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ar too often the majorityprefers to assume thatwhatever trend is in mo-

tion, the future will bring more of thesame. Unfortunately, long-termchanges within the political-econ-omy are as difficult to comprehendor observe in the day to day eventsas the gradual silent encroachmentof the aging process itself. Eachday we rise from our restful slumberto confront ourselves in the mirrornever once noticing the minutesubtle changes that are takingplace as time marches forever on-ward. Yet when we relax and pullout a photograph of years gone by,we are faced with the harsh reality

of just how much has changed witheach passing day.

Long-term political-economicchanges are very much the same.There are monumental changesthat take place every second of theday combining to move and shapethe long-term events of tomorrow.Often we are shocked by whatmight appear to be dramaticchange in the blink of an eye - like

Russia for example. While the me-dia loves to rush in and bring us thenews of shocking events as theyunfold, they are never there to re-flect the images of daily injusticesthat slowly undermine society as awhole. A woman who is raped. Ahome is robbed. A man is killed forhis car. A child is killed for hisshoes. As daily events becomemore widespread, slowly society istransformed from a trusting com-munity into one of suspicion andskepticism. A man who loses a job.

A business closes its doors. Another political promise broken. Another rise in taxation. A policemanwrites yet another ticket to fulfill hispolitical monetary quota. With eachpassing day, confidence is lost andfrustration builds spreading from individual to individual until groupsbegin to question collectively whaposterity might have in store.

The frustrations of society always, and without exception, buildover time. In some way society as

Issue #8 August 1996 Copyright Princeton Economic Institue all rights reserved214 Carnegie Center,Princeton NJ 08540 609-987-9522 Annual Subscription US$49.95

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the individual, endures the every-day injustices of community life.The quest by one special interest tobenefit at the expense of another.These subtle trends build in mag-nitude until they afflict the moral ofthe whole. In what might superfi-cially appear to be the blink of an

eye, is in reality the tears, frustra-tions and countless injustices of so-ciety that burst forth demanding im-mediate change.

As America approaches a newdawn, the subtle frustrations arebuilding within society. The conse-quences of unsound finance aresitting on our doorstep, waiting tobe addressed in the eyes of ourchildren. The swings in politicalpower within the United Stateshave been hyped up by both sides

forever placing the preferred inter-pretation carried to the peoplethrough the filtered versions of ouronce great free press. Rarely do wehear the truth from either the politi-cians or the media. Instead, theprevailing debate of left vs right be-comes an endless chatter and truththe only victim.

Our free press, once cherishedby the founding fathers, has be-come the soap box for political ac-tivists forever seeking the correct

spin to further promote their ownpersonal political goals. It is highlydebatable whether or not we trulyenjoy the freedom of the press asoriginally intended when one viewsthe major newspapers and televi-sion. It was wisely recognized thatif the press could be controlled bythe politicians, then truth wouldnever surface. What if the press isnot controlled by t he politicians ina direct outright manner but rathercontrolled by politically minded in-dividuals seeking the same political

ends? Should we call this a freepress? Does this serve the samefunction to safeguard our nationagainst the political corruption thatalways breeds within the bowels ofgovernment historically? Is it ethi-cal for any major newspaper ortelevision network to be widely con-sidered left or right rather than anunbiased beacon of the truth nomatter who it effects?

Indeed the long-term trend ismoved and shaped by many com-ponents each in their own way con-tributing to the sum of the whole. Tosome extent, the bonds that tie so-ciety oscillate back and forth drift-ing through the current of globaltrends. The experience of major

war during the first half of this cen-tury forged together ever tighter thebonds within that generation. Butsubsequent generations lack thedepth of such experience allowingthe bonds within society to gradu-ally loosen changing the goals andexpectations as the community asa whole evolves. Such philosophi-cal changes are self-evident withinour legal system. Today, liabilityinsurance has skyrocketed be-cause there is no sense of commu-nity, only the greed of individualism

that shrugs off the responsibility ofself.

And then there are the philoso-phers who seek to change the be-havior of mankind in their quest tocreate the perfect world. Econo-mists argue that we must tax therich at a higher proportion than themiddle class because it is to thema matter of "fairness"or "ethics."They ignore the contributions to so-ciety and the vast creation of jobsby such men as Henry Ford, J. D.

Rockefeller or even Bill Gates. In-stead, their own material jealousyprevents them from seeing thechanges that computers havebrought to all of mankind becausethey cannot get past the wealth ofa single man. Ethics? Fairness?Should we try to change natureending forever the cruelty of onespices survival being dependentupon the kill of another because itis a matter of fairness or ethics?What economists and politiciansalike have forgotten is that we must

strive to understand how thingswork be it the genius of an individ-ual or the prowness of the lionrather than try to go against thetrends of nature. If we could onlylearn that ethics and fairness meana guaranteed human right to equalopportunity for all rather than theexploitation of one for the benefit ofanother.

The future that we face is actu-ally set in motion by the accumula-tive trends of the many. As Romestood firm, it found that it could nothold-off the endless invasions fromthe uncivilized world. We too can-not expect that the destiny facingAmerica is not or will not be upset

by the shifting eternal sea of politi-cal change outside our borders. Asit has been said that no man is anisland, this is also true for all na-tions. In our domestic quest to helpthe few, we must not endanger thesafety of the many ignoring thelessons that led to the sack ofRome.

The eternal sea of politicstouches every shore giving rise toone nation at the expense of an-other. The history of man is indeed

a history of political struggle be-tween the will of politicians, kings,ministers or dictators and the realityof their actions. In total, the politicalsystem of today is never the sametomorrow. With each new law orregulation that is past, even a de-mocracy has been transformed intothe very thing it once stood soproudly against. To this day, a com-plicated over-regulated system ofgovernment is often called "Byzan-tine" after the once great Easternremnant of the Roman Empire.

Byzantium collapsed under theweight of its own regulations thatfar too often made no sense as onedepartment contradicted another.

The history of politics has beennothing more than a never endingbattle between the liberty of thepeople and the desire to controlthem be it a king, emperor, landlordor politician. This eternal battle hasexisted from the very dawn of time.The first emperor of China had allthe scholars killed because they

believed in the teachings of Confu-cius who taught a ruler should en-courage the goodness of man. TheEmperors view held that the peo-ple were evil and required regula-tion and a firm rule . Stalin in Russiatook the same path for very muchthe same reasons.

These two very different schoolsof thought in politics continue to-day. There are those who believe

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in the goodness of the people andthose who believe it must be tem-pered and controlled. Both sideshave their varying degrees of inten-sity. The big government group be-lieves in regulating every aspect oflife stamping out the individuality ofhumanity. Thus the philosophies of

Karl Marx sought to eliminate indi-viduality through the progressiveincome taxation schemes. Thisbranch of political thought has oftenbeen the most dangerous for in thename of the people, communismemerged extinguishing freedomand imposing poverty in the nameof equality for all.

The freedom of Democracy ofConfucius and Pericles, producedsome of the most productive peri-ods in the history of mankind from

freedom of thought to the wondersof art. Yet these periods of brightshining optimistic hope often disap-peared in the brief time span ofmankind. Many great periods existthroughout history, but few everlast beyond 200 years. Once a de-mocracy begins the exploitation ofone group to satisfy another, his-tory warns that the slow gradualdecline begins leading ultimately toits death by suicide.

The long-term changes in our

political-economy are an accumu-lative process. While today we mar-vel at how political change canspring forth so quickly, we ignorethe years of accumulative frustra-tion. The spark of freedom that ap-peared in China and Russia in theshort time span of a single yearstartled the world. While we mightassume that such sweeping politi-cal change is solely due to moderncommunication, history would dareto argue otherwise. During the briefand shining moment of one genera-

tion, democracy was born, influ-enced the world, and died back inancient Athens. Rome too revoltedagainst its Tarquin king and theRoman Republic was born withinone year of the birth of democracyin Athens. But it too was replacedby Imperial Rome 200 years laterfollowing a bloody civil war on theheels of a major debt crisis.

Change indeed has alwayscome with a burst of vigor and en-ergy often appearing in the blink ofan eye to the casual observer. Butto the student of history who seeksthe knowledge and understandingof how things change, this notion isrejected. Such sweeping bursts ofpolitical change are NOTmere ab-normalities or random eventswithin the long continuum of time.

The long-term trend is not stag-nant, but rather very much a dy-namic scheme that is self-evidentthroughout all natural systems. Ourattempts to run our political-econ-omy from a linear approach hasnever worked. For within the vastcomplex of the universe, nothingmoves in a pure linear motion fromweather, disease and animal popu-lations right down to the humanactivity of booms and busts.

As the 21st century calls to uson the horizon, a new age of majorchange is about to unfold. It will bea new age of enlightenment. A newbeginning that will finally see thecollapse of Marxist socialism in thewest and communism in both Rus-sia and China. These major sweep-ing changes are coming and theywill arrive within our lifetime per-haps by storm. Let us hope that thecollapse of debt markets that

prompted the first civil war in Romewill not be the catalyst for changein our lifetime. Such events are aleast possible to avoid, if we knowthat we should at least considesuch possibilities.

Such monumental sweeping political changes around the world wilbe both exciting and painful. Thebenefactors of the old system wil

not go quietly into the sunset. Theiutopian world is gradually disintegrating before their eyes taking withit their hard fought power to exploione group for the benefit of another. The Socialists and Marxistswho have sought to control mankind seeing only material evil instead of long-term economicgrowth, will seek to prevent thenatural change in political thinkingfrom ever happening. They will f ighto the last ignoring all the failurescreated by their tampering with thenatural course of society. Thegreed of the socialists have createdvast hoards of capital residing offshore - just beyond their greedyinterventionist hands. Todaynearly $4 trillion rushes around theworld from offshore investment forever growing day by day.

