rest of the room will be illuminated by lights hidden above a mesh ceiling.

Purists who believe that architecture should take a back seat to art may grumble that the uneven blend of natural and artificial light will be distracting. But the result will be atmospheric, with the mood of each room shifting slightly over the course of the day depending on the weather. In their choice of materials - from the smooth concrete floors to the exposed steel I-beams - the architects sensitize the visitor to the tactile qualities of the world around them. The aim is to lure us out of our everyday stupor, to open our hearts to the art.

Of course, one building alone cannot remake a culture. But Lisa Phillips, the museum's director, clearly found the right architect for her building. And she has brought in curators who have no interest in preserving the status quo; instead they envision the museum as a laboratory for cultural change.

The question on every New York architect's lips is whether the museum will be willing to organize the kind of architecture shows we so desperately crave: shows with a strong critical point of view, like the ones that MoMA mounted in its glory days.

Rarely, in today's New York, does a building project inspire so much confidence in the future.

John McGettrick, the co-president of the Red Hook Civic Association, favors more housing for the neighborhood.

Industry vs. Gentrification

A pier under construction in Red Hook is big enough to accommodate the Queen Mary 2. It is scheduled to open in the spring.

 

Red Hook could've been a contender, just like Marlon Brando's character in "On the Waterfront," a film that immortalized the bleak, harsh atmosphere of the Brooklyn docks (even if it was filmed in Hoboken).

With acres of piers for hauling cargo, and sweeping views of the Manhattan skyline, Red Hook should have become a leading industrial port or another charming Brooklyn village like nearby Carroll Gardens.

But a series of government miscalculations - like cutting the neighborhood off from the rest of Brooklyn with the Gowanus Expressway and the Brooklyn Battery Tunnel, and shifts in the waterfront economy to containerized cargo - left the square-mile peninsula with forlorn blocks pocked by tumbledown houses, unkempt lots and hollow-eyed factories.

In recent years, however, Red Hook has become a vigorous place again, so much so that it is now a contested ground for apartment developers wanting to cash in on the views, artists and restaurateurs looking for cheap space, factories seeking a haven from gentrification elsewhere and old-line residents wanting to keep the old-time flavor.

Red Hook is poised to receive stores like Ikea and Fairway, million-dollar condominiums, humming factories and bustling docks, and even a pier for the 1,132-foot Queen Mary 2 and other cruise ships. Yet, its future is caught up in a battle royal.

Developers want to convert waterfront warehouses and factories into apartments, even though the areas are zoned for manufacturing. But factory owners and cargo haulers fear that well-heeled apartment dwellers would not take kindly to their trucks barreling through Red Hook's narrow cobblestone streets or their middle-of-the-night foghorns and bright lights.

"You're going to be doing something they don't like, even if it's interfering with a guy barbecuing on the block," said Michael DiMarino, owner of Linda Tool and Die Corporation, a precision metal fabricator with clients like NASA and Boeing. "I don't blame him, but we were here first."

Many factions dread the prospect of big-box stores like Ikea, which plans to build a waterfront furniture emporium with 1,500 parking spaces by 2007. Blue-collar businesses fear that Ikea's shoppers would clog Red Hook, stalling their trucks. Homeowners worry that Ikea would shatter the quiet.

Yet residents of the housing projects, whose 8,000 tenants represent three-quarters of Red Hook's population, are eager for the 500 jobs Ikea is dangling. Dorothy Shields, 74, the president of the Red Hook Houses East Tenants Association, who has taken a liking to Ikea's Swedish meatballs, supports the store because one of every four of the projects' tenants is unemployed.

"It's the jobs," she said. "I have so many people who needs jobs."

Artists and craftsmen trickling in from Dumbo and Williamsburg fear any change because they suspect they will end up priced out of another blossoming neighborhood. Madigan Shive, a 29-year-old cellist, moved from San Francisco into a rental house with three other artists.

"There's a good chance we could lose our house in the next year," she said. "If I lose this space, I don't know that I can stay in New York."

The neighborhood quarrel is embodied in two men, John McGettrick, co-president of the Red Hook Civic Association, and Gregory O'Connell, a former city detective turned millionaire developer and one of Red Hook's largest property owners.

