De Lorenzo nails it

[Camino LS6]

[

Link: http://www.autoextremist.com/

After the smoke clears, it's time for America, Inc.

By now it should be obvious to even the most casual observers that the domestic automobile industry is on the verge of total collapse. Already reeling from the gas spike earlier in the year and the subsequent decimation of the light truck and SUV markets, the national financial and credit crisis has conspired to cut the amount of survival time for two of the three domestic automobile makers from years to just months, leaving General Motors and the Cerberus-owned Chrysler LLC on the brink of bankruptcy.

And it has also finally become obvious to even the most jaded anti-Detroit zealots in Washington and around the country that a collapse of the domestic automobile industry would be a cataclysmic event with devastating and far-reaching consequences that would threaten to shake this country's economic future to its core.

The urgency of this looming economic disaster - which initially was just a sideshow compared to the national and international financial crisis - is now on the front burner for this country's decision makers, and is one of the prime topics in the presidential race too.

It is clear that GM is in direct talks with the White House about receiving an early injection of money - from either the $25 billion already promised to the Detroit 3 or the $700 billion financial institution bailout package - in order to ease the financial blow to employees and dealers as a result of its acquisition of Chrysler from Cerberus. And that agreement may in fact have already been made.

The alternative? There is no good alternative. If GM were able to acquire Chrysler (although the financial wherewithal for GM to do it completely on its own just isn't there) straight up, the immediate cessation of most of Chrysler's operations and the brutal dismissal of 90 percent of its employees - not to mention the utter devastation to thousands of dealers across the nation - would plunge this country toward economic disaster on top of an already deepening recession.

The point of no return.

Free-market theorizing aside, we have long since passed the point of no return in this matter. If this country allows one of its key manufacturing pillars to slip into insolvency, it would set-off a dark chain of events that would reach into every sector of the economy and would not only devastate the states where Detroit has its manufacturing and parts facilities, but it would affect every state of the union too.

There are still some out there who don't believe this "Detroit thing" will have anything to do with their lives or livelihoods, of course. It's hard for some people to understand that because Detroit and Michigan ("The Flyover State") are viewed as relics from an ancient country no one remembers anymore, even though 1 in 14 jobs in the U.S. are still either directly or indirectly dependent on the domestic automobile industry. I really don't know how else I could possibly present those figures in order to get through to people out there that they should care deeply about what's going on in Detroit and Washington right now, because it's real and it will affect you, no matter where you are, or how flush your circumstances are.

Even though I am absolutely convinced that the idea of GM acquiring Chrysler is fraught with opportunities for abject failure on a grand scale, the White House will make the decision that a managed dissolution of Chrysler over time under GM's stewardship would be preferable than an immediate corporate blow-up.

But let's move beyond that for a moment. Let's operate under the assumption that with government assistance GM does take over Chrysler. Now what? Critics are quick to point out that Detroit can't continue to do business as usual and that accountability and some measure of performance deliverables have to be built into the "strings" of any loan package. And I say fine to all of that, except I must point out the reality that it hasn't been "business as usual" here and that Detroit has been racing to revamp its product offerings for going on five years now (lead time is not a concept that people outside this business find easy to understand).

A wildly naïve "whatever" consumerist mindset.

But I am really much more concerned about the negative and wildly naïve attitude that has been allowed to fester in and around Washington and across the country of late, the attitude that suggests that our manufacturing base and this country's ability to make things somehow doesn't matter in this brave new consumer nation that the U.S. has become in the 21st century.

It's the same attitude that suggests - if not outright promotes - the idea that we can exist in some alternative consumerist universe of our own creation, a Starbucks Nation of "whatever" consumers who don't really care where whatever it is we're coveting comes from as long as its here, now and c-h-e-a-p.

This is the same attitude that has left this country ill-prepared for the burgeoning realities of this global world we're living in. And this "whatever" posture that has become far too commonplace in our nation, and the idea that this will all workout somehow - because it always has - is not only beyond scary, it's just flat-out wrong.

America at a crossroads.

I've said this before and I will say it again: This nation is at a crossroads. Our idyllic, textbook, free-market notions and our "Aw, shucks, we just want you to play nice with us like we play nice with you" Jimmy Stewart-like attitude that we continue to try to foist off on jaded nation-state competitors that just don't care are simply obsolete in this new global economy we live in.

