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The Auto Industry meltdown, Debt serfdom, housing as shelter, interets-free coinage, the Coming Depression and more   (week of December 2, 2008)


For more stimulating ideas, please visit the Of Two Minds blog.


Steve R.

Love your take on the debt serf cum banker.

The idea, and my practice, is to become your own bank. Save a pile of money, your Reserve, and lend it to yourself for big ticket items. Pay back to your reserves, in installments. Its interest free money. The trick is not to spend compulsively and squander your reserve. Think of it as not using your house for fireplace fuel.

Charles Eisenstein in his book Ascent of Humanity explains how loans and interests work to clobber the debt serf. In his example, a thousand dollars is the extent of a localized money supply. It is lent out to 10 serfs. Each must pay back the 100 loan plus the interest. The Fed can print more money to fill the gap created by the interest, but that is inflationary unless all of the goods and services can be precisely quantified in value, so the pressure is to continually under inflate money supply. Inevitably, and through no fault of her own, one of the ten serfs will be unable to repay her loan and interest obligation.

Funny thing about bank lending. It is one of the ways that the Federal Reserve keeps track of $ in circulation and how to regulate the $ supply. And $ supply is the mothers milk of the finance sector, the first receivers of all new money. Your idea is seditious. Power to ya!

I have another idea. Since the price of housing is so sticky at unrealistic levels, those of us still looking to buy should adopt a new tactic. Instead of haggling over the ridiculous price of houses offered for sale, only to have our offers rejected, we should offer to pay the list price. The twist is, we make the offer contingent upon getting a no interest or very low interest load for the duration of the mortgage. A $360,000 list price can be honored; the new owner pays $1,000 a month on a 30 year loan (quite affordable); the bank gets its fees; the bank still collects a wad of cash (the much prized liquidity) for the down payment; and, the banks keep the sale prices high, preserving the value of the assets on their books. They are going to take a hair cut anyway, why not just do it fairly and cut the buyers a break. after all, they will still be forking over to the banks huge chunks of cash on a deal that is still almost guaranteed to devalue.

Just a thought. Of course, like your proposal to simply run government on the State budgets from 2002 in order to deal with the current California budget crisis--it will never be adopted since it is too simple and makes perfect sense.


Harun I.

Another excellent post An Adversarial Culture: Auto Industry Bailouts (December 4, 2008)

I would like to examine what I believe to be, in much broader terms, the crux of the entire issue.

Your opening comment:

1. It's easy to be cavalier about the situation--no bailout, etc.--but since hundreds of thousands of jobs are at stake I think it behooves us to consider matters carefully before announcing "what's best for the country."

It has always been about the human cost. Anyone who tries to analyze this by reading a 10Q is missing the point.

But when you say "hundreds of thousands of jobs", how does that compare to the 3 million manufacturing jobs already lost?

Let's take an infant from the parent of every American business that has recently shut down, downsized, or gone bankrupt with infants from American autoworkers and put them in a room. Can you differentiate? Which of them deserves to suffer? Who should decide?

The realization of the real responsibility of corporate and union leadership that was abandoned when everyone was giddy with greed is now the instrument being used to ply the wallet of the taxpayer: the human cost.

All industry leaders have a responsibility for the people in their employ directly and indirectly. The American automotive industry leadership chose what they thought best for their workers and they were wrong.

If we are going to eliminate risk then shut down capital and commodity markets, decide who is going to set costs and how much and to whom goods and services will be doled out and get on with the business of communism.

Results equal intentions. We all get what we deserve.

The deflationary winter in which global economies find themselves will ultimately be measured in human suffering. The cause of all this suffering is debt as money, fractional reserve banking, and counterfeiting of money.

The American taxpayer has no money to lend. America is insolvent.

Thus, in the grand scheme of things, the question that begs is whether we should attempt to mitigate suffering with the very thing by which it is caused?