Mr. O'Connell, who supports expanding blue-collar businesses, is a ubiquitous figure who uses the paper-strewn dashboard of his pickup as his desk and file cabinet. Mr. McGettrick, whose father slung cargo on the docks but who favors housing, manages an investigations agency.

The two antagonists tap into different elements of Red Hook history and are backed by rival civic groups. Mr. McGettrick contends the city hurt Red Hook in 1961 when it zoned as industrial numerous blocks in which frame or brick houses had always been mixed in. Homeowners could not expand and banks would not offer mortgages, and the result, he said, was abandonment and arson. "There is a desperate need to rebuild the population that was lost," Mr. McGettrick said.

Mr. O'Connell has revamped Civil War-era warehouses set on waterfront piers but filled them with blue-collar trades like wood and glass workers. Those tenants will be joined this spring by a Fairway, the grocery cornucopia, which is also on Manhattan's West Side and in Harlem.

JOHN WILLIAMS' SHADOW GOVERNMENT STATISTICS
www.shadowstats.com


FEDERAL DEFICIT REALITY: AN UPDATE


July 7, 2005

_____


U.S. Treasury Shows Actual 2004 Budget Deficit at $11.1 Trillion

Ultimate Crisis for Dollar Moves Beyond Possible Remedies

Hyperinflation and New Gold-Based Currency
System Are Likely Consequences

Foreword

From time to time, the U.S. financial markets manifest some concern about the nation's twin deficits -- the federal budget and the current account shortfalls. These episodes have been short-lived, however. Generally, the markets have been very sanguine about these problems -- much too sanguine, in our view! We believe there is a great deal about which to be concerned in both areas, and that longer run, the U.S. markets will indeed reflect it -- negatively, of course. This article updates our thoughts, etc. on the federal budget deficit.

___

When the U.S. Treasury reported the official 2004 federal budget deficit at a record $413 billion last October, the hisses and boos in the financial media were unrelenting. Two months later, the Treasury reported the actual 2004 deficit -- using generally accepted accounting principles (GAAP) -- was really an incredible $11.1 trillion [1], up from $3.7 trillion in 2003, yet nary a word was heard in the financial media, from Wall Street or from any political denizen of that former malarial swamp on the Potomac. An exception, of course, was Treasury Secretary John Snow, who signed the government's financial statements, but the data release was as low key as physically possible.

The silence partially reflects the financial-market terror that would accompany an effective national bankruptcy. Such is the risk when a government's fiscal ills spin so wildly out of control that they no longer are containable within the existing system.

Consider the traditional solution of raising taxes. Putting the $11.1 trillion deficit in perspective, if the government raised individual and corporate income taxes to 100%, seizing all salaries, wages and profits, the government's 2004 operations still would have been in deficit by trillions of dollars. The deficit has moved beyond practical fiscal control! Many in government and the markets are aware of the underlying deficit reality, but few dare to sound the alarm, for the ultimate resolutions to the situation all are political or financial nightmares.

The government's GAAP-based accounting generally is as used by Corporate America. It includes accrual accounting for money not yet physically disbursed or received but that otherwise is committed. The largest differences come from the bookkeeping related to Social Security and Medicare, where year-to-year changes in the net present value (discounted for the time value of money) of any unfunded liabilities are counted. In contrast, traditional deficit accounting is on a cash basis. It counts the cash received from payroll taxes (social Security, etc.) as income, but it does not reflect any offsetting obligations to the Social Security system.

For nearly four decades, officially sanctioned accounting gimmicks have masked federal deficit reality. Surpluses in trust accounts, such as Social Security, have been used to obscure the true shortfall in government spending. With less than one tenth of the actual deficit being reported each year, a cumulative negative net worth for the U.S. government has built up in stealth to a level that now tops $45 trillion, with total obligations of $47.3 trillion (more than four times annual GDP). The problem has moved beyond crisis to an uncontrollable disaster that threatens the existence of the U.S. dollar and global financial stability.

Indeed, the unfolding fiscal nightmare likely will entail a U.S. hyperinflation and a resulting collapse in the value of the world's primary reserve currency, the dollar. With surviving politicians looking to restore public faith in the global currency system, a new system probably will be based on gold, the only monetary asset that has held public confidence for millennia.