Other nations have taken advantage of Uncle Sam's quaint view of the world for years, to the point where they must privately refer to us as "Uncle Sap."

We've allowed other nations to come into this country virtually unimpeded, and showered them with lavish, long-term tax breaks and incentives for good measure. Yes, jobs were created, but now we're waking up to the fact that American-owned manufacturing strongholds are fewer in number because our manufacturing base has been slowly but surely eroded from within.

Just a few examples? We allowed Japanese automobile manufacturers to dump vehicles in this market - vehicles that carried none of our American workers' health care or pension overhead burdens of any kind - for years while the Japanese government did everything in their power to keep American made vehicles from being sold over there. We also watched as "Japan, Inc." willfully and consistently manipulated the yen in their homegrown automakers' favor - to the point that Toyota was making millions of dollars every quarter just on currency manipulation alone - while our own government shrugged their shoulders and mustered little or no protest, saying "Gee, we wish you guys wouldn't do that," or some such nonsense.

Where did all of this leave the Detroit automakers? The manufacturing powerhouse that forged this nation's middle class and once powered the "Arsenal of Democracy" in WWII? The companies that allowed millions of people to make a decent living, send kids to college, and allow communities big and small across this nation to thrive for the better part of 100 years?

Broke down and busted on the side of the road, that's where.

Make no mistake, Detroit was more than culpable for their predicament, that has already been well-documented by me and others ad nauseam. But trying to compete with Japanese vehicles that started out with a $3,000 cost advantage before they even hit the dealership lots while paying for health care and pension funding that grew exponentially with each passing model year was a debilitating, no-win game for Detroit. And now that game is well and truly over.

The time is now for "America, Inc."

After the smoke clears, the dust settles and the hand-wringing and political posturing stops over this Detroit bailout, this country will be faced with some difficult choices going forward.

Do we want to continue to compete in this brutally competitive global economy with hat in hand and shuffling feet, hoping countries treat us nice and with respect? Or do we wake-up, smell the coffee and realize that these countries are only in it for the money - our money - and they will do everything in their power to get their hands on it, even if it means turning us into a nation of consumer zombies with little left to stand on other than our revolving plastic.

If we want to shore-up this nation and we want to get this country back on track, then we're going to not only have to make some difficult sacrifices, we're going to have start playing tough in this new global marketplace. And that means that the gloves will have to come off in Washington. This country needs to start thinking in terms of "America, Inc." and that means first and foremost rebuilding our manufacturing base and supporting our American companies - no matter what sector they're competing in - because to not do so in this global economy borders on the criminal.

The reality about all of this is that countries from all over the globe love to do business here, and they love to do so for a reason. And that reason is because we don't ask them to sacrifice much to come over and set-up shop here. As a matter of fact, we make it real easy for them. Twenty-five years of tax break incentives? Sure, why the hell not! Free land? Come on down!

The bottom line is that this type of total economic acquiesence on the part of our government - at the national and local level - will have to change, and dramatically so too.

Don't agree with a "bailout" or "loan" for Detroit? Then what if every foreign auto manufacturer - whether they have plants here or not - had to pay anywhere from $250 to $1500 per vehicle sold (on a sliding scale) to do business here? (Because no matter how much they say that they've created jobs in the states they operate in and that they shouldn't be penalized for doing so, at the end of the day their profits return to their home countries, not here. And to pretend otherwise is to have your head in the sand.) And then what if that money went directly into a fund to help support American workers' pensions or an education fund for their families?

The idea that in this global economy our free-market policies will be accepted and embraced and that everyone will play nice with us because we want to play nice with them is simply absurd and woefully out of touch. America must change its ways if we are to survive as a global leader, economic and otherwise.

The bottom line in this discussion is that we have a multitude of problems in this country that will take time, sacrifice, hard work and collective effort to solve. And we're only going to be able to do that if we're unified as a nation, and we compete in the global marketplace as "America, Inc."

Thanks for listening, see you next Wednesday.

[regfootball]

bravo

[Camino LS6]

Thanks WMJ!