Michael Goodfellow

I'm not sure how much the problems of the auto industry have to do with bad management decisions or bad union decisions per se. I'm struck by all the problems IBM had when I was there in the 80s. It had absolutely no union problems, but still managed to run some of its core business into the ground. They had just been on top too long, had become too slow moving and too resistant to new ideas. When personal computers came along, they could only respond by setting up a new division in Boca Raton to make the IBM PC.

It's not that the rest of the company wasn't interested, but they just couldn't get a product together. Even after the PC came out, there were a few efforts inside the company to write their own OS, to get rid of DOS and stop paying Microsoft. All of those efforts failed, despite the large number of capable programmers the company put on the job. It was simple organizational dysfunction.

I think the heydey of the U.S. auto industry in the 1950s and 60s laid the base for all the problems that followed. Both management and labor acted like there was no competition from over seas, and no new manufacturing technology to worry about either. They just fought over the U.S. turf. When Japanese and German cars started to come in, there was no response. When the market started to tighten up in the 70s, they just fought their unions over wages and benefits, rather than improving cars. Not until their market shares really dropped in the 80s did they even start to compete on quality.

As we all know, they got temporary peace from the unions by promising retirement benefits that they didn't have to pay right away. At the time, they must have been worried, but you couldn't expect them to realize the effects of the baby boom and medical inflation. What looked bad then looks suicidal now. Most of the difference in cost structure between U.S. and Japanese manufacturers in the U.S. is due to retirement benefits, and the legacy of a huge number of current retirees that the Big 3 have to support. Honda in the U.S. just doesn't that that.

Going forwards, I think you are right that there will be layoffs regardless. There's no point in paying people to make cars you can't sell. Even if the layoffs all end up in job banks, I really think the future is automation, not rehiring the old (age 50-ish) employees in a couple of years. I also don't think they have any car models in the pipeline that are really going to look great compared to the existing Japanese and European small cars. These low-range electrics or expensive hybrids just aren't going to do the trick.

On principle, the auto industry should be forced through bankruptcy and come out the other end with a couple of much smaller companies (I think Chrysler is history.) The unions really have to give up ground, not just on benefits, but on job flexibility and plant closings as well. Perhaps the political power of the local dealerships will drop too, since so many of them will go out of business. All of that will be driven by the decrease in sales, regardless of what Congress does. All Congress can control is whether the management and union bosses have to negotiate now or later.

The principle really is important here. The alternative to a bankruptcy is companies that will certainly be back for more money later. There will be no way to draw a line in the sand on bailouts. If the economy continues to fade, there are going to be a lot of industries begging for cash. And the Feds still have all the state and city governments to bail out!

I agree it's small change compared to bailing out banks. The Fed so far thinks it has been making loans to tide the banking system over a rough patch (even that last injection of capital has to be paid back.) It's a stretch for banks, but it's ridiculous to think that companies currently valued at under $10 billion will pay back $50 billion in loans (counting the environmental money already committed.)


Kevin K.

Thanks for posting Joe's comments on the auto industry. A agree with most of his points except that I feel that more that 15 out of every 1,000 brag about screwing the company (for years I worked between a man from Ohio who worked in a UAW plant after Vietnam before grad school and the move to California and a women from Michigan who still has family in the auto industry).

I think that Joe (and most others) have missed the main reason that the US Auto Industry is in trouble. Management agreed to pay more than they can afford to the workers and either the contracts need to be re-negotiated in bankruptcy or the companies need to close down. As you know I have worked in real estate and real estate lending for years. I have seen the financial statements of developers who were building homes during boom times (a particular developer building in Salinas in 2004 comes to mind).

If the guys building homes for this developer (who was making about $200K a home PROFIT) said they were going to strike if he didn't give them health care for life he probably would have done it.

The real estate market today is a lot different than 2004 and I know of many of the guys that were making millions just a few years ago will lose it all in BK. Many of these guys took the profits and bought land in places like Modesto and Tracy to keep building and now they are stuck with land that is almost worthless and homes that are worth less than it cost to build them.


Peter B.

Seriously.....!!!

Congress would do far better to give the bail out money for the "Auto Industry" (sic).... ...NOT to the "Big 3" But to "America's other auto industry".