This article updates and expands upon our original background piece on the topic, "Federal Deficit Reality", published in September 2004, and a special economic alert, "Financial Report of the United States Government (FY 2004)", which appeared last December. Portions of those articles are revised and incorporated herein.


Current Detail and Options

Where the official cash-accounting deficit for fiscal-year 2004 (year-ended September 30) widened by 10.0% to $413 billion, the broad GAAP-based deficit (including Social Security, etc.) blew up to $11.1 trillion (96% of GDP) in 2004, triple the 2003 deficit level of $3.7 trillion.

Much of the increase in the broad GAAP-based deficit was due to a set-up charge from booking the 2004 "enhancements" to the Medicare system. Net of the $6.4 trillion one-time increase in net unfunded liabilities, the annual broad deficit was about $4.7 trillion, which still would have been a shortfall with 100% taxation.

        -----------------------------------------------------------------
         U.S. Government - Alternate Fiscal Deficit and Debt (Source: US
           Treasury; $s Are Either Billions or Trillions, as Indicated)
        -----------------------------------------------------------------
                Formal    GAAP       GAAP      GAAP             Tot. Fed-
                 Cash-    Ex-SS    With SS    Federal   Gross    eral Ob-
        Fiscal   Based     Etc.      Etc.    Negative  Federal  ligations
         Year   Deficit  Deficit   Deficit   Net Worth   Debt     (GAAP)
        -----------------------------------------------------------------
                 (Bil)     (Bil)    (Tril)    (Tril)    (Tril)    (Tril)
                ------    ------    ------    ------    ------    ------
         2004   $412.8    $615.6     $11.1*     45.9     $7.4      $47.3
         2003    374.8     667.6       3.7      34.8      6.8       36.2
         2002    157.8     364.5       1.5      32.1      6.2       32.7
        -----------------------------------------------------------------
          *$4.7 trillion, excluding one-time setup costs of the Medicare
          Prescription Drug, Improvement, and Modernization Act of 2003
          (enacted December 8, 2003).
        -----------------------------------------------------------------

Nonetheless, the total numbers reflect something close to true liability. The new Medicare charges show how quickly politicians can make an already impossible situation significantly worse. By adding features to Medicare without setting up full funding for same, the Administration and Congress helped increase the total net present value of unfunded federal government obligations by 31%, from $36.2 trillion to $47.3 trillion in just one year.

In like manner, any "fix" to Social Security, such as raising the retirement age, would result in a one-time change to the unfunded liabilities, but the ongoing annual shortfalls would be affected only minimally. An annual minimum broad GAAP-based deficit of $4.5 to $5.0 trillion appears to be in place.

Wall Street hypesters recently have been touting how the official 2005 federal deficit will narrow from 2004, and the Administration is promising ongoing deficit reductions from the official 2004 level. First, if the economy falls into recession, which it appears to be doing, all such projections are worthless. Second, even if the promised cuts came to pass, after full reductions in an about-$4.5-trillion broad GAAP-based deficit, the mere billions saved would still leave the annual deficit rounded to about $4.5 trillion.

The impossibility of the current circumstance working out happily is why lame-duck Federal Reserve Chairman Alan Greenspan has been urging politicians in Washington to come clean on not being able to deliver promised Social Security and Medicare benefits already under obligation. He suggests,correctly, that there is no chance of economic or productivity growth resolving the matter. The funding shortfall projections already encompass optimistic economic assumptions.

The current circumstance also is why the Bush Administration has been pushing for Social Security reform, but the plans discussed do not come close to touching the magnitude of the problem. Most Congressional Democrats will not even admit there is a problem. Indeed, neither side of the aisle is willing even to mention the scope of the actual shortfall or talk about the Medicare problem, which is even worse than Social Security.

If the Administration and Congress were willing to address the unfolding fiscal Armageddon, only two very unpleasant general solutions are available:

* The first solution is draconian spending cuts, particularly in Social Security and Medicare, accompanied by massive tax increases. The needed spending cuts and tax increases are so large as to be political impossibilities.