In the United States, the death othe Democratic Party will be inevi

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table. This party that has fought so

hard for the establishment of the"Byzantine" style big governmentwill lose the generation that voted itin so overwhelmingly with FDR aswe pass beyond the year 2000. Asthe entitlements bring the unfundedobligations into focus by 1998, themiddle class will demand changeas sweeping in our day as it oncewas when FDR took office. Theseshifting tides within the eternal po-litical sea may not necessarilybenefit the Republican Party. Forhere too, much of the established

party members still believe in a so-cialistic purpose for big govern-ment. They prefer incrementalchange that is as destined to fail asthe slow pain-staking attempts atreform in Russia are giving riseonce again to the Communists asan alternative to reform.

We can see that historically, theAmerican people have never beenlong-term believers in big govern-ment (Figure #1). Our illustration ofthe Concentration of PoliticalPower since 1856 is very enlighten-ing. Only two big governmentdemocrats have ever won the officeof president by an overwhelmingmajority (FDR and LBJ) in com-parison to 7 former Republicanpresidents. With the exception ofFDR, the total concentration of gov-ernment in the hands of the Demo-cratic party has never been thatoverwhemingly successful. De-

spite the fact that the Democrats

controlled the House of Repre-sentatives for 40 years until 1994,their concentration of power wassteadily declining since FDR. BillClinton was able to capture the of-fice of the president with 43% of thepopular vote (a level below that ofeven Dukakis)only because of asplit in the Republican vote forPerot. The Clinton victory is farfrom a reversal of the overall declin-ing trend of the Democratic partysince the last major high estab-lished by LBJ.

If we look at the Senate (Figure#2)and the House (Figure #3)wealso see that the concentration ofpower for the Democratic partypeaked with FDR. In both cases, asthe bureaucracy has grown, thereis an undeniable gradual decline inthe concentration of power for theDemocrats. While this may at firstglance appear to benefit the Re-publican party, the appearance ofRoss Perot in 1992 demonstratedthat the frustration with governmentas a whole is rising.

Ross Perot himself is not thecause of this rise in third party ac-tivity. The beginnings of the ReformParty were there long before Perotappeared. He just happened to beat the right place at the right time.Perot may in fact capture LESSofthe popular vote in 1996 than he didin 1992. Nonetheless, this will in no

way diminish the threat to both po-litical parties in the United Statesfor 2000 or 2004. Perot may havestarted something that is biggerthan Ross Perot - a forum thatcould emerge as a totally new partyfor the 21st century. The ReformParty, or some amalgamation of it

with other smaller groups, couldemerge in 2000 to pose a seriousthreat to the two party system. In-deed, it appears that we may in factone day have a president who isneither Republican nor Democratby 2004.

An analysis of our computermodels for the 1996 election showssomething that the polls do not - atleast at this time. We find that if thethird party vote is in fact less for the1996 election as our computer is

forecasting, then a very close racecan emerge between the Republi-can and Democratic parties.

TABLE #11996 PROJECTIONS FORPRESIDENTIAL ELECTIONas per cent of the popular vote

DEMOCRAT REPUBLICAN---------- 59.1753.77 --------51.05 ------------------ 48.95

46.12 46.23--------------------------------------- 43.0840.83 ---------

We can see from Table #1thatif a third party vote comes in under8% of the total popular vote then anear dead-heat becomes possiblewith Democrats at 46.12 and Re-publicans at 46.23. Anythingabove 8% for a third party couldcause the Republican vote to be

43.08. It is interesting to note thatour long-term forecast for theDemocratic party decliningsharply would begin in 1996should the Democrats come inUNDER 40.83%.

TABLE #21996 PROJECTIONS FORELECTORAL COLLEGE

DEMOCRAT REPUBLICAN

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------------- 525432 ---------297 ---------277 --------------------- 240------------ 145------------ 9913 ---------

The previous Table #2offers ourcomputer model guide to the Elec-toral College projections. Here wecan see that while 270 votes areneeded to elect the president, theDemocrats seem to have resis-tance forming at the 277 level whileRepublicans have support at 240.This again suggests a very closerace is possible. This also suggeststhat the Republicans could be fa-vored to win again if the third partyactivity is kept to a minimum. Given

the fact that the economy is not atan extreme at this time according tointerest rates, unemployment or in-flation, third party activity may notbe altogether strong for the 1996elections.

Nevertheless, if the Democratsdo win, they do not appear to be ina position where a super majorityvictory is likely. Despite the currentpolls showing as much as a 20%lead for Clinton, our computermodel warns that this will be nar-

rowed significantly by the Novem-ber 5th election.

It is unfortunate that regardlessof the victor, the next president willbe faced with monumental prob-lems beginning in the Fall of 1998.We may be looking at the Dow ris-ing to as much as 10,000 by mid1998 and then falling like a stone asunfunded liabilities explode into theheadlines nationwide. We showthat Medicare plan A will move intodeficit in 1997 -NOT 2003. We also

see that Social Security is mostlikely to move into a deficit positionin 1997. Thanks to Bill Clintonsshifting of the national debt to 70%short-term and 33% funded one-year of less (see Clintonics05/96), short-term interest rateshave doubled during his admini-stration. This results in the govern-ment static model forecasts for fu-tures entitlement expenditure be-ing way-off the mark. As interest

rates rise, the default dates for ourunfunded liabilities come in muchfaster with each passing day. Thelow in the "combined" deficit (us-ing SS surplus to offset budgetdeficits)is clearly going to be 1996in line with our Economic Confi-dence Model forecast. Therefore,

as both Medicare and Social Secu-rity move into deficit next year, the"combined"deficit, as reported bythe Treasury, will rise sharply in1997 right after the elections.

In our view, the unsound financepolicies of the past 40 years willstart to rise to the surface during thenext administration. If the Demo-crats win, then this time their partywill be blamed for the debacle.Should the Republicans win, thenunless they immediately come

clean with the American people let-ting them know what has happenedto our budget and entitlement pro-grams, this time bomb will explodebetween 1998 and 1999 causing ahigh probability of a third party vic-tory in 2000.

In conclusion, the 1996 electionfor president of the United States isgoing to be a critical turning point inthe long-term scheme of things.There is a brief and small windowin time here where the fate of the

nation can honestly be reversed. Ifwe do not deal with the time bombof tomorrow now, our model clearlywarns that it will be too late once wepass 1998. Thereafter, the entirepolitical landscape for the 21st cen-tury will not be anything like it istoday. Perhaps we will return to amore responsible form of govern-ment. But there is also the dangerof moving toward a more authori-tarian form of government as well.

The blame for this debacle that

we face is traditionally placed onthe current administration of theera. Like Herbert Hoover, who en-tered office less than 1 year beforethe fateful Crash of 1929, the presi-dent who is in office next year runsthe risk of receiving all the blame forthe sins of the past 40 years. Con-sequently, political swings of thisnature are never fair and oftenshort-sighted at best. As a result, aRepublican victory that included a

sweeping change to the tax systemwithout dealing with the hard issuesof tomorrow, could easily beblamed for the coming mess just asHoover once was despite the facthat he had nothing to do with creating the Great Depression. Theforces of unsound finance through

out Europe were already underwaylong before Hoover ever took office. When all the European, AsianSouth American and Russian governments defaulted on their publicdebt in 1931 (except Britain andSwitzerland),the destructive forcesthat depleted our capital formationworldwide could hardly be prevented by a newly elected president of the United States.

With history in mind, we musrealize that fate is never fair. A

critical turning points in history, thefinal direction can be decided bythe fickle winds of chance. If theblame is laid upon the socialisticpolicies of the Democrats over thepast 40 years, then the politicachange will swing toward less government and greater freedom. If theblame is placed upon barely a 1year term of the Republicanagenda, the winds of change mighjust as easily carry us off into aneven more authoritarian stateKeep in mind that during the depths

of the Great Depression, an electedsenator rose to the floor on capitahill and stated that "even a dictatorship is preferable to what weare experiencing today!" Whenthe going gets tough, the last vestiges of a democracy become veryfragile indeed.

The die will be cast perhaps righhere and now in 1996. Even a Republican victory will NOT save thenation unless a full overhaul of ousystem is carried out now before i

is too late. A continued incrementalist approach on the part of theRepublican party will make little difference from that of an ignored approach by the Democratic party.

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With only nine months left beforea general election of members ofthe House of Commons must beheld, the Conservative Govern-ment of Prime Minister John Major,holds onto an overall majority ofone seat in the 651 seat parliament.The Conservatives narrowly won inthe last (1992) elections against thetrend of the opinion polls which in-dicated Labour with equal or moresupport and the Liberal Democratsincreasing their support with eachpassing month in third place. Halfway through this parliament thepopularity of John Major slumpedto 18.1 percent in December 1994,the lowest result since The GallupOrganisation started this poll in1945. Less than 10% of the 9,000polled approved of the govern-ments record and voting intentionsupport dropped to 20% giving La-bour its greatest ever lead of 40%over the Conservatives. That leadhas now narrowed to 27% and ap-proval of the governments record

has climbed back to 25%.

