As Goes GM, So Goes the Nation

The history of GM is an instructive story in how success can breed failure; how being the biggest and the best can lead to arrogance and an inability to adapt. GM was the premier car company in the world for so long that it failed to see the need for change. The company was so used to being leader that it couldn’t contemplate following others. It was this mindset, this overwhelming belief that it was GM’s divine right to be the most successful automobile company on earth that condemned the company to two decades of disaster. When GM did finally see the need to adapt, it did so with wild ineptitude, spending tens of billions in the 1980s for little reward.

General Motors has lost $72.5 billion in the last three years. Why is the American taxpayer propping up this failed entity?

Long Road to Ruin

Bill Gross, one of the wisest and deepest thinkers in the financial world, wrote a report in May 2006 that compared the plight of GM with the plight of the United States. Mr. Gross’s words of almost three years ago ring even truer today.

I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.

General Motors failed to find a solution to its problems. CFO Fritz Henderson admitted in 2006 that, “I have a social security system hooked to our balance sheet.” The reason he had a social security system hooked to his balance sheet was because previous management had made commitments that could never be kept in the long run in order to keep the party going in the short run. Sounds like GM management would do extremely well in government jobs.

Source: PIMCO

Eroding Competitiveness

The United States peaked as a manufacturing economy in 1960, with manufacturing employees making up 26% of the workforce. They now make up less than 10% of the workforce. Total manufacturing jobs peaked at 19 million in the late 1970s and now have plummeted below 14 million and continue to fall. The U.S. decided to outsource manufacturing jobs because we were going to do the thinking for the world. Why get your hands dirty creating things when our brilliant MBA trained geniuses could turn loans to deadbeats and frauds into AAA rated Mortgage Backed securities? The U.S. decided to take the easy path of financial engineering rather than the hard path of creating products that other countries would buy.

The trade deficit caused by decades of choices by government and industry reached $677 billion in 2008. These deficits were always unsustainable. Borrowing from the Chinese and Japanese to buy stuff produced by China and Japan could never go on forever. Instead of realizing this imbalance and taking actions to gradually rebalance the world financial system, our financial leaders and Federal Reserve reduced interest rates and encouraged the imbalance to grow, until it collapsed in 2008. Now their solution is to lower rates to 0%, devalue the currency, and encourage further borrowing. Sounds like choices made by GM in 2001. The Sage of Omaha, Warren Buffett explained the dilemma.

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

The mortgage is now due.

Source: US Census Bureau

Uncompetitive Labor Costs

By devaluing the currency and producing never ending inflation while manipulating the CPI statistics to understate true inflation, the government and Federal Reserve attempt to keep America competitive through gimmicks rather than hard work and sacrifice. When the country produced products that the world wanted, median family income rose at an annual rate of 3.7% above inflation. Since 1970, using government manipulated inflation statistics median family income has been stagnant. If a true inflation factor was applied, the median family has lower income today than they had 30 years ago. The only way people have “achieved” a better life is through the use of debt, which has been encouraged by the government, Federal Reserve and banks. This encouragement led to the collapse of the great American Ponzi scheme in 2008.

American families will see their real household incomes plunge in the coming years to 1970 levels. The backlash against immigrants, both legal and illegal is likely to intensify over the next few years. The decades of allowing our economy to be hollowed out and shipped to China is coming home to roost. Besides weapons and movies, what does America produce that anyone wants? Our financial geniuses have essentially brought down the worldwide financial system by selling foreign countries MBSs, CDOs, etc. That has been our contribution to the world in the last eight years. Now, we have delegated the responsibility of our corporations to the U.S. government bureaucracy. Lee Iacocca explained years ago how well the government runs things.

 1  |  2  |  3  |  4