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.”
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.