In addition the so called feel-good factor within the electoratehas climbed back from a low pointof minus 35 to the levels aroundthe 1992 election and trendingpositive. Some of the other pollswho after their failure to pick the lastelection adjust their results by

weighing towards the Conservativevote, are showing a more convinc-

ing swing equally split from Labourand the Liberal-Democrats towardsConservative.

There is no doubt a Labour gov-ernment would be returned if anelection was held today based ontheir still very large opinion polllead. And there is also no doubt thatmany votes for Labour would be avote for changes after fourteenyears of Tory (Conservative) rulerather than a vote for specific La-bour policies. In deed it is difficult to

see where major differences arenow in stated policy between TonyBlairs new Labour Party and thetraditional right wing Conserva-tives. Both parties espouse sooth-ing and vague centre ground poli-cies to attract the floating voter.Both parties have their bogie man.In the case of the Tories it is John

Redwood who sees himself as thetrue heir to the Margaret Thatcher

throne and is a confirmed Euro-sceptic. In the case of Labour it isClare Short, who after demotionwithin the shadow cabinet, callednew Labour a lie and describedBlairs advisors as the people wholive in the dark.

So the media campaigns are fall-ing into place. The Conservativesattacking with New Labour, NewDanger showing a satanic TonyBlair looking through the dark withglowing red eyes, and Labour

countering with the slogan Sameold Tories, Same old Lies. Whatwe can expect not to get is effectivedebate during the run up to thiselection on the major issue at stakefor the United Kingdom - its rela-tionship with Europe. The reasonfor this is that both major partieswould have to reveal the intensedifferences within their respectiveparties on European Union issues.And both John Major and TonyBlair know that voters prefer aunited party rather than one racked

by feuding.Enter Sir James Goldsmith and

his Referendum Party officially tobe launched on the 19th of Octoberthis year at a convention inBrighton. This event will introducethe candidates and provide the in-itial publicity for the ReferendumParty campaign and its single issuepolicy to hold a referendum on fur-ther European integration and thecommon currency. There have

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been many minor political partiesformed but apart from regional in-fluence for nationalist groups therehas been little long term success inbreaking the mould of British poli-

tics. Even the Social Democratsformed in 1981 with 26 sitting MPs(Members of Parliament) failed togather enough momentum beforesubsiding partly into a merger withthe Liberals in 1988 with the rem-nant suspending activity in 1990.

The results of all elections heldthis century in the UK show theConservative Party has attracted

40% to 45% of the vote consistentlyand the Labour Party has grown atthe expense of the Liberals whohad their last taste of power in the1920s coalition governments. A

rash of independents squeezedboth the Liberals and the Conser-vatives after the First World Warbut it was not until the 1970s thatminor parties started to take anysignificant share of popular sup-port. This has not been proportion-ately transformed into seats in theHouse of Commons because of thefirst past the post political system.However, an increasing minor

party vote will have an impact onthe ability of the Conservatives oLabour to form a majority government.

Will the Referendum Party create this situation? Certainly the relationship with Europe is the mos

emotive political issue since the1975 referendum when the thenPrime Minister Edward Heath tookthe UK into Europe on a platform otrade and stability. As he recentlyadmitted, political integration wasthe hidden government agenda.

The Conservatives have a battleto win back sufficient public opinionfor a credible chance of anotheterm in office. The factors affectingthem will be more than their negative poster campaign against La

bour. The issue of Europe will be-come impossible to downplay ovethe next nine months. A continuingrecession in Germany and Francetogether with a final peak in theDeutschemark this October or firsquarter 1997 will provide the instability for monetary and political union sufficient to ensure this is thecase.

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Politics is not a sciencebutan art

Otto von Bismarck, 15. March

1884

Chancellor Helmut Kohl mightnot enjoy his holiday as much as heexpected. Some of his politicalpartners from CDU, CSU and FDPare obviously keen to grant inter-views on one of the most excitingsubjects while he is away; they talkabout the tax-reform in Germany. Itis amazing, without even havingstarted a discussion about the re-form, the involved parties argue al-ready over the start date - and theruling party, including Mr. Kohl, be-lieves that the value-added taxwould need to be raised in the nextlegislative period, beginning in late1998. This would be merely be a

switch from direct taxes to indirecttaxes.

Tax reform has taken a particu-lar importance as Mr. Kohls gov-ernment hurries to get its financesinto shape in order to join Europesplanned currency union at the endof the decade. The Tax-Reform willbe on of the most difficult tasks forthe years ahead and the issue is,could a serious tax reform changethe course of the economy, avoidthe budget crisis, reduce the num-

ber of unemployed people and alsobring back the production whichhas already left the country be-cause of high taxes.

Fact is, that the current tax sys-tem is one of the most complicatedand unfair systems in the world.Even tax advisers struggle to un-

derstand and implement the floodof 40 ministerial acts, 200 tax ver-dicts of the Bundesfinanzhof, 1000new tax procedures and about3000 verdicts of the Finanzgerichteon average per year.

The following concepts do exist:

The Uldall-Modellproposesthree tax rates of 8, 18 and 28percent. The maximum rate wouldapply above 30,000 DM ($15.000)taxable income for a single person.

The cost of that are estimated at122.5 billion DM ($81 bln). This willbe financed by the abolishment ofall tax relief.

The Solms-Modellis based onthree rates as well: 15, 25 and 35percent. The maximal rate starts at60,000 DM ($40,000). This wouldcost about 75 billion DM, financedby some reductions of tax relief andan increase in VAT.

The CDA-Modellis similar toUldalls. It adds a fourth rate of 35%above 120,000 DM ($80,000) tax-able income

The Bavarian Modellincreasesthe tax rate linear-progressivelyfrom 20% to 40%. The maximumrate will apply for income above150,000 DM ($100,000). This shallbe financed solely by expense sav-ings, abolishment of tax relief andrestructuring of the tax system.

However, Mr. Kohls problem isnot the tax reform, nor the questionwhether Germany is heading forrecession or not. The real problem

is that Germanys version of thesocial market economy is break-ing down. Germany is facing somemajor problems:

1.The budget deficit is still in-creasing. The tax revenues fromthe corporations are decreasing.

2.The real disposable incomehas not even beat inflation forthe last decade.

3.The unemployment rate hasexceeded the 10 percent level.

4.Labor cost, rules and regu-lations to not attract foreign in-

vestment in Germany and do-mestic corporations invest inmore competitive countries.

5.Investments in the capitalmarkets are less riskier andbring a higher net-return than in-vestments in the corporate econ-omy.

Disposable income is decreas-ing, unemployment is increasingand the economy is close to a re-cession. The budget deficit is swel-ling because the social spending isenormous. - Is Germany only suf-fering because the world economyis sluggish or is it the strong DM thatcauses all the trouble? Is this all justanother temporary recession or isGermany (and subsequentlyEurope) due for something worseto come? The wait and see policyin the past did not improve norchange any of the structural prob-lems which are now at least recog-nized.

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Brought to you by...

The premiers of Canadas prov-inces began their annual meeting inthe Rocky Mountain resort town ofJasper on August 21st. For the firsttime, corporate sponsors are pick-ing up part of the tab. CanadianAirlines, CN Rail, Nova Corp.,Telus and 20 to 30 smaller compa-nies are expected to cover about$150,000 of the conferences ex-penses.

Democracy Watch, an Ottawa-based advocacy group, sees aclear conflict of interest. Thissounds worse than the US Con-gress that is known for these typesof junkets. The message it sends tothe public is if you have the money

and corporate backing, you havegreater influence and access topoliticians, said coordinator DuffConacher. However, Mitchel Gray,national research director of theCanadian Taxpayers Associationpoints out that these companiesare already huge contributors topolitical parties and therefore anyinfluence gained through sponsor-ship is moot.

Move to Decentralize

Derailed

The agenda for the conferencewas to include a movement by twoof the premiers to decentralize thefederal governments control overthe provinces. But the idea was

scrapped because of resistencefrom Canadas poorer provences.Ontario Premier Mike Harris andAlberta premier Ralph Klein want toput more of Ottawas control back

into the hands of the provinces.Harris described the planned moveas a rebalancing of the powers ofConfederation. He wants provin-cial rights he feels were centralizedby the federal government overtime to be restored to the prov-inces. The thrust of the plan is to letthe provences set their own stan-dars for social spending. The mainargument for increased decentrali-zation is the fact that Ottawa hascut health, education and socialservices contributions to the prov-

inces by 42.2 percent while relin-quishing no control over the prov-inces. Klein said, "Most, if not allpremiers are willing to accept thosereductions, but they are saying ifthere are going to be reductions, atleast give us the flexibility to deliverservices."

The poorer provences derailedthe idea because the poorerprovences feel they will lose out inany deal that lets the provences settheir own social standards. Sas-

katchewan Premier Roy Romanowsaid of the proposed decentraliza-tion "it breaks down between thehave and have-nots...its the ele-phants dancing among the chick-ens."

While the premiers meeting inJasper are discussing decentrali-

zation of federal powers, citizens ofB.C. are thinking about separatingfrom Canada completely. A three-page analysis titled British Colum-bia Separatism, itemizes BCs rea-sons for wanting to separate. Thereport says that B.C. is not getting

its fair share back from Ottawa, thathe federal government is insensitive to provincial interests, that B.Cfeels alienated from federal government decisions, that geographic

isolation gives B.C. more in common with its American neighborsand the Pacific Rim countries thenthe rest of Canada and that 10years of economic growth hasgiven B.C. a sense of economicindependence.

