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GM Bankruptcy, There Goes The Country

Economics / US Economy Jun 03, 2009 - 04:10 AM GMT

By: John_Browne

Economics

Best Financial Markets Analysis ArticleYesterday, after a painfully long death spiral, General Motors finally filed for Chapter 11 bankruptcy protection. Oftentimes, bankruptcy portends rebirth. Unfortunately, the politically-inspired GM plan holds no such possibilities. Under the current deal, the restructuring of GM will cost taxpayers some $100 billion (after the hidden costs of interest and refinancing are included). Even then, it is highly unlikely that GM will ever be competitive or that its debts will ever be repaid. Far worse, the massive government bailout will delay rather than encourage broader economic recovery. And yet, U.S. stock markets rose on the GM announcement as if it were good news.


General Motors is but a microcosm of what most ails the U.S. economy. For decades, GM rested on its laurels. Its management yielded to innumerable, exorbitant trade union demands, passing the costs on to consumers in the form of lower quality products. The result was that higher quality foreign cars, eventually also produced domestically by American workers, severely eroded GM's once dominant market position. The company's autonomy was effectively extinguished by the growing debt needed to finance this downward spiral. Investors, believing that GM was "too big to fail," continued to accept the company's high-risk paper.

In short, GM was brought to its knees by the abuse of trade union power and management's unwillingness to fight back.

Contrary to general belief, GM is not a huge employer. It directly employs only some 60,000 workers. This is less than one tenth of one percent of the number of Americans presently unemployed. However, its trade union pension fund is being given billions of dollars of citizens' money and a major stake in the restructured company. Favoring GM workers over the millions of America's unemployed is grossly inequitable. The reason, however, is found in the murky world of politics.

The United Auto Workers (UAW), GM's primary union, was a major supporter of President Obama's election campaign. Predictably, this Administration has moved aggressively to subsidize them. Obama has taken the position that GM workers are an 'elite' and entitled to privileges not afforded to other workers. If GM were any other company entering bankruptcy, many workers would have lost their jobs, pensions and health coverage. Not so under the protective blanket of Daddy Government.

In its fight for grotesque entitlements for this small, but heavily Democratic, subset of the workforce, the Administration has run roughshod over those who financed the American auto industry, even labeling some as "unpatriotic" for failing to surrender their contract rights as bondholders. The notion that these stakeholders should "cooperate" to reach an "equitable" solution ignores the free-market cooperation that led to the original, contractual agreements. If I agree to give you half of my steak in return for half of your mashed potatoes when I finish my entrée, and when I go to collect you have eaten 9/10 of your mashed potatoes, can you plead poverty? You ate the potatoes!

Aside from these considerations, the sheer logic of the deal is faulty. Has Obama ever heard of opportunity costs?

Having pursued a path to commercial failure for many decades, it is clear that GM's management and workforce are moribund. However, the government has decided to pump massive amounts of citizens' money into this flaccid firm, without the practical ability to change its operations. Remember, the unions put Mr. Obama in office, and this project is meant to reward them. Will he have the courage to do what a profit-seeking management couldn't, by cutting the fat from this company? Obama now claims that a new "private sector" management team will be installed to make decisions independent of political control. This is farcical.

Economists believe that for each $1 billion spent on infrastructure projects, 35,000 wealth-generating jobs are created in the broader economy. The Administration is set on spending a minimum of $60 billion, and more likely $100 billion, to protect 60,000 workers at GM. Spent on much needed infrastructure, these same monies would create between 2.1 and 3.5 million real private sector jobs.

Furthermore, the money spent on GM represents a direct penalty against those foreign auto companies that manufacture domestically, who are fighting desperately for a piece of a decreasing market. American workers at these plants must surely feel unfairly discriminated against. Perhaps these competitors' ownership is overseas; but, while GM was shipping its manufacturing to Canada and Mexico, these firms were expanding their operations right here in America.

The federal bailout of GM exemplifies the grossly negative impact that government intervention has on the economy. As this type of behavior becomes ever more accepted and popular (barring a major change in voter sentiment), the prospects for the U.S. dollar and American stock markets is grim. Yet, American investors are bullish on the bad news. They are reading corrupt bankruptcy proceedings and profligate spending as a sign of effective governance. This highlights how desperately most investors, indeed most Americans, are clinging to the red herrings of "hope" and "change."

As goes GM, so goes the country.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff's new book For an updated look at his investment strategy order a copy of his just released book " The Little Book of Bull Moves in Bear Markets ." Click here to order your copy now .

For a look back at how Peter predicted our current problems read the 2007 bestseller " Crash Proof: How to Profit from the Coming Economic Collapse ." Click here to order a copy today .

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

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Comments

Mike
05 Jun 09, 14:00
Intellectually Dishonest - to say the least

While throwing around the 60 thousand GM employee number helps make our liberatarian blood boil you neglect to mention the hundreds of thousands of automobile parts suppliers, dealerships, and transportation jobs that are directly aided as well. If you count them in, the bailout isn't nearly as bad as you paint it.

I'm not a defender of GM and I agree the union role in this has been incredibly irresponsible and insane. The workers at GM from top to bottow were and remain grotesquly over-paid in comparison to the market. But you have to be honest in the assessment of the number of workers affected.

You need to include the dealership employees, parts manufacturers, and the transportation industry that relies heavily on auto parts and raw materials. All those jobs have to counted in too.

In truth this reality has been the leverage the unions have used over the years to create their sweet spot. Still the fact reamins GM is at the top of a delicate food chain of jobs and commerce that the country can not afford to give away to Asia.

Thanks for the read though.

Mike


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