* In the absence of political action, the second solution is tacit bankruptcy, with the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely eventual outcome is the Fed massively monetizing the U.S. debt, triggering a hyperinflation. U.S. obligations then would be paid off in a significantly debased and devalued dollar at literally pennies on the hundred dollars.

These alternatives are politically unthinkable and unspeakable for the Administration and Congress, hence the silence. Yet, these same political bodies are responsible for the current circumstance, along with the acquiescence of the financial community and an uninformed or disinterested voting public.


Decades of Deception -- Historical Perspective

Misleading accounting used by the U.S. government, both in financial and economic reporting, far exceeds the scope of corporate accounting wrongdoing that keeps making financial headlines. The bad boys of Corporate America, however, still have been subject to significant regulatory oversight and at least the appearance of the application of GAAP accounting to their books. In contrast, the government's operations and economic reporting have been subject to oversight solely by Congress, America's only "distinctly native criminal class." [2]

Nearly four decades ago, President Lyndon Johnson's political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government's budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked reporting was dubbed "unified" budget accounting.

The government's accounting then, as it is now, was on a cash basis, reflecting cash revenues versus cash expenditures. There were no accruals made for monies owed by or due to the government or to the government's trust funds at some time in the future.

The bogus accounting understated the actual deficit for decades and even allowed for claims of budget surpluses in the years 1998 to 2001. While there were extensive self-congratulatory comments between the President, Congress and the Fed Chairman, at the time, all involved knew there never were any actual budget surpluses. There has not been an actual balanced budget, let alone a surplus, since before Johnson and his cronies cooked the bookkeeping.

The doctored fiscal reporting complemented the short-term political interests of both major political parties. Additionally, the ignorance and/or complicity of Pollyannaish analysts on Wall Street and in the financial media -- eager to discourage negative market activity -- helped to keep the fiscal crisis from arousing significant concern among a dumbed-down U.S. populace.

There were those, however, who believed the government's bookkeeping should be as accurate as possible. In the 1970s, the then "Big Ten" accounting firms proposed setting up for the federal government an accrual accounting and reporting system similar to that used in the business community. Purchases of capital equipment, weapons and buildings would be booked as assets and depreciated, taxes receivable and accounts payable would better reflect near-term cash needs. Accrued liabilities, such as Social Security payments due in the future, would reflect longer-term cash-flow needs.

As the project progressed, GAAP accounting was applied to the government's operations and prototype annual statements were published beginning in 1974. The appropriate accounting for Social Security liabilities, however, was discarded during the Reagan administration as being politically untenable.

Under the eventual mandate of Congress, the accounting project culminated in the U.S. Treasury publishing its first formal Financial Report of the United States Government for fiscal year 2000, consistent with GAAP, except for Social Security and similar accounts such as Medicare, Medicaid and the Railroad Retirement Fund.

The gimmicked accounting standards, as established during the Johnson era, still guide today's official, unified budget reporting. To the credit of the current Bush administration, however, the later GAAP reports, published in April 2003, April 2004 and December 2004 for fiscal years 2002, 2003 and 2004, indicated for the first time since the 1980s what the Social Security and related numbers would look like if they were included in the accounting, just as corporations need to account for pension and retiree health benefit liabilities.

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An Important Aside, Re: U.S. Government Economic Data
One of SGS' more important missions is to analyze, then report on the poor and deteriorating quality of "official" U.S. economic data. This growing lack of quality and the attendant diminution of accuracy contributes to bad business and investment decisions -- even bad political ones.

In the June edition of the newsletter, we took our mission a step further with the following announcement:

"Due to popular demand, SGS plans to begin publishing an alternate, monthly consumer price index by fourth-quarter 2005. The index numbers will be set -- not subject to revision -- and usable in calculations in the same manner as the official CPI. A history going back to 1990 will be reconstructed, with a bridge to pre-1990 CPI reporting. Annual inflation in the new series will tend to run about three-percent higher than the government's official inflation reporting of recent years.

"A full methodology will be published, in advance, and results will be replicable. The SGS index calculations will be fully transparent and based on publicly available data, not on massaged surveying by the Bureau of Labor Statistics, or over-modeled and over-theorized price levels. Further details will follow in upcoming newsletters. Comments and suggestions are welcomed."