At a conference of the CanadianMedical Association, Canadiandoctors brought up the subject of atwo-tiered medicare system - onewhere individuals could buy privateinsurance while those who couldnot afford private insurance wouldstill be covered by the governmentThis idea was immediately shotdown by Federal Health MinisteDavid Dingwall. He said moving towards a two-tiered system wouldbetray the trust of the Canadianpeople and violate the fundamenta

principles of Canadas currenmedicare system. This discussioncomes at a time when many Canadians who can afford to are buyingUS health insurance and going tothe US to receive treatment. Soeffectively, a two-tier system already exists. A two-tier system isalso supported by just under half oCanadians surveyed in an AngusReid poll. Many of those polled sawprivate health insurance as a wayto substitute for money the provinces and federal government have

cut from health care budgets recently.

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The Governor of the Reserve

Bank of Australia, Bernie Fraser,has dampened speculation aboutinterest rate cuts by dismissing theimportance of the Governmentsmooted fiscal cuts in determiningshorter term monetary policy.Fraser, a Keating appointee hasalso suggested that increasedtaxation measures should be partof the measures used to reign in thebudget deficit.

Treasurer Peter Costello wantsany new appointment to the posi-

tion of Governor of the ReserveBank of Australia to exchange mu-tual letters of understanding withthe Government on appointment.In doing this the Government wouldbe seeking to emphasize the pri-mary importance it places on a rolefor the central bank of fighting infla-tion first. The government cannotlegislate an inflation first strategyfor the central bank, which as partof its charter must also ensure eco-nomic and employment growth,and former Prime Minister Paul

Keating has weighed into the argu-ment with the assertion that infla-tion first would have meant 2.5%growth versus 4.5% for the pastyear - disingenuously ignoring theunderlying deficit and continuedhigh unemployment under his re-gime.

Several of the more contentiousitems in the August 20 FederalBudget are being announced in ad-vance in order to diffuse some ofthe expected public outcry. $1.8bil-

lion will be saved over 4 yearsthrough cuts to universities andrises in new students fees andrates of student loan repayments.Students have taken to the streets!

$400 million over 4 years will beslashed from aboriginal culturaland legal services with pro-grammes for aboriginal health,housing, education and employ-ment left intact. The AustralianBroadcasting Corporation is also tohave its budget trimmed provokingan outcry among the "chatteringclasses". However, the mining andagriculture sectors have beenspared cuts in the $1.4billion p.a.diesel fuel rebate scheme whichkeeps diesel fuel prices at 28c a

litre for these industries as opposedto 58c for other users due to federaltaxes - mining stocks rall iedstrongly on this news as severalmines would have become uneco-nomic if diesel fuel prices had beenincreased to 58c.

Further pressure on the federalgovernment to overhaul the taxsystem is coming from the GreenSenators currently holding the bal-ance of power in the Senate. TheGovernment needs to broker a deal

with either of the 2 Greens in orderto ensure passage of key legisla-tion including the Budget, privatisa-tion of Telstra and industrial rela-tions reforms. However, the leftleaning Greens idea of reform isprobably more likely to be of the"tax the rich" type of rhetoric thanconstructive economic argument.

The Federal Governments Pro-ductivity Commission has alsoplaced a GST on the agenda ofneeded reforms along with reform

of Federal-State finances, most tar-iffs to be cut to zero and businessass is tance schemes to bescrapped. The commissions reportrecommends acceleration of indus-

trial relations and workplace re-forms and increased efficienciesfor roads, rails and ports.

A bill to curtail administrativered-tape has been introduced bythe Federal Government. The billwill place an automatic 5 year re-peal on all non-legislated rules,codes, determinations and decla-rations and a mandatory consult-ation process with business groupsbefore any new regulation is intro-duced under delegated legislation.

A growing number of companiesare establishing their Asia- Pacificregional headquarters in Sydney orMelbourne. Since 1993 around 150international companies have lo-cated branch centres in Australiaattracted by cheaper rents, lifestylefactors and a stable skilled work-force. The main impediment to thisemerging trend is Australias un-competetive tax regime comparedto its Asian neighbors. The trend isalso creating a strong demand for

Australian executives with experi-ence in the Asian region.

Industrial unrest is rising acrossseveral sectors including carmanufacturing, oil refining, con-struction, coal mining and sea-ports. The unions are yet to adaptto the new industrial relations re-gime adopted by the federal gov-ernment and we will possibly seequite a bit of kicking and screamingyet before things settle down.

September.... Hong KongOctober......... Tokyo, Osaka, Scotland, Frankfurt

November..... AmsterdamForecasts & Trading Techniques ..... Vancouver, BC, Canada Nov 16-17

January......... Annual Vancouver Public Seminar

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In Hong Kong the downgradingof territorys Gross Domestic Prod-uct (GDP) growth forecast by twomajor banks proved timely after thegovernment said first quarter GDPgrowth came in at 3.1 per cent - thelowest level in six years. EarlierHong Kong Bank revised its 1996forecasts downwards to 4.6 percent from 4.8 per cent while HangSeng Bank lowered it even furtherfrom 4.8 per cent to 4.5 per cent.These figures will represent thebottom of the economic cycle, buta substantial pick-up will be neededin the 2Q for the governments fullyear estimate of 5 per cent GDPgrowth to be realised. The maindrag on growth was a flagging ex-port performance as domestic ex-ports fell 7.4 per cent while re- ex-ports grew by a weak 7.5 per centin the 1Q. This was attributed to theimpact of a new export tax regimein China, a fall in intra-regionaltrade because of cross-strait ten-

sions and the strong US dollareroding Hong Kong export com-petitiveness. However with thesefactors absent in the 2H, a strongerperformance is expected, buoyedby a recovering Chinese economy.

The main positive news from thefigures was signs of a pick- up inprivate consumption expenditurewhich rose 3.5 per cent comparedwith 0.1 percent in the 1Q of 1995.The critical factor for a continuedrecovery in private consumption

will be a sustained revival in theproperty market due to the multipiereffect on related housing pur-chases and also the wealth effecton Hong Kong residents. The spec-tre of a rise in US interest ratesshould alone not be enough toknock the recovery in the propertymarket off course. It should onlyhave an initial psychological impacton demand as increasing eco-nomic activity in China and the

growing wealth in the territoryshould more than offset the impactof interest rate increases.

Looking at the banking sectorsinterim results, it would be hard totell Hong Kongs economy hadbeen stagnating. Market heavy-weight HSBC Holdings came inwith a whopping 34% increase inin ter im pre- tax prof i ts toHK$27.5bn leading to across theboard earnings upgrades for the fullyear. This result set the tone for thebanking sector which generally re-ported above the best expecta-tions. As well aggressive expan-sion of their property loan booksafter two years of retrenchment, in-creasing fee income and creditcard penetration all boosted earn-ings. Despite uncertainty over USrate moves, banking stocks are ex-pected to remain the focus of atten-tion in the near future.

Recently we have seen specula-tive attacks on Asian currencieswith the Thai baht and the US -Hong Kong dollar peg coming un-der attack. In Thailand, this was areaction to uncertainty over thegovernments management of theeconomy as it attempts to jugglecooling the economy to curb infla-tion while containing a ballooningbalance of payments deficit withoutsending the economy into reces-sion. The Bank of Thailand nowforecasts that GDP will expand just

7.8 per cent this year, the slowestgrowth in a decade. Something hadto give and we saw the worst run onthe baht since the Mexican pesocrisis in 1994 - at one stage over-night interbank rates rocketed to 22per cent and the Thai Central Bankspent $1.8bn in open market op-erations to support the currency.Most agree that the Thai economyis not terminally ill, rather goingthrough a period of structural ad-

justment as it moves from labouintensive industries to higher valueadded products. However a lack oresolve or clarity in governmenpolicy has fuelled speculation dating back to April when the idea owidening the dollar - baht tradingband was first muted. The IMF hasalso called for a change to the Thaexchange rate system as the onlyway to achieve "enduring improve

ment" in monetary controls, addingweight to speculators interest. Thenext attack may be more difficult todefend.

September31st1996

for reservations call 852-2810-5556

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Russias political turmoil hadbarely calmed with Boris Yeltsinsvictory when rumors of presidentialillness quickly surfaced. An un-easiness surrounding the health ofYeltsin was in the making a weekbefore the election when he was nowhere to be seen in public. Nosooner after taking the oath of of-fice on August 09 did Yeltsin againretreat from the public. Rumorshave recently been floated in themedia that the President may havesuffered another bout of hearttrouble or even be preparing forby-pass surgery. The mystery andlack of information surroundingPresident Yeltsin has undercut thestability and confidence gained bythe recent elections.

Concern over leadership suc-cession in the event Yeltsin wereincapacitated was eased when thepopular moderate Viktor Cher-

nomyrdin was re-elected as PrimeMinister the day after Yeltsins in-auguration. The Russian constitu-tion calls for the Prime Minister tolead for three months while theCentral Electoral Commission pre-pares for another presidential elec-tion during that time. The commu-nist and nationalist majority in theparliaments Duma cast 314 votesof 450 in favor of Chernomyrdin.

