Friday, December 5, 2008

Column #90 WHAT DO THE BIG-THREE AUTOMAKERS REALLY NEED?

(Week 17 - Friday, Dec. 5)

The "Big-Three" American automakers have come to Washington as the latest applicants for financial "bailouts," these in the form of loan guaranties in the aggregated amount of some $34 billion dollars. Much has been said about the supposed mismanagement of these corporations, the unrealistic demands of organized labor, and the effects of foreign competition as being contributing factors in the seeming inability of these companies to continue on their present course. Relatively speaking, I find merit in almost all of what has been said, but have heard virtually no dialogue (except to a minimum extent in the non-mainstream media, mostly on the internet) that goes to the heart of what has caused the financial position of such a huge industry and virtual American institution to become untenable.

The myriad issues of manufacturing efficiency, new technologies as they relate to environmental realities, model-development decisions, arriving at Senate hearings via corporate jets, executive compensation, workforce benefits, and the increasing ambivalence about automobiles in the culture as a whole, are, to be sure, all worthy topics for discussion, but there is one aspect of the automotive question that, in my view, is conspicuously missing from the discourse. That is, how is the industry's financial crisis affected by the very nature of the money that is the life's blood of its financial life?

The fundamental problem at the heart of the apparent insolvency of the automotive industry is the fact that the money that finances its operations is issued in the form of loans from a private banking system, to which is attached a compounding "interest" charge. This means that the executives and workforce who are responsible for bringing the wares of industry as a whole (of which the automotive industry is a major part) to market are losing buying power out of their profits and paychecks before they can spend them, to "interest" payments on bank loans, for which they receive no value. This means that the "cost of production" for goods brought to market, which consists entirely of money paid to people responsible (directly and indirectly) for bringing those goods to market, is not matched in the marketplace by consumer buying power.

This sets up a chain of cause and effect whereby goods will pile up as unsold inventory, orders for new goods will be reduced, and workers will be laid off. Fewer goods will be produced in the next round, but even this reduced level of production will not be able to be sold because the paychecks of those fewer workers also will have their purchasing power depleted by interest payments before they can spend them, and so will not be able to purchase even the reduced equivalent of what they produce. This causes a further reduction in orders for new goods, creating more layoffs, and so forth. The tendency for the economy, then, is to sink into a spiraling economic contraction.

The way this can be counteracted is for the economic players in society (whether private individuals, corporations, or civic bodies) to take on ever increasing amounts of "debt." Until recently the citizenry has been, for the most part, able and willing to do that, but the numbers associated with that "debt" have become astronomical, their ability to take on more has been tapped out, and their confidence in being able to pay off even what they owe now (let alone after taking on more) has declined precipitously.

For the automotive industry this has had a particularly devastating affect because cars are what economists call "durable (long term) goods" that are for the most part not in immediate need of replacement (one can almost always get a few more miles out of the car one already has), and replacement for most people requires the taking on of major new "debt." Their reluctance to do this has been exacerbated by other factors, such as the sudden disinclination of the public to buy the large fuel-thirsty vehicles the industry is offering in this time of ballooning gas prices. It is true that gas prices have plummeted recently, but confidence that they won't come back in the long term has been shaken.

Added to this is that the almost utter dependence upon the automobile that we have effectively cultivated has come into question. This society has now lived through the effects of a century of automotive proliferation, and many people are asking fundamental practical and moral questions about that dependency.

The upshot of these and other converging factors is that the Big Three of the American automotive industry are experiencing great difficulty in selling their wares. This has become, not only a business problem of unsold automotive inventory, but also a financial crisis that threatens to draw the larger economy into an imploding monetary vortex. Financing for new vehicles is one of the great mechanisms for "debt-money" generation, and when people decide for a time to make do with their old vehicles and concentrate on paying off their loans at the bank, this causes a net contraction of the money supply, which in turn fuels a deepening crisis of confidence.

The question is, what can be done to halt this vicious spiral? Much of the discourse that is going on related to efficiency, new technologies, model choices, executive compensation, workforce benefits, and the reliance of our society on automobiles is healthy and will lead to new answers in many respects, but the monetary question needs to be brought into the dialogue. In my view, there is no resolution without it. If all the other factors are addressed effectively, but the monetary question is not, then the industry will be back again asking for more money. The syndrome of inadequate-purchasing-power-available-to-cover-the-cost-of-production-caused-by-"interest"-payments-on-the-money-supply will not be broken.

What the Big Three automakers really need, I suggest, is precisely what all segments of the economy need (including the auto executives, the automotive workforce, and the customers they serve); that is, a return of the money-creation franchise to the public sector so that the pool of money upon which we all rely will not be drained of value by "interest" payments, with the result that we as a community of participants in the economy cannot buy what we produce. With a publicly-issued money supply, an adequacy of funds to cover the aggregate cost of producing goods will be guaranteed, and the more specific problems of the automotive industry raised in the public dialogue at present can be addressed in a truly effective manner.

Richard Kotlarz
1904 1st Ave S, #12
Minneapolis, MN 55403

218-828-1366richkotlarz@gmail.com

The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm

3 comments:

Sefa said...

Very helpful articles!


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Lars said...

Personally, I'm not as concerned with the interest payments as with the special power banks have to create new money through fractional reserve lending. Interest payments and fees at reasonable levels should be allowed for banks to make profit, but their ability to create money out of thin air should be curbed. That is why our economy is contracting, as currently operating our economy requires new debt to create new money. As people become unwilling or unable to borrow more and more, less money is created and the economy contracts.

elaine said...

Lars, I think you may appreciate the earlier blog by Richard concerning these matters. I think he presented this excellently in his "Playing Poker, Federal Reserve Style" column on Nov. 26. Article link - http://economictree.blogspot.com/2008_11_26_archive.html

Richard's key point is that as long as we, the American people and government (we're responsible for them), 'borrow' money into existence from the Fed. Reserve (privately owned), we truly do not own our money supply. I contemplated this, and the incredible difference is in "I cannot loan myself money today, charge myself interest, and say I owe me double tomorrow and am therefore in debt to myself" (this is individuals or gov't). In order for this to occur, "I" have to be split in two, either by establishing an entity outside myself such as a separate business venture, or in the case of our Gov't, by allowing the Fed. Reserve to 'own' the monetary process. Then "I can borrow money from this entity and owe a debt with interest, due and payable and subject to legal bindings."

I recall a news blurb where an individual did this through the courts - he sued himself and won? He, the employee, was injured on the job that he, the employer owned, thus owing himself. Without the split in identities, he could not have created this scenario. In my mind, it seemed as if money from one pocket was transferred to the other on the same individual, yet the legal ramifications - decreased profits, financial statements, taxes - 'debt' - occurred. Equally, if we, American people and government, truly created and controlled our own money, we simply could not "be in debt to ourselves" - this is a Constitutional mandate of gov't responsibility spelled out in the first document forming our country. It was usurped by private banking when the Fed. Reserve was established almost a century ago, and Woodrow Wilson, in hindsight, lamented "he'd started the ruin of his country".

I think you'll find the gist of this in the above-linked column, and appreciate your comments! Thank you for sharing - Richard's main goal is to create a dialogue with others concerning these matters.

Elaine Kain (blog assistant)