Anyone wishing to learn more about this project and follow its progress is cordially invited to do so by letting us know at "CONTACT US". To help in properly responding to requests, we request that you provide your name as well as e-mail address. However, this is by no means obligatory.
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Dollar, Debt and Hyperinflation

The financial-market counterpart to the federal deficit is federal debt, where gross federal debt was $7.8 trillion as of June 30, 2005. That level was $7.4 trillion at the end of fiscal 2004, of which $4.3 trillion was borrowed from the public and $3.1 trillion was borrowed from the government (i.e. Social Security). Therein lies the problem. There is and will be too much debt from the U.S. government for the financial markets to absorb and remain stable.

The burgeoning deficit means the U.S. government will be increasing its debt level significantly for years to come. Near term, the amount borrowed will increase more rapidly than the markets are expecting, with the economy slowing down and entering recession. The ultimate question is who will lend the money to the U.S. Treasury? The answer is not U.S. investors.

The Federal Reserve's flow of funds accounts show that foreign investors, both official and private, owned 42.5% of U.S. Treasuries at the end of 2004, up from 18.2% at the end of 1994. In 2004, foreign investors bought 98.5% of new U.S. Treasury issuance. (See "A Look at Foreign Investment Behavior in the Latest Flow-of-Funds Data," courtesy of Gillespie Research Associates.)

Part of the reason for this relates to another deficit crisis the United States faces on the trade front, where an exploding trade deficit is throwing excess dollars into global circulation. By holding dollars and investing in Treasuries, instead of converting dollars to a local currency, foreign investors have been helping to fund much of the U.S. deficit.

The combination of the rapidly deteriorating trade and budget deficits guarantee this will change. At some point, willingness among foreign investors to hold dollars will evaporate along with the reality that currency losses are more than offsetting any investment gains. When sentiment shifts away from the greenback, not only are foreign investors going to stop buying U.S. Treasuries, but also they likely will dump their holdings of existing Treasuries along with the U.S. dollar. Such actions would lead to a sharp dollar decline, a sharp spike in interest rates and a sharp sell-off in equities. The question, again, is who is going to buy the Treasuries?

With new debt continually hitting the market, eventually the Fed will have to step in to buy the Treasuries -- as lender of last resort -- effectively monetizing the debt. The more the Fed monetizes, the greater will be the growth in the money supply, the greater will be the weakness in the dollar, the greater will be the rate of inflation.

Where the numbers already are there for this to happen, fiscal pressures will get even worse. Already, the Pension Benefit Guaranty Corporation looks like it needs a federal bailout. As the economy deteriorates, the Congress or the Fed will step in as needed to prevent the collapse of any major financial institution that would threaten the system. Such action, though, will prove fiscally expensive.

The Fed let the banks fail in the 1930s, which helped intensify a decline in the money supply. That in turn was given major credit for deepening the Great Depression. The Fed will try to avoid the mistakes of the 1930s, but, in the process, it likely will end up triggering a hyperinflationary depression.

Last year, we discussed in some detail that the U.S. government's sovereign credit rating of AAA more appropriately should be around B-, a below-investment-grade category, based on the 2003 GAAP statements ("Federal Deficit Reality".) Based on the 2004 GAAP statements, that rating now should be at C-, just above the default level. Never has an investment-grade overeign rating, let alone a AAA country, been supported by such negative extremes in underlying fiscal condition. Based on the latest numbers, the broad GAAP deficit for 2004 represents 96% of GDP, up from 33% in 2003, with total obligations now at 409% of GDP, up from 334% in 2003.

For political reasons, none of the rating agencies are likely to take a credit action against U.S. Treasuries under current circumstances, but that could change in the event of a major dumping of U.S. securities by those wishing to exit U.S. dollar exposure.

As noted by Fitch Ratings [3] in its Sovereign Ratings Rating Methodology: "Sovereign borrowers usually enjoy the very highest credit standing for obligations in their own currency. If they retain the right to print their own money, the question of default is largely an academic one. The risk instead is that a country may service its debt through excessive money creation, effectively eroding the value of its obligations through inflation."

Such has been the traditional cure for countries that borrowed so far beyond their means that they ended up with a choice between bankruptcy and hyperinflation. Hyperinflation seems to be the easier political route, although, for the first time, it will involve the world's primary reserve currency.

