An American Christmas Carol: Part II; A Ghost of America’s Present

Today, we are a people that would best be characterized as sheep. Having taken control of our money as well as the most important functions of our Government, the banking sector is fulfilling its traditional role in support of it by creating all the money it wants to spend. The two major political parties of our nation have lost any meaningful distinction, and both favor a strong central government that oversees most areas of American life underneath layers of bureaucracy. They only differ in terms of how that power should be used: Republicans favoring the traditional fascist agenda of allowing government to work closely with large corporations to enhance their profits, while leveraging the military to open up and further expand the influence of both. Democrats favor using the power of government to reallocate wealth and correct for the errors of a free market. Both seek to expand government powers that were never granted by the US Constitution to begin with.

Instead of being outraged at the continual depredation of the American Government and way of life by moneyed powers and power-hungry politicians, Americans look to television to tell them what they should care about and how they should feel. Television serves to do little but distract them from what’s going on around them; even the news channels do little outside of featuring infotainment designed to titillate our infuriate its viewers regarding some contrived controversy epitomized by Fox News’ “War on Christmas.” And so Americans have come to look at politics much as they do sporting events: they have the team they’re rooting for and sympathize with, and the opposition they love to hate. They don’t seem to care whether the party sticks to its principles or not. Sometimes they don’t even know what those principles are.

In the midst of these sheep, the banking industry is content to make itself the power behind the curtain. Let Americans look to their government for guidance; they’re happy to just keep creating the money and lending it at interest for all of our ridiculous wants.

And why shouldn’t they? It’s not their money, after all. It’s ours.

The US Dollar is our obligation, and the bonds we take out to finance the whole circus are our childrens’. Why should the banking industry care if we spend it frivolously? It didn’t cost them anything — and they’re happy to make the interest.

At every turn in American political life, the banking industry is there to guide us. And, when it turns out that they’ve loaned Americans money they can’t afford to pay, they’re ever quick to exert their influence with Washington politicians to receive a bailout — courtesy of the tax payers, of course.

The game bankers play reminds me a bit of how parents pacify children; they know that children have short attention spans and a primitive understanding of the world, and so are happy to play on both in order to mold their behavior towards the parent’s own ends. And so it is with bankers and the American people: bankers know that Americans’ eyes roll into the back of their heads when they mention interest rates or the mathematical models of Keynes and his almighty multiplier effect, so they make what they’re doing artificially complicated as to purposefully misdirect everyone away from the obvious scam being perpetrated against us. And when they need to translate it out of economistspeak and into ordinary terms, they always do so with the most dire of warnings: Ben Bernanke himself told Congress that if they did not act to save the economy this week, that there might not be one to save come Monday. Of course, there was, but people were still scared enough to grant the Treasury and the Federal Reserve additional powers.

This can only go on for so long before we lose our prosperity and complete, in the words of FA Hayek’s book, The Road to Serfdom. And here we are, at the end of the road. Looking to our shepherds for guidance as we face a crisis that they previously promised us would never happen. Today our shepherd is Barack Obama and the Democratic party, and they are convinced that they can spend enough money to stimulate us out of the hole that naturally resulted from all the previous efforts at stimulus. As if to somehow show solidarity with Socialism, Dick Cheney recently scolded Congress for not bailing out the auto industry.

And so, we again are ready to rally around the leader and follow whatever plan he outlines to get us out of these dark times. We march forth, not really understanding the problem we are facing, but determined to do our best to fix it anyhow. Ben Bernanke has said that we have to lower the value of our money in order for us to beat this recession, and he has offered to do that for us by creating money out of nothing and loaning it out until interest rates fall to absolutely nothing. I’m sure that the average American feels somewhat suspicious of that course of action, just as they were somewhat suspicious of the Wall Street bailout, but they figure that the middle of a crisis is no time to question the orders being handed down. If the plan is to devalue the dollar, then here we go:

Printing presses: maximum warp!

This can only lead to one inevitable destination. We’ll look at that in the final installment of this series, when visited by the Ghost of America’s Future. Until next time.

The Logic of the Auto Bailout

Today it was announced that George Bush was extending $13.4 billion of the $750 billion in bailout money to the auto industry: $9.4 to GM and $4 to Chrysler.

Let’s take a closer look at that. According to GM’s balance sheet, it’s currently worth, oh, -$60 billion dollars. That’s not good credentials to secure a loan, but maybe their income can make up for it. Hmm, GM’s income statement shows that GM lost -$38 billion in 2007, -$1.9 billion in 2006, and -$10.5 in 2005.

Hmm. Well, that’s none too encouraging, either.

I suppose there is some good news in all of this, though. The -$60 billion that GM’s currently worth has largely all come about in the last three years or so. Although, if you go back to when they were earning money, the company made $3.6 billion in 2004 (2.9 of which came from GMAC), $3.8 billion in 2003, and $1.7 billion in 2002.

Hmm. Well, that’s not looking so good, either.

2003 seems to be the only year where GM actually made much money manufacturing (as opposed to loans for) cars, and the profit they made in that year was roughly $4 billion. Even if the company were to restructure to produce $4 billion in profits every year from here on out, it would take 15 years for them to have a net worth of zero, and an additional 3 if we now factor in paying back the government loan.