[thegriffon]

To work they need to make it a sales tax on everything sold, imported or not, and use it to fund pensions and health care. It won't solve the healthcare problem which is rooted in inefficiencies, lack of transparency and competition and official corruption, but it will put American business and manufacturers on a more even footing and encourage investment in manufacturing by both American and foreign businesses. If ah importer is already paying your pension and healthcare, why not get some work out of you as well?

[balthazar]

>>"...Make no mistake, Detroit was more than culpable for their predicament, that has already been well-documented by me and others ad nauseam."<<

After DuhLorenzo finishes patting himself on the back, I would be curious to know if he ALSO sufficiently "documented ad nauseum" the predicament that >>"We allowed Japanese automobile manufacturers to dump ..."<< etc etc, but I'm betting he was part of the critic mob that ignored this for decades in lock-step with the government.

Edited November 1, 2008 by balthazar

[thegriffon]

Your suggestion that "...what if every foreign auto manufacturer - whether they have plants here or not - had to pay anywhere from $250 to $1500 per vehicle sold (on a sliding scale) to do business here?...And then what if that money went directly into a fund to help support American workers' pensions or an education fund for their families?" Is not a bad idea, and has been suggested before, but it needs refining a little. To pass WTO scrutiny it should be expanded to a sales tax on everything sold in the USA, imported or domestic, physical or abstract. Applying this tax to fund pensions, social security and healthcare (through subsidies, rebates or expanded Medicare coverage) would help all American industries, without being seen as protectionist or restricting trade. Such a tax would need to be substantial to fund exorbitant healthcare costs, the looming shortfall in social security and the PBGC, but would give consumers an effective substantial pay rise, especially at the lower end of the economic scale, and relieve all American industries currently providing benefits to workers from a substantial cost burden, far exceeding the increased tax cost added to their products and services. At the same time foreign producers and service providers would still face a substantial increase in cost to their consumers, making their products far less competitive. Importers will in effect be paying the same benefits as GM, Ford and other venerable American companies, whether they employ American workers or not. New manufacturers, domestic or foreign, will effectively be paying the same benefits as older companies, and paying a share of the legacy costs older manufacturers have incurred as well. At present any new entrant, even paying the same benefits as the established companies, faces much lower costs simply because they have no retirees to support. That burden needs to be placed on the economy as a whole, and on importers as well as domestic competitors.

Unfortunately that is not enough. Manufacturing and employment follow the markets, and the growth markets are not in North America and Western Europe. The lenders and investment funds which support manufacturing do not understand the merits of local manufacturing. They see China and India as the biggest markets with the greatest potential growth, and it makes sense to them to base all manufacturing there to take advantage of this. Supporting established, low-growth economies, reducing logistics costs, minimizing inventories, reducing reaction times, all this is apparently too complex for finance managers to understand, even though Toyota has educated other businesses to it's necessity. Retailers left with too many imported winter coats after a prolonged warm autumn and winter don't seem to have got the message, but then even if they have, they are now left with no alternative, having cut the knees out from under the majority of local suppliers. It's unfortunate that government has not understood this any better. Until the lean production and supply mindset is truly understood by both governments and financial markets, and public and private investment adjusted accordingly, the US and Europe will continue to lose jobs and income, creating a vicious cycle of low or negative growth and consequent loss of investment.

Yet another concern is a self-defeating fixation on keeping inflation in check, even as governments and central banks have lost control. Once upona time economies were largely local, and dampening local demand would keep prices from escalating too much. No more. Demand and prices are now global, and even large economies such as the US and the EU have minimal control over global demand and therefore inflation. Ever-increasing rises in interest rates have been shown now to have no effect on inflation, but still central banks do not seem to have realized this. Only as economies face recession have interest rates been reduced, and even then the central banks are concerned about igniting inflation. They need to understand that they no longer can no longer control inflation through interest rates, they can only control the costs incurred by local businesses and households. The price of food, fuel and other household staples is set by global demand. Raising rates can only impoverish consumers, inflate rents and increase foreclosures.

