by Gary North
by Gary North
On April 29, 2004, the last Oldsmobile rolled off the assembly line in Lansing, Michigan.
The Olds Cutlass had been the #1 selling car in America in the mid-1970's. In the 80's, Olds did well. But in the 90's, it became a stodgy, nothing-special vehicle, stuck in between Pontiac (youth) and Buick (successful middle age). I knew it was not long for this world when an ad agency introduced this slogan: "This is not you father's Oldsmobile!" This immediately popped into my head: "Is it my grandfather's?"
Do you miss the Oldsmobile? Have you given it much thought?
Fast forward to today. Imagine a TV film clip of President-elect Obama. "Oldsmobile is the backbone of American manufacture."
You would think he has gone nuts. Who cares about Oldsmobile? It's gone. Forgotten. Unlamented.
Obama said this on Sunday's "Meet the Press": "The auto industry is the backbone of American manufacture."
That sounded plausible, until we recognize the context: a proposal to bail out GM, Ford, and Chrysler. Not under discussion is a bailout of Toyota, Honda, Nissan, BMW, and other automobile companies that produce cars in the United States.
This is a proposed bailout of the equivalent of Oldsmobile. It is a bailout of firms that could not meet the test of the competitive marketplace. Ford is the best of the bunch, and its share price says, "Oldsmobile!" It was over $35 in 1999, $6 in 2003, $17 in early 2004, and then down, down, down. It is under $3 today. This is Detroit iron's "giant." This is its showcase.
The Big 3 automakers are not the backbone of the American manufacture. Rather, they are located just below the backbone.
Obama continued: "It is a huge employer across many states. I don't think it's an option to allow it simply to collapse."
Not an option? Really? So, is this a one-time infusion of money? They won't be back for more in 2009? 2010? 2011?
Not only is it an option, it is an inevitability. This is your father's Big 3. You will pay to keep them on the road. You will pay indefinitely.
With GM going through money at $2 billion a month, with Chrysler near bankruptcy, and with Ford promising profits no sooner than 2011, they will be back for billions more before the swallows return to Capistrano.
Obama and Congress are also saying that Detroit must make big adjustments. Its plans have not worked. We already know this. That is why their share prices have collapsed, along with their credit ratings. That is why they are lined up in front of Congress, dutifully taking wisecracks from Masters of the Junket about why they were wrong in not flying on commercial jets to come and grovel.
Here is a Congress that is running a trillion dollar official on-budget deficit this year, and that has run up $70 trillion in unfunded Medicare and Social Security obligations, lecturing three CEO's of busted car companies about their failure to plan.
We can see what is coming. Congress will pass new laws governing the recipients. These laws will be the strings attached. There are always strings attached to Federal money. The three CEO's will swallow the cyanide pills because they are groveling for loot extracted from the public. They will consent to anything; just give them the money.
The debate is over whether this is a new bailout or part of the one passed in September, the $25 billion bailout that received little attention. That bailout was to help the Big 3 fund lower polluting cars. Now Congress is considering the siphoning of $15 billion of this money to keep the companies alive long enough to adopt the new technologies.
What about the next round of Big 3 bailouts? Congress will fork over the money. Not to do so would make this bailout look foolish. They will pour good money after bad. Detroit iron is a bottomless pit.
Congress can posture all it wants about the needed restructuring. What does Congress know about building cars that people want to buy? Nothing.
NO MORE PORK!
Obama has assured us that the age of pork is over.
In an interview on NBC's "Meet the Press," Obama said: "What we need to do is examine: What are the projects where we're going to get the most bang for the buck? How are we going to make sure taxpayers are protected?
"You know, the days of just pork coming out of Congress as a strategy, those days are over."
Good news, indeed! The tradition of Congressional pork is going to end, after only 220 years. It's about time!
On this terrific news, stock markets around the world soared.
But there was this news, too.
"If you look at the unemployment numbers ... the fragility of the financial system and the fact that it's an international system," the recession "is a big problem, and it's going to get worse," Obama told NBC News' Tom Brokaw on Saturday. The interview aired Sunday on NBC's "Meet the Press."
Acknowledging that his agenda had changed sharply just in the month since he was elected, Obama said passing a short-term economic stimulus package was now his top priority.
But stock market investors heard what they wanted to hear. What they wanted to hear was this.
President-elect Barack Obama has warned that "things are going to get worse before they get better" as he outlined details of an economic stimulus package that could reach $1 trillion and is designed to lift the United States out of recession." . . .
He proposed government programmes for bridges, roads, broadband internet and schools as well as plans for greater energy efficiency and health spending. The National Bureau of Economic Research has said that America has now been in recession for a year.
Although he played down expectation for a quick economic recovery, Mr. Obama said his plan was "equal to the task" that the US faced.
Let us add up these figures. He is proposing a trillion dollars of new spending.
Noting the US budget deficit might exceed $1,000bn even before his campaign promises and new spending plans were taken into account, factored in, Mr Obama said: "We understand that we've got to provide a blood infusion to the patient right now to make sure that the patient is stabilised.
"And that means that we can't worry short term about the deficit. We've got to make sure that the economic stimulus plan is large enough to get the economy moving."
The article went on to say that he has not announced an exact figure for increased spending.
Mr Obama has not put a full cost on his plan but his advisers estimate it will be more than $700 billion and could even top to $1 trillion.
But, we have been assured, there will be no pork this time. Congress will lay off the pork. An extra trillion dollars to go for state roads, bridges, and infrastructure, but there will be no pork.
