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.
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.