This fixation on inflation has caused successive US administrations to focus on keeping the currency relatively high, favoring cheap imports to keep prices low. This is only exacerbated by the global use of the US currency as the intermediary of exchange, fostering increased demand for US dollars far in excess of any "natural" level to buy US goods or invest in US businesses. No other currency faces this burden, nor is there any need for any local currency to do so. A currency of exchange need only be notional, not actual, and unlike the US$ there is no need for there to be a finite supply. Its value is only as a medium of exchange and unlike a real currency it can be reset regularly against any agreed indice without consequence. Of course it can be argued that floating currencies of fluctuating relative values is an idea whose time has past. It has not achieved what it had set out to, in part due to speculation and other forms of currency investment unrelated to natural demand and local costs of manufacture. It has only created barriers to trade, recognized by the EU if no-one else, and discourages investment. Theoretically the recent fall in the US dollar should have resulted in a boom in investment in US industries, and increased employment which would slowly lead to an increase in value to bring things back into balance. Quite clearly to everyone on the street, this did not happen. It could not happen, because businesses feared precisely what did happen - the unnatural demand for the currency drove the value up again even though domestic circumstances should have driven it down even further. For US businesses to become competitive the US currency first needs to be freed from it's burden as the medium of exchange and commodity pricing, allowed to fall once more to historic lows, and then fixed against increasing number of other currencies. Trade in these currencies should then be eliminated in favor of transparent and seamless conversion. If US$1 = CA$1 then a US dollar becomes a Canadian dollar when transferred from one the US to Canada. In such transactions the currency becomes not a commodity but a unit of measure, and conversion becomes not a trade but simply a calculation, like converting from yards to meters, and banking systems must be adjusted appropriately. With fixed currencies businesses and consumers can conduct effective arbitrage transactions, leveling prices across markets. Businesses can more effectively plan their investments, knowing the current conversion rate will still be in effect when their plant has been built in 12 to 18 months time, or in 4 years time when product development is complete. Thus they can cut costs and set target prices more effectively.

Of course expecting any government to implement any of these policies remains a remote possibility at best, despite the potential for widespread public support.

[CARBIZ]

I read Delorenzo's blog every week and generally find his remarks bang on. At least for the 3 or 4 years I have been reading his rantings, he has been pretty critical of Detroit and Washington.

Alas, I think it is going to take a worse meltdown than we have witnessed thus far to rattle middle-America (and Canada) enough to make them give a &#036;h&#33; about their neighbor's jobs.

[FUTURE_OF_GM]

SPOT ON!!!

As usual!

[ponchoman49]

Each and every American citizen should read this article before making there Toyota or Honda purchase. Oh wait American Idol is on. Maybe later.

[Sixty8panther]

Applying this tax to fund pensions, social security and healthcare (through subsidies, rebates or expanded Medicare coverage) would help all American industries, without being seen as protectionist or restricting trade.

Why? Why does the whole world use the USA as a doormat

and now while we're kind of on the same page, you're more

conncerned with talking about not stepping on toes &

making certain to be P.C. when it's our economic security &

childern's future at stake.

I say F*** you to the world. Everyone can go F*** them

selves, we give them a hand-out they HATE us, we leave

them alone, they HATE us, we treat them with respect and

rebuild their country after they attack us and provoke us

into WWII and they still have no respect for us, they play

games & economically rape us continually while we say:

"Please stop" or "I hope you enjoyed raping me..."

I'm sick of all this P.C. bullcrap.

[Sixty8panther]

Alas, I think it is going to take a worse meltdown than we have witnessed thus far to rattle middle-America (and Canada) enough to make them give a &#036;h&#33; about their neighbor's jobs.

I agree. we live in a nation that is comprised of

selfish, idiotic, ignorant, self-serving morons.

The football game, latest iPod and a Gucci purse

will always trump any amount of economic

danger to the USA in their skewed attention span.

I think Ponchoman49 was making the same point,

American Idol is discussed ad naseum while we

pay no attention to the unemployment stats &

talk of impending economic doom.

That movie Idiorcary is right.

Edited November 14, 2008 by Sixty8panther

[prinzSD]

I read Delorenzo's blog every week and generally find his remarks bang on. At least for the 3 or 4 years I have been reading his rantings, he has been pretty critical of Detroit and Washington.

Alas, I think it is going to take a worse meltdown than we have witnessed thus far to rattle middle-America (and Canada) enough to make them give a &#036;h&#33; about their neighbor's jobs.

Same here. It is the first thing I read on Wednesday mornings, even before my email. He has been critical of GM since the beginning so he opinions have merit unlike the clown from the NY Times... Friedman or what ever the Toyo humping freaks name is.