The shaky ground under theKremlin is causing cracks in Yelt-

sins newly formed government.Two key officials began an internalpower struggle and allowed it to slipinto the public forum. AlexanderLebed, who was appointed head of

security after winning 15% of thepopular vote in the run-off, sur-prised many. Having just received

broad oversight of the military andgovernment agencies in Chech-nya, Lebed accused Minister of In-terior Anatoly Kulikov of incompe-tence and pro longing theChechnyan War at the expense ofRussian soldiers and issued an ul-timatum of his resignation or Le-beds own. Kulikov countered thatLebed withdraw his criticisms or hewould resign. A spokesman forYeltsin said that a resolution hadbeen reached and neither menwould be resigning. Lebed, praise

or condemnation aside, has movedto expand his influence over pri-mary security ministries while di-rectly lining up beside Cher-nomyrdin as a major power in Yelt-sins new government. After manypr ivate meetings with Cher-nomyrdin and finally endorsinghim, the Communists and their al-lies are sure to be watching care-fully as they recall Lebeds distinctrefusal of their partys positions andcourtships.

All of this comes with the begin-ning of yet another national cam-paign season where the 87 districtgovernments will elect their chiefofficers (similar to the US gover-nors). The Communist Party haspledged to run campaigns in everydistrict and is heavily favored tomake serious gains. The Commu-nist Party has a strong party organi-zation and many of the regionalofficials were in these seats beforethe Soviet Union broke apart. A

communist victory and strongholdat this level of government will addto the budgetary woes of the Krem-lin as tax evasion, corruption, andpolitical favors has grown un-

checked. It will also make imple-mentation of continued reformmore difficult thus straining the

economy further.

Meanwhile, the war in Chechnyahas shown little sign of resolutionas promised by Yeltsin and the re-formers by association. The cost ofcontinuing this conflict is addingmore deficit to a budget alreadyballooned by Yeltsins campaignspending. Rather than waiting forthe public to simply forget andshrug off the election promises, aresolution was passed through thelegislature withdrawing the prom-

ises and prohibiting any funding.Associated Press reports placeRussia back in the lead for armssales to developing nations con-tracted during 1995 - boosting fed-eral revenue by an estimated $6billion. This figure brings Russiaback to the 1990 level of the SovietUnion. At the same time, theUnited States continues to under-write over one-third of the UNs"peace-keeping" activities and con-tributes a hefty portion to the IMFand World Bank that is keepingRussia afloat. As domestic pres-sure is building for Congress to se-verely limit its funding to world or-ganizations and even to withdrawfrom the UN, Russias political andeconomic stability is sure to be af-fected. The IMF has again releasedlending to Russia after a one monthsuspension; Yeltsin has still not ap-peared in public to dispell rumors ofheart failure; and the control anddirection of Russias military iscoming under growing conflict

within the highest level of the gov-ernment. The high tide of Russiaspolitical and economic instabilitydid not recede with the Yeltsin vic-tory but rather has yet to come in.

This is going to be a very exciting seminar. For the first time since 1987, we will spendone day on providing a training session of how to use our forecasts and long-term

projections to trade and invest for the future.

Seats are US$495 per person

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The US share market is poisedfor a reaction high ideally during theweek of 08/19 with a target objec-tive in the 673- 678 range basis theS&P500 futures. We see that aslong as this market does not pro-duce a weekly closing above the678 area, then the subsequent de-cline ahead is likely to be moderatewith a low perhaps in Octoberaround the 598 level.

In the event of a weekly closingabove 678, then we would expectto see one more new high. How-ever, our computer models are

warning that new highs are simplynot sustainable at this time. If wesee new highs by the week of09/09, then there will be a risk of asharp decline into October with aminimum objective in the 560-573range.

The worst possible pattern forthe US market would call for a rallyinto the 1st quarter of 1997. Thiswould then signal a major crashnext year of up to 28% by year-end.Therefore, the best pattern would

call for an August reaction high atthis time followed by a test of 598in October with a year-end rally andretest of the low in Jan/Feb. Thistype of pattern would then set thismarket up for a truly explosivemove to the upside where the DowJones Industrials could come veryclose to reaching the 10,000 mar-ket by June of 1998.

Gold and silver remain captive towhat appears to be the inevitablestart of IMF gold sales. Any rallyattempt in gold is being met withmassive selling by the trade. It doesnot appear that gold is quite readyfor prime time until early next year.

The seasonal summer rally ismore likely to be evident in silver.Here we see a rally up to the 525level as likely with an outside pos-

sibility of testing 531 with a maxi-mum target objective of 541-545.Nonetheless, a weekly closingabove 523 basis spot silver for theweek of 08/19 would suggest that

silver could punch a bit higher up tothe 528-533 area for the week of08/26. Still, silver appears to begoing nowhere fast. Only a monthlyclosing above 538.8 would evenremotely raise some hope of a sus-tainable breakout to the upside.

As it stands at this time, an Au-gust high should be followed bywhat may prove to be the final lowin the Feb/Mar time period nextyear. This suggests that we couldexpect a final low in the $3.14 area

if silver penetrates $4.62 at anytime between now and year-end.

While our long-term models con-tinue to suggest that the dollar isgoing to rally dramatically into2003, we do see that the potentialfor one more dollar low does existduring the first half of 1997 againstmost major continental Europeancurrencies, with the noted excep-

tion of the pound. Only a monthlyclosing for the dollar above 15840on the Dmark would suggest thatthis forecast is wrong and that thedollar low is in place. Otherwise, amonthly closing below 13985 forthe dollar vs Dmark would suggestthat this forecast is correct and thatan appropriate hedge position iswarranted.

The dollar/yen is a differentstory. The low for the dollar againstthe Japanese yen is clearly in place

but a reaction back to the par levelis not out of the question. Overall,a decline should continue takingthe dollar up to 12500 or 14500level over the next two years. As westated last month, resistance stoodat the "11300 level and a failure tomove above that level by Septem-ber would also raise the possibilitythat a retest of support at the10489-10315 level is likely. A

monthly closing below 10315would then raise the potential for avery sharp decline back to the10065 area or 9755 at worst."

Here the primary monthly closing support remains at the 10801level. A monthly closing beneaththis area will signal that a sharpdecline to the 10100-10200 area ispossible. We do see that the number of 30 year bond auctions havebeen increased and that the Augusauction included a greater amounof supply than originally anticipated. Extreme caution should be

used here since we believe that theTreasury will begin a new trend oissuing more long-term debt thanpreviously announced. There is stilthe possibility of a new high on the30 year bond. However, this is nowappearing to be linked with perhapsgeopolitical events rather than economic.

Our last report stated... "The

Japanese share market has moslikely reached a temporary top inJune. Here we see that a monthlyclosing below 21170 will signal thaa correction is underway onceagain. The bulk of support lies athe 19628 and 18896 levels. Amonthly closing below 18896would warn that a retest of longterm support is possible taking thismarket back to the 15292 zone.Indeed July closed at 20692 warning that a temporary high is inplace. Still, a reaction back to resis

tance is likely going into the end oAugust reaching the 21349 areaHowever, only an August closingback above 22347 would signathat new highs are possible fromhere. Otherwise, expect a declineperhaps into October.

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In our last report we stated..."The Canadian share market basisthe TSE reached a high during Mayat 52490. Here we see that a cor-rection back to the 48182 to 44867level is likely. A monthly closingbelow 44867 would warn that amuch more serious decline is pos-sible where a sharp drop to the39307 level is likely. We do see thata year-end closing below 43300would warn that the overall correc-tion could extend into early 1997before reversing to the upside fornew highs going into mid 1998."Indeed, the July low came in at48105. Here we see that a sharprally into late August is likely. How-ever, important resistance willstand at the 51550 level. Only anAugust closing above this areawould raise the possibility of newhighs along the same pattern as theUS market. Otherwise, an Augustreaction high is likely to be followedby a retest of support going intoOctober.

The British share market basisthe FT100 is very strong at this time

based largely on inter-Europeancapital flow movement. Here newhighs seem to be likely going intolate August. Resistance will standat the 39100-39500 level basis thecash index. Timing models indicatethat a high in this market could ex-tend into the first week of Septem-ber. If September closes lower thanAugust, then expect a correctionback down into October with a po-tential of pressing further down-ward into the February time period.Here too, as long as the 34334 area

holds during and correction on amonthly closing basis, then the FTcould follow the US market into newhighs for 1998. Only a continuedrally from here into Jan/Feb of nextyear reaching at least the 41500level would warn of major crash in1997.

In our last report we stated..."The German share market basisthe DAX futures reached a high theweek of June 24th. Vital supporthere begins at the 24875 and22750 levels. A weekly andmonthly closing below 22750would warn that a correction is pos-sible where we see long-term sup-port forming at the 21450 and20185 levels." The correction intoJuly took the DAX down to 24530holding key support. This suggeststhat a rally into late August is pos-sible. We still see that a downwarddirection change appears likelystarting in early September. Only abreakout to new highs going intoJan/Feb of next year would signala major top for this decade.

The French share market basisthe CAC 40 futures has continuedto underperformed most otherworld share markets. Here the ma-jor high took place back in February1994. Major resistance continuesto stand at the 22380 level followedby 22620-22765. Here we see that1996 must close at least above

20252 in order to hold on to anyhope that a retest of resistance ispossible in the months ahead. Aclosing below 20252 will leave the

possibility that a penetration of the1995 low could develop in early1997. Major year-end closing sup-port lies at the 17968 area. Should1996 close below this level at year-end, then a drop back to the 15750area will be possible next year.