Reward good behaviour, and give them the where with-all to be able to pick up the pieces of wreckage from the 'Big 3".

Don't throw good money after bad.

..."and there is some truth in the observation that Ford and GM could shutter their entire North American operations and go on as non-U.S. global manufacturers." Absolutely!!!

A step back and refocus is the only hope for these companies. Time to cede the field, where the battle is already lost anyway.

But in the bigger picture, put the bailout money where it could actually make a useful difference. (and that sends the right signals)

Seriously...!!!


Gene M.

Came across this quote from a column by Ambrose Evans-Pritchard in the Telegraph, also a very acture writer on economics. Dovetails with one of your columns and found it interesting: World stability hangs by a thread as economies continue to unravel

In the 1930s, it was not obvious to people living through debt deflation that their world was coming apart. The crisis came in pulses, each followed by months of apparent normality like today.

The global system did not snap until September 1931. The trigger was a mutiny by Royal Navy ratings at Invergordon over pay cuts. Sailors on four battleships refused to put out to sea. They sang the Red Flag.

News that the British Empire could not uphold military discipline set off capital flight. Britain was forced off the gold standard within five days. A chunk of the world followed suit.


Phillip H.

Another way to stop feeding the debt monster is to hold all cash reserves in coin form. I order dollar coins in $1000 boxes (which weigh 18 pounds) and use them for all possible cash transactions. It is very rare for someone to insist on breaking open the $25 rolls to count them (probably paranoid about slugs in the middle?). The Difference: "If you reach into your pocket and pull out some quarters and some bills, what is the difference if the count is the same? What is the difference between paper money and coins?

The answer is lethal: It costs no interest to keep the coins in circulation..... The paper money is created by the banking system. For it to come into existence, a debt has to be created and interest on that debt goes on ad infinitum, or until the end of the government. The coins, in turn are issued by the government. The bank is not needed to create the coins. Because no debt is created, there is no interest required to keep the coins in circulation." - excerpted from page 2 of https://www.acresusa.com/toolbox/reprints/History%20of%20Money_CW.pdf

There is a big advertising campaign about this in Portland with TV and newspaper ads. They even had armored trucks at six locations Thanksgiving week where folks could swap FRNs for US Dollars. I have written the Oregonian reporters that have written on the environmental reasons for doing this informing them that while that is a good reason it is not the most important reason to use them. I have personally put over $5000 in circulation this year.

I first did this when I lived in Idaho in the 80s when the SBA (Susan B. Anthony) dollars came out but in a small town it only took a few months before all the merchants had heard my rant about debt money. It is much easier now to just point folks to websites like www.monetary.org when they want more info on the issue. I just tell cashiers that all of the paper money in their till is costing we taxpayers interest by the second.There is absolutely no reason OUR government could not issue all money debt-free. Robert Poteat's excellent website was just discontinued for webhost reliability issues but I really liked the way he presented the issue. I attached his title page and I have available the articles under Monques Index I can upload to a fileserver if desired.

"If the public chooses to hold two coins for each note in circulation, significant secondary effects would have a positive impact on the federal budget. That development would permit the government to finance $4.5 billion of federal debt by issuing non-interest-bearing coins rather than interest-bearing debt. At a 6 percent rate of interest, the federal government would save $270 million in interest a year by substituting $4.5 billion in Treasury coins for Treasury securities. With reduced interest costs in the first year, borrowing from the public would be lower in all subsequent years and the interest savings would snowball into an ever larger sum." - excerpted from https://www.cbo.gov/doc.cfm?index=5499&type=0

One interesting point: A friend recently wrote in a forum that all of our coins say Liberty on them. I wrote that he obviously hadn't seen the new Presidential dollar coins because they don't although they do have the Statue of Liberty. I wondered if the omission was a message that the job Washington and Hamilton started during the Whiskey Rebellion was almost finished? Yours for a kleptocracy-free future--


Dale R.