We have seen all this before. The Japanese government resorted to infrastructure spending and a decade of fiscal deficits to deal with the recession of 1990. It had been produced by the easy money, low-interest rate policy of the central bank. The bubble burst in December 1989. At that time, the Nikkei stock index was over 39,000. Today, 19 years later, it stands a little over 8000. That is a 79% decline, plus two decades of forfeited income.
The solution of Japan was to hide the so-called zombie loans of the zombie banks. That is not Washington's way. The banks' losses have been laid out for all the world to see. Then Congress engineered a series of bailouts to allow huge banks to be absorbed by larger banks. Number-four Wachovia was almost absorbed by number-one Citigroup in late September. Two months later, Citigroup was within a weekend of bankruptcy. The Treasury Department bailed it out.
Zombie banks. Zombie loans. Zombie taxpayers. It's the year of the living dead.
Yet Obama's announcement of Japan II sent London's FTSE up by 6% on Monday. Germany's DAX was up 8%. The Nikkei was up by 5.2%.
The optimism of investors seemed complete when the U.S. stock exchanges opened on Monday morning. Up went the Dow by over 300 points: 3.6%.
The faith of investors in the Federal deficit is complete. What if there is a $1.5 trillion increase in fiscal 2009? What if there is $2 trillion? No problem!
But there is a problem: the source of the funds.
Obama's website says that he will push for a tax cut for 95% of American workers.
Cut taxes for 95 percent of workers and their families with a tax cut of $500 for workers or $1,000 for working couples.
Provide generous tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth.
Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of healthcare and to reward investments in innovation.
Dramatically simplify taxes by consolidating existing tax credits, eliminating the need for millions of senior citizens to file tax forms, and enabling as many as 40 million middle-class Americans to do their own taxes in less than five minutes without an accountant.
So, as far as we can see, there will be lower taxes. Unless Obama has become a devotee of what President Bush I dismissed as voodoo economics, he knows there will be falling revenues.
There is also a recession in progress. Recessions reduce profits and therefore lower corporate tax revenues.
This raises a question: Where will the extra $1.5 trillion to $2 trillion come from?
There is the bond market. The Treasury must not only roll over at least one-third of its $10 trillion debt, it must also sell an additional $1.5 trillion, minimum. What will happen to interest rates?
In a recession, Treasury rates may remain low. Money that would have gone into stocks, corporate bonds, small business loans, and real estate will go into the Treasury. But when the recovery begins, T-bonds will be sold, and investors will shift to stocks. That will drive up rates, cutting short the recovery. American stocks will fall. Again.
Then there are Japan, China, Russia, and the oil-exporters. Russia and the other oil exporters will be hurting from low oil prices. Japan and China export manufactured goods. To generate sales, they lend money to Americans to make these purchases. The trade deficit is about $750 billion per year.
The basis of hope in the recovery is that the recession will frighten investors so badly that they will stay in Treasury bills, where there is no hope of capital gains, merely a little loss.
The other hope is a continuing trade deficit.
What else? Federal Reserve inflation.
In August 2007, the first month of the credit crisis, its assets were at $900 billion. As of December 3, 2008, this stood at $2.17 trillion. That increase was funded by fiat money: an increase in the monetary base. This was just the beginning. The FED has announced the following loans:
1. $200 billion in student loans
2. $100 billion for Fannie Mae and Freddie Mac
3. $500 billion to cover in the two F's holdings of mortgage backed securities
4. $306 billion (at least) for bad loans of Citigroup
The Treasury says that the government must force down mortgage rates to 4.5%. That will take a lot of new money.
The Treasury has taken over $5 trillion in bad or questionable assets. The FED had absorbed over a trillion and a half, counting $406 billion in swaps of Treasury debt for toxic waste held by the biggest banks.
Then where are we? Here, says Prof. Rozeff.
The bad loans remain hidden and submerged within banks and other institutions. This paralyzes lending. The weak companies and poor managements that should be quickly cleaned out instead are given taxpayer money.
With public debt rising, the interest costs of the national debt rise. Capital that should be going to healthy enterprises is diverted to government and to zombie enterprises. Inefficient enterprises are subsidized.
Serious inflation looms larger and larger as a long-term problem.
The capital markets become dependent on Fed loans, and it is not clear how that dependence can be ended.
The government takes ownership interests in the most major banks, inducing further inefficiency in these semi-nationalized firms and threatening control of the allocation of capital. In this regard, the government policies have already fostered an undue concentration of assets in large banks. The three largest banks in the U.S. now have 38% of all large bank assets as compared with 27% in 2003. Banks with over $300 million in assets grew by 64% in the last 5 years, which is a very high per annum number, but the three largest banks grew by a still higher 130%.
In short, the actions of the government and the Fed are throwing a giant monkey wrench into the operations of banks and capital markets in intermediating capital from savers to businesses. The likely result is a prolonged slowdown in economic growth and more government control over the economy.
Put another way, America has become Oldsmobile Nation.
The world we grew up in has been lost since August 2007. The man who saw this coming and warned about it, Dr. Kurt Richebächer, died that month. He had predicted the worst capital crisis in our era. This is what it is becoming.
Investors are Keynesians. They believe that policies like these got America out of the Great Depression. They didn't. World War II did, because 12 million male workers went into the military, because tax revenues quadrupled (the withholding tax), because the Federal Reserve pumped in money, and because the government declared price controls and rationing. Real wages plummeted, yet patriotic people worked for rationed peanuts "to support our troops."
Nobody is willing to support our troops with self-restraint today. That world is long gone.
Inflation is coming. Then controls. Then rationing.
This is the future of Oldsmobile Nation.
December 10, 2008
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