The Swiss share market basisthe nearest futures was one of thestrongest European markets. In ourlast report we stated... "There is apotential for a July high to form if wesee a weekly closing below the35435 area. This will immediatelywarn that a correction into Octoberis possible testing at least the31650 zone. A weekly closing be-

low 31360 will signal that an overallcorrection back to the 27690 or atworst 25450-24400 area will be-come possible." This market didreach a high on July 11 at 38155.However, the lowest weekly clos-ing so far has been 35330. We dosee that a weekly closing below35100 will now signal that a correc-tion is likely to continue. Still, a re-action back to resistance is prob-able going into late August. As longas we do not see a weekly closingabove 37890, then a decline shouldresume into October.

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FOREIGN INVESTMENT: For-eign investment in the US rose forthe third consecutive year in 1995,the Commerce Department said,but at a much slower rate than theboom levels of 1994 and 1993.

The department said outlays fornew investment increased by$8.7bn, or 19 percent, to $54.4bn

last year. They had jumped 74 per-cent and 71 percent, respectively,in the two previous years.

Despite these increases, the de-partment said new investment re-mained well below the 1988 peaklevel of $72.7bn, largely because ofa sharp reduction in the level of newinvestments from Japan.

The largest foreign investors in1995 were Germany with $14.2bnagainst only $3.3bn in 1994; Britain

with $9.7bn ($17.3bn in 1994); andCanada with $6.5bn ($4.1bn in1994), the department said.

PURCHASING MANAGERSINDEX: The US Purchasing Man-agers Index rose to its highest levelin 16 months in June, signaling astrong rebound of economic activ-ity in the manufacturing sector.

Purchasing managers said theirindex -- closely watched as a guideto cyclical economic trends -- roseto 54.3 percent last month against49.3 percent in May. This was thehighest level since February lastyear and well above the Wall Streetpredictions of an increase to about51 percent.

The index has climbed above 50percent -- the threshold for expan-sion in manufacturing industry --only twice in the past year. Earlier

this year growth of manufacturingoutput was depressed becausecompanies were cutting productionto reduce excessive stocks of un-sold goods. The associations in-

dex of new orders rose sharplyfrom 52.4 percent in May to 61.3percent, its highest level since No-vember 1994.

CONSUMER SPENDING:Consumer spending rose 0.8 per-cent in May, easily outstripping a0.4 percent increase in personalincomes. However, the pattern ofspending was distorted by tax pay-ments which fell last month, boost-ing disposable incomes, following asharp rise in April.

EMPLOYMENT COST INDEX:The labor department said thewage and salary component of theemployment cost index -- thebroadest measure of pay pres-sures -- rose 0.9 percent in thesecond quarter and 3.2 percent onan annual basis. The quarterlygain was slightly lower than in thefirst three months, when wagesrose 1 percent, but significantlyhigher than last year when quar-terly gains averaged 0.7 percent.

The overall employment cost index-- which includes fringe benefits --rose 2.9 percent on an annual ba-sis, up from 2.8 percent in the firstquarter.

CONSUMER CONFIDENCE:The Conference Board, a businessanalysis group, said its index ofconsumer confidence rose sharplyto 107.2, a six-year high and a gainof more than 7 points from June.The index is volatile on a monthlybasis, but the latest reading is con-

sistent with rapid growth of employ-ment and personal incomes.

HOME SALES: New US homesales soared to their highest levelin a decade in May. The Com-merce Department said sales rose7.5 percent to a seasonally ad-justed annual rate of 828,000, thehighest level since April 1986. Thefigures surprised Wall Street as

most economists had projected adecline in sales of about 3.7 percent in response to recent increases in mortgage rates.

DURABLE ORDERS: According to the Commerce Departmentnew orders for US durable goodsrose sharply last month, reflectinga surge in demand for commerciaaircraft. Orders rose by 3.3 percenlast month and by 7.7 percent in theyear to May. The data surprisedWall Street economists, who hadprojected an increase of about 1.2percent. Excluding transport, orders rose 0.7 percent, roughly inline with expectations.

LEADING INDICATORS: Theconference Board, a businessgroup based in New York, said theindex of leading economic indicators rose 0.3 percent in May to itshighest level in more than a yearThe leading index is designed topredict changes in economic activity six to nine months ahead.

The rise in the leading index foa fourth consecutive month indicated the economy was likely toremain strong for the rest of this

year. The main components pushing up the index were increases insensitive materials prices, a longefactory working week and higheorders for plant and equipment.

UNEMPLOYMENT: The USLabor Department said the unemployment rate fell from 5.5 percenin May to 5.3 percent in June, itslowest level since the peak of theprevious business cycle in 1990Payroll employment rose 239,000against Wall Street expectations o

an increase of about 150,000, anddata for May was revised to show again of 365,000.

President Bill Clinton said thefigures showed the economy wasin the best shape for a generation"It is good news when Americancan have high job growth, stronginvestment and low inflation," hesaid.

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The jobs data left little doubt thateconomic growth is accelerating.Monthly gains in employment aver-aged 265,000 in the second quar-ter, up from 200,000 in the firstquarter and 171,000 in the final pe-riod of last year.

The report showed employmentgrowth concentrated in service in-dustries which created 223,000jobs in June, following a gain of316,000 in May. Manufacturingemployment fell 7,000 after a16,000 in May.

TRADE DEFICIT: The US tradedeficit for May surged by more than13 percent to $10.9bn with bothimports and exports rising to recordlevels, the Commerce Departmentsaid.

It was the third consecutivemonth that the overall deficit hadworsened. The surge of importsdefied market expectations that thedeficit would fall from $8.6bn inApril to $8bn. Many economistsattributed the shortfall to thestrength of the US economy at atime when US trading partners inEurope and other regions are re-cording weaker growth rates.

The goods trade deficit to Japan,

which has pulled out of its reces-sion, fell from $4bn in April to $3.1bn, the lowest point since February1992. US merchandise exports toJapan were $5.9bn, the secondhighest level on record.

The bilateral goods deficit for theyear is $19bn, a sharp decline from$29bn for the same period in 1995.The trade deficit is down by 11.6percent in the first five months ofthe year compared with the sameperiod in 1995.

BUDGET DEFICIT FORE-CAST: The Clinton administrationforecast that the federal budgetdeficit in the current fiscal year,ending in September, will drop to$116.8bn, $29bn less than its pre-vious estimate in March and nearly$50bn under the $164bn shortfall oflast year.

Estimates see a small increasein the deficit--to about $125bn--inthe 1996-97 fiscal year, but steadydeclines thereafter to a projectedsmall surplus in 2001.

The also project real economicgrowth from the fourth quarter of

last year to the same period thisyear at 2.6 percent, up from 2.2percent in the March projections.Consumer prices rises are forecastat 3.2 percent this year, up a littlefrom the 3.1 percent estimate ofMarch.

INDUSTRIAL PRODUCTION:Industrial production rose solidlyfor the third consecutive month inJune, by 0.5 percent the same asin May and only slightly below the0.7 percent advance of April.

CONSUMER PRICES: Overallconsumer prices in June went upby 0.1 percent, in spite of the larg-est jump in food prices in threeyears. Declines in the cost of en-ergy proved a countervailing factor.

RETAIL SALES: US retailsales fell modestly in June, provid-ing the first hint that the pace ofeconomic growth may slow in com-ing months after an uncomfortablystrong second quarter.

The Commerce Departmentsaid retail sales fell 0.2 percent lastmonth, after a strong 0.8 percentgain in May. The sharpest setbackwas in the car industry, where salesfell 1.4 percent, after a 1.8 percentgain in May. Department store andclothing sales were also weak.

However, the underlying trendremained quite strong. Sales roseat an annualized rate of 5.5 percentin cash terms in the second quarter

as a whole. Excluding cars, a vola-tile sector, the annualized increasewas 9.3 percent.

PRODUCER PRICES: Data onwholesale prices showed an unex-pectedly large increase in producerprices reflecting a surge in foodprices.

The producer price index for fin-ished goods rose by 0.2 percent

last month and by 2.7 percent in theyear to June. However, the modestoverall increase masked sharpvariations in individual prices. En-ergy costs dropped 2.1 percent, thebiggest monthly decline since De-cember 1993.

But this decline was more thanoffset by a surge in food priceswhich jumped 1.6 percent in June-- the largest monthly gain in sixyears. Excluding food and energy,the "core" producer price indexrose 0.2 percent after a zero in-crease in May.

OVERSEAS ORDERS: Britishconstruction companies struggling

to make headway in a depressedhome market increased the valueof overseas orders by 45 percentlast year to BP5.5bn, ($8.58bn) ac-cording to figures published by theDepartment of the Environment.

The b iggest ga ins wereachieved in Hong Kong where Brit-ish companies have been highlysuccessful in winning work for thecolonys new international airport atChek Lap Kok and also in NorthAmerica where British companies

have been expanding through ac-quisitions.

PRIVATE CAR BUYERS: Reg-istrations of new cars by privatebuyers, as opposed to businessesand car fleets, rose 9.7 percent be-tween April and June comparedwith the equivalent period a yearearlier. It was the fastest year-on-year growth for about eight years.

In the second quarter of 1996,registrations of new cars by private

individuals came to 197,067 com-pared with 179,668 in the equiva-lent period last year. The societyhas data for private sales only tothe early 1990s, but it seemed likelythat the year-on-year growth wasthe highest since around 1988.

Consumer interest in buyingnew vehicles -- an industry worthsome BP9bn a year at a retail level-- has until recently been extremely

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muted, in contrast to business pur-chases which have grown fairlystrongly.

