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Monday, December 12, 2005

The US Auto Industry Crisis

by Bill Totten

Nihonkai Shimbun and Osaka Nichinichi Shimbun (November 10 2005)

(I've written a weekly column for two Japanese newspapers for the past several years. Patrick Heaton prepared this English version from the Japanese original.)


General Motors (GM), the corporation that came to symbolize the United States in the 1950s, is teetering on the brink of bankruptcy. Delphi Corporation, an auto parts manufacturer that GM spun off a few years ago, declared bankruptcy at the beginning of October, making it the biggest bankruptcy in the history of the auto industry. Ford is in similar straits; slumping sales in North America have forced it to announce plans to close plants and lay off thousands of employees.


Mortgage Debts

In the era of cheap and abundant oil GM and Ford dominated the top industries in both the US and the world. There are various reasons why these two companies are now in crisis, but here I will focus on how difficult it will be for them to recover.

First, over half of the automobiles sold recently in America have been SUVs. These vehicles guzzle gasoline and pollute the environment horribly. Yet for several years both Ford and GM have focused on manufacturing these automobiles because they could sell them at high prices and reap huge profit margins. It will not be easy for these companies to adjust to high oil prices by converting their manufacturing facilities to produce less expensive cars yielding much thinner profit margins. If oil prices continue to remain high, consumers will continue to turn away in increasing numbers from SUVs, leaving GM and Ford the last players in a rapidly shrinking market.

Last year 77% of US consumption was financed by borrowing as spendthrift Americans mortgaged their homes to pay for consumer goods and services. Both the Federal Reserve and Freddie Mac say that nearly one-third of American consumption has been financed by such borrowing over the past decade.

What made this possible is the housing bubble in the US, which was underwritten by the low interest policy of the Federal Reserve Board along with large-scale borrowing of funds from Japan and China. Low interest rates stimulated demand for expensive housing. Rising demand caused prices to rise, and rising prices raised expectations for even higher prices, stimulating still greater demand and higher prices. This spiral has allowed Americans to borrow greater and greater amounts of money against the apparent values of their homes to finance much greater consumption than they could afford from their own real incomes. (Perhaps "lured" is more apt than "allowed" here.)


A Decline in Consumption is Inevitable

Many analysts are predicting an end to this housing bubble. When the bubble bursts, housing prices may fall dramatically, forcing homeowners to curtail consumption in order to pay off their mortgages more quickly to avoid foreclosure. This cycle would have a huge impact not only on GM, Ford, and other auto makers, but also on all Japanese corporations addicted to the US market.

Many US mortgages are based on adjustable rather than fixed interest rates, meaning that borrowers must pay more just to service their borrowings when interest rates rise. This will exacerbate, in both speed and magnitude, the impact on consumption of a deflation (not to mention a sudden bursting) of the US housing bubble.


Laying off workers is not a method unique to the management of GM and Ford. The first things US corporations do when faced with straitened finances is to lay off workers and reduce wages and benefits to those workers they cannot lay off. GM has already announced it will be cutting fifteen billion dollars in insurance and health care fees it was obligated to pay to retirees who had worked many years for the company. If GM, like Delphi, files for bankruptcy, under provisions of Chapter 11 of the US Bankruptcy Law, it will be possible for GM also to reduce a variety of benefits to current workers. A vicious cycle may well result: reduced employment and income for US workers (along with shinking home values) reducing the buying power of American consumers, making the auto industry shrink even further.

Moreover, one would not expect US consumers to buy very many cars from companies tottering at the brink of bankruptcy.

High energy costs are affecting not only the inefficient auto and airline industries, but also have begun having an impact even on moderately efficient rail and large-scale distribution systems. As the brief (150 year) period that depended heavily on abundance of cheap fossil fuel ends, many aspects of our economy and our very lives inevitably will be affected by high and rising energy costs.


Influence of American Capitalist Diehards

As is clear from looking at GM and Ford, the most important objective of private industry in the US is maximization of profit, immediate profit, for stockholders and for executives charged with achieving that objective. This is the ideology of America's capitalist diehards. When costs rise, the first steps taken by US capitalists is to reduce expenses by cutting wages and benefits, and to transfer the costs to consumers through higher prices while, of course, shirking their own share of society's tax burden off on those same workers and consumers.

The crisis facing the American auto industry - alongside war and prison, the very symbol of the United States - has profound significance for Japanese, both as workers and consumers of corporations addicted to the shaky US market and as subjects of an oligarchy whose only policies seem to be meekly obeying American commands and blindly aping American ways.


Bill Totten http://www.ashisuto.co.jp/english/index.html

5 Comments:

  • "Last year 77% of US consumption was financed by borrowing as spendthrift Americans mortgaged their homes to pay for consumer goods and services."

    77%? Really? What's the source for this?

    "When the bubble bursts, housing prices may fall dramatically, forcing homeowners to curtail consumption in order to pay off their mortgages more quickly to avoid foreclosure."

    What's the connection between a house's market price and the speed with which the owner has to pay off the mortgage? Higher interest rates on variable-rate mortgages will be an issue, as you point out, but declining market prices?

    "The crisis facing the American auto industry - alongside war and prison, the very symbol of the United States - has profound significance for Japanese, both as workers and consumers of corporations addicted to the shaky US market and as subjects of an oligarchy whose only policies seem to be meekly obeying American commands and blindly aping American ways."

    Would that be the same Japanese that run Honda and Toyota, and pushed hybrid technology for years while Ford and GM were still pumping out SUV's? How about Mitsubishi, the company that's announced an all-electric version of the COlt for sale in Japan in 2010?

    By Anonymous Anonymous, at 1:14 AM, December 14, 2005  

  • Source of the 77%???

    Try the credit card industry and all those offers of easy cash against home equity!

    By Anonymous Anonymous, at 12:22 AM, December 15, 2005  

  • The last time I checked, most Americans do not own their homes or cars (the banks do) and they're filling their gas tanks and buying their food with platic. Then they pay a little more than the minium balance on the cards and this is why the average houshold has over $9000 in credit card debt. Quite a large amount given that the median household income in most areas of the coutry is somewhere in the mid-$40s!

    By Anonymous Anonymous, at 12:33 AM, December 15, 2005  

  • We can ravel and rave on all day about the short term implications of high energy prices on the here and now economy.

    Lets not complicate things, the fact of the matter is, energy prices will continue to rise year after year and that will lead to certain economic demise.

    It's as true as a triangle has three sides, believe it or not, it will happen.

    By Anonymous Anonymous, at 8:13 AM, December 16, 2005  

  • Is it correct to interpret that figure of 77% funded by borrowing by saying that Americans are spending 3x more than they earn? Based on the logic that to spend $100, $77 is borrowed and $34 is earned, $100 being 3x $34.

    Say the money is borrowed at 4% interest that means that $77 loan will cost $3 to service which is 10% of annual earnings ignoring any capital payback.

    "Lets not complicate things, the fact of the matter is, energy prices will continue to rise year after year and that will lead to certain economic demise."

    I don't think it's nearly as clear cut as that. The next 10 years might well see very low energy prices. The demand response to high energy prices is likely to be extreme, say peak oil causes a 2% decline in supply from one year to another. This decline might result in a further doubling of price which could plunge many economies into recession, cutting demand by 10%. The result is an 8% surplus and the price will crash back to less than half what it is today.

    It won't seem cheap since you won't have a job to drive to or maybe not even a car anymore but I think the idea that energy will continue to get more expensive is missing an important point.

    By Anonymous clv101, at 6:03 PM, December 21, 2005  

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