Global Economic Crisis

After emerging from bankruptcy, the supposedly “new” General Motors is in reality a nationalized, government-owned automotive corpse. Courtesy of Obama economic policy, the American taxpayer now owns 62% of GM, which is increasingly (and accurately) being referred to as “Government Motors.”

The United States, which has long preached to the world the virtues of unbridled free market capitalism, unpolluted by any form of state intervention, is now prepared to subsidize any unprofitable corporation, be it in finance or manufacturing, as long as it is “too big to fail.” GM is now a ward of the state, something President Obama claimed he had no intention of bringing into fruition.

And what about this supposedly new GM? In the last few months, we have seen a lot more of the old GM; irrational last-minute reversals on key decision-making, such as ditching the long-negotiated sale of Opel, and the recent dumping of the corporation’s CEO, who had only months before replaced a previous CEO, fired on the orders of the Obama administration.

The tens of billions of dollars in taxpayer money being dumped down the sinkhole that is GM may be the worst manifestation of “cash for clunkers.”  Instead of sound economic and industrial policy, the politicians in Washington seem content to add even more public indebtedness on to the balance sheets of generations of Americans yet unborn, all for the sake of keeping zombie companies on taxpayer-subsidized life support.

After only nine months on the job, Fritz Henderson is resigning as chief executive officer of GM. He had replaced former GM boss Rick Wagoner, who was fired at the direction of the Obama administration, which has injected up to $ 50 billion in taxpayer money into the bankrupt automotive manufacturer.

So this is the “new” GM? It seems apparent that a major internal conflict has arisen within the corporation’s board of directors. A sign of this internal strife was the last-minute decision by the GM board to scrap a deal Henderson had worked out to sell Opel, the company’s European subsidiary, to a Canadian led consortium. In an earlier post, I expressed my view that GM was mad to tear up this agreement, which provided a sound  means to unload a loss-making entity GM simply did not know how to manage.

What does the sacking of Henderson mean in the long-term? Probably confirmation of my earlier assessment, which was that General Motors is toast. Unfortunately, a lot more taxpayer money will be expended before the truth can no longer be denied.

The zombie automotive behemoth that is General Motors would have been long buried but for the  intervention of the U.S. government and massive infusions of cash, borrowed by the overleveraged American taxpayer. Supposedly, in exchange for taxpayer support, GM was supposed to downsize and focus and a few core U.S. brands. Part of this restructuring was the elimination of foreign brands, the largest being European-based Opel. After months of negotiations, a consortium led by the Canadian automotive parts firm Magna International Inc., also involving a Russian bank, with significant financial support from the German government, was on the verge of buying Opel from GM. The legal papers were ready to be signed, but now GM’s management and board of directors have had an about face.

The surprise decision, made at the last moment, to scuttle the carefully crafted deal worked out by Magna, was based, so says GM, on a more positive outlook for their business. Hours after the decision was made, GM also announced it was axing 10,000 Opel employees, sending the workers of the firm’s German factories on strike.

What we have here is an impulsive, instinctive example of flawed corporate decision-making, choosing to discard the months of international negotiations for a sale that would have taken Opel off of GM’s back and balance sheet. Instead, we have a clique that wants  to hold on to the fantasy that GM remains the world’s largest automaker. As for the U.S. taxpayers who will be the ultimate losers, the “new” General Motors couldn’t care a wink.

The program actually did stimulate auto sales-for Detroit’s foreign competitors. Toyota, for example, saw an increase in car sales of 6.4%. Among domestic manufacturers, however, only Ford saw a gain, rising by 17%. But what about Chrysler and General Motors, which are only still in business due to government financed life support.?

Even with “Cash for Clunkers,” Chrysler sales dropped by 15% and GM sank by 20%. And this is supposed to have been a “successful” economic stimulus program? If so, what in God’s name would have been considered a failure?

In desperation, GM has announced it will dump 1,600 domestic dealerships in the short-term, and ultimately eliminate 2,600, reducing its total dealership franchises by more than 40%. This is only part of an array of measures designed to reduce operating costs. More auto assembly plants will be shut down; additional layoffs will be undertaken while remaining employees will see their wages and benefits shrink further. However, in the wake of the financial storm that is wrecking the global economy, these last ditch and desperate stratagems are almost certainly doomed to failure. In the next several weeks GM will file for bankruptcy protection, shed several of its brands, and accelerate the death spiral that it is now locked in. With unemployment surging, not only in the United States but throughout the world where GM has significant market share, and credit essential for auto purchases being denied to consumers-macroeconomic factors that are far more relevant to the auto industry than brand elimination and dealership disposal-the extinction of General Motors as an industrial corporation seems all but certain. Possibly brands such as Cadillac or Chevrolet may survive independently or be absorbed by other auto manufacturers, but the behemoth known as GM is destined for the scrapyard of history.