MANUFACTURING OUTPUT:Manufacturing activity expanded inJune for the first time in six monthsas it responded to strengthening

consumer demand. But price com-petition intensified and companieslaid off workers for the second suc-cessive month. The latest monthlysurvey by the Chartered Institute ofPurchasing and Supply has shownmanufacturers restraining outputthis year in the face of falteringexport sales and a buildup of un-sold goods. But the latest reportsuggests growing consumer de-mand fueled by rising personal in-comes may now be stimulating in-dustry.

CONSUMER BORROWING:Figures from the Bank of Englandprovided support for the view thatrising consumer demand will un-derpin economic growth. Consum-ers borrowed a net seasonally ad-justed BP684m ($1.05bn) in Mayfrom banks and other lenders, be-low the record BP1.1bn consumercredit borrowed in April, but grosslending remained s trong atBP8.1bn.

GROWTH FORECAST: A fore-cast from the Society of BusinessEconomists, a grouping of 800 in-dependent economists, providesfirm backing for the view that theUK is poised to enjoy strong con-sumer-led growth. The societypredicts that annual growth in grossdomestic product will acceleratefrom 2.1 percent this year to 3 per-cent next year led by strong con-sumer spending growth. It will thenslow in 1998.

BUSINESS FAILURES: Busi-ness failures slowed sharply in thepast three months to the lowestlevel for 1 1/2 years, says a surveyfrom Bun & Bradstreet, the busi-ness information company. About9,300 companies went out of busi-ness in Great Britain in the secondquarter of this year compared with11,033 in the comparable period of1995. London had the biggest dropin the failure rate, and about 1,447

companies went out of business inGreater London during the secondquarter compared with 2,142 in thecorresponding period last year.

GROWTH FORECAST: Lon-dons economy is forecast to growat an above-average 4.3 percent in

1996 and 3 percent next year, ac-cording to the London Chamber ofCommerce and Industrys quarterlyeconomic report.

In spite of its prediction of"healthy growth in London over thenext few years" the latest resultsfrom the chambers London econ-omy model, produced with the Cen-tre for Economics and BusinessResearch, represents a downwardadjustment on previous forecasts.

The main cause for caution is a"less optimistic outlook for the fi-nance sector", even though financeremains one of the areas on whichthe London economy will be relyingfor its growth. Forecast growth inmanufacturing has also beendowngraded.

CONSUMER SPENDING:Shops outside the UKs food sectorare now seeing the fastest increasein sales for eight years, official fig-ures showed. Consumer spending

in no-food stores was 2.4 percenthigher between April and June thanin the previous three months -- thesharpest rise since 1988.

Measured overall, the value ofsales in June was 7.4 percenthigher than a year earlier, while theseasonally adjusted volume was3.3 percent higher. In the threemonths to June, sales were 1.3 per-cent higher than the previous threemonths and 2.7 percent above lastyears levels, the strongest picture

since early 1994. Food salesshowed steady growth, but therewas a sharp increase in sales ofhousehold goods, clothing andother durable items.

CONSUMER BORROWING:Consumer borrowing slowed inJune to its lowest level since Janu-ary, official figures showed. Thiswas in spite of the strong pickup intown-centre sales in June.

The Bank of England -- the UKscentral bank -- said net consumecredit rose a seasonally adjustedBP636m ($992.16m) in June, downfrom BP691m in May and after arecord BP1.06bn in April.

Robust spending on retail sales

prompted expectations of strongeconsumer borrowing.

But the weaker than expectedfigures suggest spending was financed by cash rather than y borrowing as consumers incomeshave strengthened.

Overall borrowing by the personal sector rose BP6.6bn in thesecond quarter, the biggest quarterly gain since 1991. Both theBank and the Treasury have said

they expect consumer activity tostrengthen further as this year progresses.

About BP183m was borrowedon credit card, compared withBP190m in May and BP312m inApril. Mortgage lending wasBP1.4bn, down from BP1.7bn inMay, but still above levels earlier inthe year.

Lending by banks declined toBP255m from BP522m in May

Most new borrowing was due tolending by non-bank specialislenders, which more than doubledto BP368m.

INFLATION: The UKs Officefor National Statistics said Britishinflation fell to 2.1 percent in Juneits lowest rate for 30 monthsthanks mainly to lower housingcosts. The retail prices index rose0.1 percent between May and Juneto 153.0.

The annual inflation rate in thetax and prices index, which includes tax payments, services andgoods, rose 0.6 percent in the yeato June, the smallest rise sinceJanuary 1993. This implies the average household would haveneeded a rise of only 0.6 percent inpretax income to maintain its livingstandards.

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Only a year ago the rate of TPIannual increase was running atabout 4 percent, but it has fallensharply since April as last Novem-bers Budget tax cuts came intoeffect. At present, average earn-ings are growing at an annual rateof 3.75 percent, suggesting annual

real post-tax earnings growth ofabout 3.15 percent.

More disappointing for the gov-ernment was the rate of underlyinginflation, the governments favoredmeasure which excludes mortgageinterest payments. This was un-changed at 2.8 percent. The gov-ernments target is to bring inflationto 2.5 percent or below over thenext two years.

RETAIL SALES: The Confed-

eration of British Industrys distribu-tive trades survey shows that al-most two-thirds of retailers are nowseeing higher sales than a year ago-- a much higher proportion than inrecent months.

M4 MONEY SUPPLY: TheBank of England revised up its es-timate of the annual growth rate inJune of M4, the broad measure ofthe money supply, from 10 percentto 10.1 percent. M4 growth still farexceeds the governments moni-

toring range of between 3 percentand 9 percent. This has promptedsome concerns that it may fuel in-flationary pressures in about twoyears time.

But a large proportion of the M4growth was due to borrowing bycompanies, which may signal in-creased investment, or be linked totakeover activity. The Bank hasargued that the latter effect maymean M4 growth is not inflationaryand will slow as companies payback their loans once the takeovers

are completed.

BANK LENDING: Figures pub-lished from the British Bankers As-sociation showed lending by theUKs large banks to consumersrose strongly over the whole of thesecond quarter. It rose BP1.1bn,the largest quarterly increase sincethe associations series began in1991.

UNEMPLOYMENT: The fed-eral labor office in Nuremberg saidthe pan-German jobless total in-creased by an adjusted 3,000 to3.93m in June, reflecting a rise ofabout 7,000 in western Germany to2.77m and a decline of about 3,000in eastern Germany to 1.16m.

The office also revised down itsearlier estimate of Mays season-ally adjusted jobless decline to just2,000 from the 7,000 reported lastmonth.

April remains the only recentmonth with any notable improve-ment in labor market conditions.Seasonally adjusted unemploy-ment fell 65,000 in that month,while figures released yesterdaypointed to a 27,000 adjusted in-crease in total employment in April.

Average employment, at 34.4min April, was 389,000 lower than theyear before.

On an unadjusted basis, unem-ployment across Germany fell by33,800 between May and June, butthe latest jobless total of 3.78m was327,700 higher than in June last

year.

Jobless data brought the unad-justed pan-German jobless rate be-low 10 percent for the first time thisyear with 9.9 percent of the laborforce registered as unemployedlast month against 10 percent inMay and 9 percent in June lastyear. On a seasonally adjusted ba-sis, the rate was unchanged be-tween May and June at 10.3 per-cent but was higher than last Junes9.4 percent.

PLANS TO CUT SPENDING:The German federal governmentplans to cut spending in 1997 forthe third year in succession as partof its intensifying efforts to bring thecountrys public sector deficit belowthe limit set by the Maastrichttreaty.

The draft budget envisages a 2.5percent drop in federal spending to

DM440.2bn ($289.6bn) next yearfrom a planned DM451.3bn thisyear and a decline in Bonns netbor rowing requirement toDM56.5bn from DM59.9bn.

According to Mr. Theo Waigel,the Finance Minister, the federal

government will fulfill the promisemade in April to cut existing spend-ing plans by DM25bn next year aspart of its program of spending re-ductions, supply side reforms andwelfare restructuring to boostgrowth and jobs.

Bonn is aiming to bring Ger-manys overall deficit down to 2.5percent of gross domestic productnext year and so below the 3 per-cent Maastricht ceiling. but suc-cess will depend crucially on

whether the federal states or Lan-der can produce a total of DM25bnof budget cuts through their individ-ual efforts after failing last week toagree a joint austerity program.

Cuts are envisaged in 18 of 26individual spending plans nextyear, with the ministries of econom-ics, transport, defense and agricul-ture accounting for DM4bn of theDM7bn of cuts negotiated in recentweeks. The transport budget is setfor a particularly sharp fall to

DM45bn in 1997 from a plannedDM51bn this year, although invest-ments should be protected be-cause of increases in other reve-nues including asset sales.

Defense will see its budget cut toDM46.5bn next year from theDM48.2bn set aside in recentlypublished plans for this year. Thebudget of Mr. Gunter Rexrodt, theeconomic minister, will decline by8.4 percent to DM17bn fromDM18.6bn planned for this year.

The labor and social affairs min-istry remains the biggest federalspender by far next year, althoughits budget is set to decline toDM122.1bn f rom a p lannedDM124.6bn in 1996.

Increased spending will mainlycover the growing costs of theplanned move of Germanys gov-ernment from Bonn to Berlin. How-

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ever, the cost of servicing the fed-eral debt is also set to rise toDM89.2bn from DM86bn.

Mr. Waigels budget will be set inthe context of slow real growth of0.75 percent this year with a pick upexpected in the second half.

Growth of between 2 and 2.5 per-cent is expected in succeedingyears.