In a hyperinflation, the currency very rapidly becomes worthless. In the classic case of the Weimar Republic of the 1920s, a 100,000-Mark note became more valuable as toilet paper than as currency; wheel barrows full of currency were needed to buy a loaf of bread; an expensive bottle of wine one night was worth even more the next morning, empty, as scrap glass. That is the eventual environment the United States faces because of its out-of-control fiscal madness.

For decades, "The deficit doesn't matter" and "The dollar doesn't matter" have been guiding principles in Washington. The deficit and the dollar do matter, greatly, as Washington, the U.S. public and the global markets will learn shortly.


A New Gold Standard?

The dollar, as we know it, soon will be history. Dollar inflation has been through a number of cycles since the founding of the Republic, but its current perpetual uptrend -- net of some bouncing during the Great Depression -- only began once the Federal Reserve was created in 1914. Now, with fiscal policy careening beyond any chance of containment, the Federal Reserve will get to oversee the U.S. currency's demise.

It is not that the Fed wants to monetize the federal debt and trigger a hyperinflation -- the U.S. Central Bank certainly will do its utmost to avoid that outcome -- but it will have no politically acceptable alternative. The system otherwise would tend to right itself anyway through the economic shakeout of a hyperinflationary depression. While the Fed might hope to mitigate and to control the disaster, given the Fed's nature, it is more likely to exacerbate conditions rather than to improve them.

When the dollar loses most of its value, through hyperinflation and/or currency dumping, the global currency system and economy will be in shambles, and a new currency system will have to be established. Those setting up the new system will need to establish its credibility, and there is only one monetary asset that can accomplish that: Gold.

Gold is the only commodity that has held up as a liquid store of wealth over the millennia. The amount of gold used to buy a loaf of bread in Ancient Rome still buys a loaf of bread today. In like manner, the amount of gold that bought a regular haircut for a man in 1914, still buys a similar haircut today. Where the public does not trust today's politicians and central bankers, it does trust gold.

Whatever structure evolves for the new currency system, it most likely will have gold at its base. That is one reason that central banks rarely have followed through on threatened gold sales in recent years. The threats usually were nothing but jawboning aimed at depressing current market prices. Those countries holding the most gold will have the greatest advantage in any new currency system, and the central bankers know that, including Mr. Greenspan.


Timing of Related Currency and Financial Market Troubles

Central banks, OPEC, corporations and investors, both foreign and domestic -- as holders of U.S. dollars -- increasingly will sense or realize the greenback is headed for the dumpster. It only is a matter of when, not if.

The dumping of the U.S. dollar and/or U.S. debt by investors likely will hit quickly, with little advance notice. All the official actions that in turn could trigger hyperinflation would follow rapidly, with a full-fledged dollar collapse and developing hyperinflation possibly unfolding in a matter of weeks.

When this will happen is the tough question. It could be years; it could be next week. Without knowing the precise proximal trigger of the shift in sentiment against the U.S. currency, the timing is impossible to call. Nonetheless, some early warning signs may be evident in unusual anti-dollar activity in the currency markets, or in unusually sharp and unexplained spikes in the price of gold.

It would be extraordinarily surprising if the ultimate dollar collapse can be held off three to five years, let alone a decade. The pending global financial crisis conceivably could break in the immediate future, triggered possibly by one or more of the following developments: action by China to peg its currency to a basket of currencies instead of the dollar, OPEC pricing oil using a basket of currencies instead of the dollar, a sovereign credit rating downgrade on U.S. Treasuries, a major terrorist act, a very bad monthly trade report, a misstatement by an Administration official or some other event that may appear obvious in retrospect.

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If you would like information on Shadow Government Statistics, be be sure to CONTACT US. ___
Footnotes:

[1] "2004 Financial Report of the United States Government." The full document is available as a PDF file at www.fms.treas.gov/fr/04frusg/04frusg.pdf. The table published in the Overall Perspective on page 11 shows the $11.1 trillion annual eterioration in the government's net worth. As an aside, check the GAO's auditor's letter as to why they will not certify the statements.

[2] Samuel Clemens.

[3] Fitch Ratings website.