While Teddy Roosevelt was completing his second term as U.S. president in 1908,the first GM automobile was manufactured. In 1954, General Motors saw its 50 millionth car roll off the Detroit assembly lines, at a time when more than half a million Americans worked for GM. Now, at death’s door, GM has announced that its dwindling workforce will shrink by a further 38%, reaching a planned level of 38,000. That represents a reduction of 93% from the 1954 employment figures!

The financial and political elites who dominate policymaking in America seem unperturbed. They apparently prefer having companies exist that engineer exotic financial derivatives than a manufactured product that is assembled by a skilled, well-compensated workforce. However, even with this melancholy certainty in front of us, I will always imagine a ride in a 1957 Chevrolet convertible as being infinitely more romantic than cruising the lanes on foot with a pocketful of securitized subprime mortgages. So, America, where does the economic road ahead lead us?

Rest in peace, General Motors.

General Motors is a much larger carmaker, with a global presence and vast overhead. Its very size defines the essence of the problem being faced not only by G.M. but also by other global car builders, including Toyota, Nissan and Ford. Currently the world has the manufacturing capacity to assemble more than 90 million automobiles a year. However, the Global Economic Crisis has created a vortex of demand destruction in the car business, reducing global demand to around 50 million units. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity. With worldwide sales reduced to 50 million cars, no major car company can make money.

The only solution for preserving General Motors is to provide sufficient demand for its manufacturing capacity. This demand need not be restricted to cars; during World War II Detroit became the arsenal of democracy, as its assembly lines retooled to build the weaponry that helped defeat Nazi Germany and Imperial Japan. However, in 2009, political leadership appears to lack the imagination to see the potential of harnessing the productive capacity of the auto manufacturers in other directions that can facilitate global economic development and recovery. What we are left with are ultimatums that provide only two possibilities: bankruptcy now, or becoming “leaner” with the future possibility of insolvency still hanging like a sword of Damocles.

I do not think the Obama plan for preserving a domestic U.S. auto industry, as presently conceived, will work. At most, it may preserve fragments and echoes of what was once the mightiest industrial productive capacity on the planet. Unlike the Great Depression of the 1930s, in which industrial giants such as G.M. and Chrysler did survive and eventually prosper, the Global Economic Crisis is devouring what were once seen as the pinnacles of economic and industrial might. If G.M. and Chrysler are in fact doomed, along with much of what remains of America’s industrial capacity, this will be largely due to a policy decision that establishes the financial sector as the center of gravity for the U.S. economy, reflecting the vastly more significant taxpayer dollars that have been allocated to that sector, with far fewer strings than are being attached to the paltry aid given to Detroit.

How is it possible for the U.S. to rebuild its economy if the industrial sector, epitomized by companies such as General Motors and Chrysler, is largely sacrificed on the altar of Goldman Sachs, AIG, Bank of America and their ilk?

What began as a financial crisis in the U.S. housing and mortgage market has metastasized as a virulent global economic cancer. The U.S. economy is imploding, and taking down much of the world with it. In a tsunami of financial panic, central banks across the globe have been slashing interest rates to virtual zero, while simultaneously borrowing and printing trillions of dollars, which are being injected into failing banking systems.

With global financial arteries clogged, the economies of the planet are now cratering, with the United States economy in particular imploding at an alarming rate. A concrete example of this is the impending bankruptcy of the American automobile industry, which directly and indirectly represents the core of what is left of the domestic manufacturing industry in the United States. Ford, Chrysler and especially GM have told the U.S. government and its elected representatives in no uncertain terms that unless the government injects untold tens of billions of dollars into their virtually empty coffers, those companies will go bankrupt in a matter of months. GM has even indicated it could be forced to shut down within weeks.

With a federal budget deficit that has grown from the hundreds of billions to the trillions of dollars, where is the U.S. Treasury going to get these vast funds for the industrial bailout requests that are now piling on? Perhaps soon the retail sector of the American economy will be coming to Capital Hill, hat in hand. However, an infinite series of bailouts is not a solution to the global economic crisis.