The DM56.5bn of net borrowingprojected for 1997 will be aboutDM7bn higher than anticipated ayear ago. According to the draft,the federal borrowing requirementwill not fall below DM50bn until2000, when i t should to ta lDM48.9bn.

M3 MONEY SUPPLY: The

money supply figures from the Bun-desbank showed a continued de-cline in the growth rate and a slow-down in bank lending.

The bank said 3 increased inJune at an annualized rate of 9.6percent, down from 10.5 percent inMay and 11.2 percent in April.Bank lending to the private sectorrose 7.2 percent (on a six-monthannualized basis) compared witharound 8 percent in the two pre-vious months.

TRADE SURPLUS: Germanystrade surplus widened to DM8.2bn($5.38bn) in April and the currentaccount def ic i t nar rowed toDM900m according to the FederalStatistics Office. Compared withthe same period a year earlier, Ger-man exports rose 11.7 percent toDM63.6bn in April, while importswere up 11 percent at DM55.4bn.In march, the trade surplus wasDM6.2bn and the current accountdeficit was DM1.4bn. In the firstfour months of 1996, the German

trade surp lus widened toDM28.4bn from DM27.3bn in thesame period in 1995. The currentaccount deficit grew to DM5.4bn inthe period from January to Aprilfrom a deficit of DM4.6bn during thesame 1995 period. German ex-por ts rose 4.8 percent toDM247.6bn in the first four monthsof the year while imports rose 4.9percent to DM219.2bn.

INDUSTRIAL ORDERS: Ger-man industrial orders rose 0.3 per-cent in May from April, much lessthan the 2.8 percent surge in April.West German orders fell by 0.3 per-cent month-on-month but were out-weighed by an 11 percent increasein the east, which kept the pan-Ger-

man figure positive.

INFLATION: Western Ger-manys annual rate of inflation fellin June to 1.2 percent, reverting tothe level reported for April anddown from Mays 1.5 percent. An-nouncing data based on returnsfrom four of Germanys 16 states,the federal statistics office said thecost of living in western Germanywas unchanged between May andJune. Falling car prices were a keyfactor holding down prices. The

1.2 percent year-on-year inflationrates for April and June are thelowest since August 1988.

IMPORT PRICES: German im-port prices fell 0.7 percent in Junefrom May and were up 0.2 percentyear-on-year . Export pricesslipped 0.2 percent in June fromMay and were up 0.2 percent froma year earlier.

INDUSTRIAL PRODUCTION:German industrial production ad-

vanced in May on a seasonally ad-justed basis for the third month insuccession, prompting hopes theeconomy is on the way to recovery.

The Bonn economics ministrysaid Mays 1 percent seasonallyadjusted gain in production com-pared with April reflected a "notice-able expansion" of manufacturingoutput. This contrasted with Aprils1.7 percent gain compared withMarch, more narrowly based on asharp rebound of construction ac-

tivity after a long, harsh winter.

Using the two-month figures thatnormally iron out big erratic move-ments, there was a 2.5 percentjump in output in April and Maycompared with February andMarch.

Seasonally adjusted construc-tion activity in April and May roseby 16.5 percent compared with the

two preceding months against a 1.5percent gain in manufacturing output in the period. Better weatheand the greater weight of the construction sector in the eastern German economy caused a 14 percenjump in output in the new Lander inthe two months compared with 1.5

percent gain in the west.

CONSUMER PRICES: Consumer prices in west Germany rose0.4 percent in July from June, ayear-on-year increase of 1.3 percent.

TOKYO DEPARTMENTSTORE SALES: Sales at department stores in the Tokyo area rose

for the sixth straight month in Junedue in part to favorable weatherthe Japan department stores association said. Sales at the 29 storesoperated by 14 member-companies grew 1.4 percent from a yeaearlier to Y199.4bn ($1.8bn). TheJune growth was bigger than the0.5 percent increase recorded inMay, it said.

The association attributed thegrowth in the reporting month tofavorable weather conditions

There were also five weekends inJune, once more than the samemonth last year, which helped toboost sales. Corporate demandremained stagnant, and demandrelated to the summer gift seasonwas also sluggish, the associationadded.

RESEARCH SPENDING: TheJapanese government adopted a"master plan" to allocate Y17,00bn($155bn) to science and technology over the next five years, a sub

stantial increase in state spendingon basic research. The governments science and technologyagency believes the countrysweakness in research is a seriouscompetit ive handicap. "The nations technology is currently in itsmost severe condition in recenyears" its report said.

The agency says the JapaneseR&D structures main deficiency is

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the domination of public researchlaboratories by senior lifetime em-ployees. The countrys respect forseniority still takes precedenceover promoting the best young sci-entists, it says. It proposes an over-haul of the research career system,to employ scientists on short-term

contracts related to projects and toallow state-employed researchersto take second jobs in the privatesector, a common practice in thewest.

The plan would lift state-fundedresearch spending to US and Euro-pean levels of about 1 percent ofgross domestic product. But offi-cials admit actual spending mightfall short of the target because thefinance ministry, keen to curb thebudget deficit, retains control over

the annual research budget.

If the funding target is met, theplan would represent 5.8 percentincrease in research spendingcompared with the past five years.It proposes that spending shouldrise by just over 12 percent a yearuntil 2000, to reach Y4,300bn an-nually. That would be double thelevel in 1992, when the agencydrew up the plan.

Mr. Hoshiba said spending

would focus on training, coopera-tion between research projects andthe purchase of equipment andcomputers for the governments re-search laboratories.

Currently, 80 percent of Japans$130bn a year science and tech-nology spending is carried out bythe private sector with nearly alldevoted to applied, rather than ba-sic, research.

VEHICLE PRODUCTION:Japanese vehicle production fell

4.3 percent in the first half of theyear. Total vehicle production inJapan declined to 5.1m units in thefirst six months, according to theJapan Automobile ManufacturersAssociation. It was the first fall forthe period in two years. In Junealone, vehicle production slumped6.7 percent, reflecting the weak-ness of domestic demand and asharp drop in exports.

The fall in domestic production,larger than initial industry expecta-tions, underlines the weakness ofdomestic demand and the shift ofproduction overseas as Japanesecar makers have sought to avoidthe impact of a higher yen.

Vehicle production in Japan hasdeclined since its peak of 13.5munits in 1990 and is expected to fallunder 10m units, a level seen in theindustry as critical to maintainingdomestic jobs.

Last year, domestic productiondripped 3.4 percent to 10.2m unitsas exports fell 15 percent to 3.79munits. The poor first-half resultsstemmed from a weaker-than-fore-cast market, in the middle of a re-placement cycle that was expected

to lift demand 2.3 percent to 7munits this year. First half sales wereless than 1 percent higher than ayear ago, at 3.6m units, promptingfears that full-year sales will notreach the industry target.

Domestic production in the sec-ond half could yet rise to reversethe disappointing first-half perform-ance, as stronger overseas de-mand lifts exports and the continu-ing domestic economic recoverygathers pace, helping to stimulate

consumer spending.

Imports, which have risen 64percent over the past five years to362,265 units last year, have con-tinued their steady increase thisyear, while Japanese car makersextra overseas capacity of 500,000to 600,000 units is expected by theend of the decade.

STORE SALES: Further evi-dence of an improvement in Japa-nese consumer conf idence

emerged in the form of the firstsix-monthly rise in departmentstore sales in four and a half years.Department store turnover rose 3.7percent to Y4,120bn ($38bn) in thesix months to June against thesame period last year. The JapanDepartment Stores Associationwarned the improvement camefrom an unusually low base.

Sales nationwide were strong inpersonal goods and clothing, butweak in household goods and fur-niture, the association added.

UNEMPLOYMENT: Unem-ployment in Japan remained at arecord high in June, according to

official figures. But underlying la-bor market conditions continued toimprove in line with the gradualeconomic recovery.

The governments managementand coordination agency said theheadline jobless figure remained at3.5 percent of the work force inJune. It was the same as lastmonths figure, the highest sincedata were first collected 40 yearsago.

The job-offer-to-applicants ratio,a better measure of activity in thejobs market, improved to 0.71, thehighest level for three years, amidfurther signs that companies havecompleted their job-shedding pro-grams.

The total labor force grew by 0.8percent on a year earlier, its fastestrate of growth since last December.

Total employment grew by 0.5percent on a year earlier, also the

strongest rate of growth this year.The number of job offers was 0.5percent higher than in the previousmonth while applicants fell by 1.3percent.

SPENDING CAPS: The Japa-nese government yesterday ap-proved ceilings for the core ele-ments of public spending for thecoming fiscal year.

The cabinet approved an overallmaximum rise of about 3.5 percent

for general operating expendituresto Y44,600bn ($411bn) for the year1997-98, well below the 4.2 percentrise last year.

The figures signal a move to-wards fiscal retrenchment amonggovernment departments as the fi-nal budget is compiled later in theyear.

The totals are the permittedmaximum rises in budgetary re-

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quests from the various govern-ment agencies and ministries thatwill be accepted by the finance min-istry in the core areas of social se-curity, defense, education, andpublic works.

The relatively tight constraints

are an attempt to rein in spendingwhich has been bloated in the lastfour years by the effects of thecountrys longest recession sincethe second world war.

INDUSTRIAL PRODUCTION:Japans economic recovery contin-ued unevenly in June, with a sharpfall in industrial production after in-creases for three months. Outputfrom the nations factories andmines fell 3.9 percent in June froma month earlier, but government

statisticians were quick to point toaberrant factors. Car productionwas especially weak, an official atthe Ministry of Trade and Industrysai