That’s close to 20 years down the road before this company even achieves a net worth of zero.

I don’t know about you folks, but that seems highly unlikely, and even if it is in the realm of possibility, I still have to ask: “So what?”. Should we celebrate that GM might someday work and plan hard in the hopes that it someday might achieve the honor of being worthless?

And, if we step back from this rosy scenario of $4 billion in profits per year, the situation looks ever more bleak.

I’m here to tell you that next year will not feature a sudden bounce back in the demand for GM cars, and the year after that’s not looking too good, either. As I describe in my book, we are looking at the tail end of a multi-decade expansion in consumer spending. Consumers at this point are completely and totally buried in debt; they too hope that someday they may be able to work and save and someday be able to call themselves flat broke.

In fact, debt is everywhere we look today: car companies, consumers, governments — all are hopelessly indebted. And, really, all we’re talking about doing here is creating some money out of nowhere (which is where this whole “bailout” is going to come from to begin with, in case you didn’t realize) and loan it out at interest to someone who has no real hope of ever paying it back, in the hopes that the benefits of keeping GM around will outweigh the costs.

Not likely.

Let’s face it, folks. As Peter Schiff says, the US government can’t even afford to bailout a lemonade stand at this point. No one has any real money. Everyone’s broke, and the only money that can be used to remedy the situation has to be printed and assumed as someone’s debt. Which is really an exercise doomed to fail. The American automakers are in as bad a shape as the rest of us. I see no reason we should use fiat money to try to redistribute wealth away from one group of broke people and towards another.

All of us have to realize that true wealth can’t be created from thin air, and you can never borrow your way to prosperity.

Until we release those delusions, we’ve got a long hard road to the bottom to look forward to.

What About the Auto Industry

My friend, James, is a graphic artist and did my book design. He’s also a Socialist, but that doesn’t seem to hinder our friendship. If anything, it makes for exciting conversations. He was asking about deflation, it’s causes, and what we should do about the auto industry. I thought some of you might find our conversation interesting:

Preston: Well, regarding the auto industry, what do you expect the government to do? Bail it out? This is not the first time the auto industry has been bailed out?

James: Yea, I know.

Preston: Is the auto industry somehow of such strategic significance to America that we must defend it?

James: Well it’s manufacturing. Which means high paying jobs for people.

Preston: Well sure. But what exactly can the government do about it? I’m reminded of the comment Bill Bonner made in Financial Reckoning Day: Surviving the Soft Depression of the 21st Century regarding the hopes that America had that Alan Greenspan would be able to bailout the economy in 2002. Bill Bonner described Alan Greenspan and the Fed as being “Like a transvestite. Having all the tools needed to do the job except the essentials.” 

James: *laughs*

Preston: And really, what can the government or the Fed do? When the chips are down, businesses have to make a profit. If the businesses are unprofitable, you can throw all the money in the world at it, and the situation’s not going to change.

James: But is the industry really unprofitable?

Preston: Yes. Even in the last Greenspan inflationary boom of 2003-2007, GM did not show a profit for manufacturing cars. Instead their profit was made in the financing (GMAC) wing, and that’s obviously fallen on hard times now. When the chips are down, the combination of labor, resources, and management have to produce a product profitably on the world market or close shop. 

James: Not necessarily.

Preston: How so?

James: We could put up tariffs. 

Preston: Studies have indicated that the more protectionist societies have lived poorer compared to the societies that engage in free trade.

James: Poorer for who. 

Preston: Well, it was like what Che Guevara and what he did with Cuba. He felt that steel was a strategic industry and that Cuba needed to manufacture it domestically. They erected tariffs making foreign steel expensive and the end result was that the price of steel caused manufacturing in Cuba to suffer. The society was made poorer compared to how it would have been due to protectionist policies. 

James: But Capitalism is always focused on short term consumption. 

Preston: No it isn’t. You’re confusing the society of the last thirty years with Laissez Faire, free market Capitalism. It’s not. In a free market society, savings is a virtue. Companies and individuals save and invest and prosper. Those that borrow and spend fail, which is what we’re seeing with the auto industry. Management tended to take on large amounts of debt and engage in certain manipulation of earnings in an effort to boost short term profit at the expense of long term viability, but that’s not symptomatic of the free market system as a whole. In fact, in a free market society, the firms that allow themselves to be foolishly managed go broke and the virtuous survive. 

James: You live in the 1800s, but the world isn’t like that anymore and it’s not going to go back. 

Preston: Well I’ve studied what the thinkers were thinking back then. It makes sense to me, and it seems that their greatest fears have all been realized in our day and age. I just keep asking we can’t go back to the good ideas that seemed to work so well for us as a country. 

James: But the free market would allow for greenhouse gas emissions to run rampant. 

From there our conversation degenerated into Environmentalism. James is a good man, but he has a deeply held mistrust of the power of corporations. To him, corporations must be regulated else society will become one of the savage rich versus the many destitute and I don’t seem to be able to convince him otherwise.