While roaming around the internet today I ran across an article about Calvin Coolidge, titled: The Price of the Presidency by Richard Norton Smith (reprinted in entirety, with permission from Yankee Magazine, January 1996)

This was found at The Internet Public Library, under POTUS (Presidents of the United States)

(This is only one little part of the article)

According to the article, around 1931-1932, Coolidge was quoted to say:

As for the Depression's causes, he professed bewilderment. "We may say that it was the result of greed and selfishness," he wrote. "But what body is to be specifically charged with that? Were the wage earners too greedy in getting all they could for their work? Were the managers of enterprise, big and little, too greedy in trying to operate at a profit? Were the farmers too greedy in their efforts to make more money by tilling more land and enlarging their production?"

"The most we can say is that there has been a general lack of judgment so widespread as to involve practically the whole country. We have learned that we were not so big as we thought we were. We shall have to keep nearer to the ground. We shall not feel so elated," Coolidge concluded, "but we shall be much safer."

These words are as true today as they were 75+ years ago.

Joe H.

I liked your analysis using progressively lower fly-overs. I want to add the following observation:

-The capital that was consumed was squandered on non-productive assets.
-Those assets will be difficult to recycle into productive uses

Robert T. Kiyosaki, the author of Rich Dad, Poor Dad makes the observation that assets are things that put money in your pocket and liabilities are things that take money out of your pocket.

Most people have no difficulty classifying a boat as a liability, even though it is conceivable that one could use a boat to make money (charter, fishing) or a boat could appreciate (vintage wooden boat)

The common wisdom is that boating is similar to standing under a cold shower and tearing up $100 bills. Boats require much maintenance. Boats depreciate in real terms (mildew, corrosion, UV damage, wear-and-tear of mechanicals). There are always fees, taxes, and other costs associated with owning one. There is opportunity costs associated with the capital they tie up. There is the cost of the interest.

Houses are schizophrenic. Undeniably, housing has a utility function.

But all square-footage and luxury-status amenities in excess of the utility function is basically a boat that does not float.

It is difficult to imagine a scenario where 4000 square foot houses will be duplexed.

It is even more difficult to imagine a scenario where 2000 square feet of lumber, wiring, nails, etc. will be recovered and re-injected into the economy.

One of the better scenarios might be to demolish the least healthy and least energy efficient housing and domino everybody up into "better" housing. That would shrink the overhang. I cannot picture how that could be done. The political hurdles would be huge. Some basic questions like, "Are there jobs the displaced people can perform anywhere near their new housing?" remain to be answered.


Jeff P.

RE: The Coming Great Depression: Leaving Fantasyland (November 29, 2008) :

What I think you are missing is, The Federal Gov't will step in and be the borrower of last resort as the masses shrink away from more debt , and if foreigners don't buy the bonds the federal reserve will be the lender of last resort and "monetize" HUGE amounts of new and existing debt, and that will lead to the end of the dollar as the "reserve currency" of the world, look for the budget deficit of local and federal gov't to skyrocket, as revenues collapse and expenditures increase= Inflationary Depression, I enjoyed the article, it was on 321gold.com.


John U.

I read your blog on the 321Gold Website about how Peggy Noonan thinks no depression is coming because "things look the same" That can be said of Iceland too. Things look the same. Except for a few key things. Massive lay-offs. Long lines outside the unemployment office. Bare store shelves. Huge demonstrations by the natives demanding the government's resignation and the resignation of its central bank heads. Ya, things really look the same in Iceland! That will play out in the US soon enough. Hold on to your hat, Noonan! We are in for one wild ride, I can tell you! The "fun" hasn't even begun yet.

Michael H.

Unless the firefighters in Vallejo have a non-PERS retirement system, you will find that final compensation is based on the highest average monthly pay rate not income. The real rip-off was raising the final maximum compensation to 90% from 75% after 911. Just found your blog and I enjoy it.

(Fire Dept., retired)


Riley T.

I agree with your analysis of home prices and investment value. In fact, I feel so strongly that my wife an I live in a tiny, paid-for house that represents only about 10-percent of our modest net worth. I have often attempted to dissuade friends from over-spending on homes. Yet there is one "soft" part of this hard look at houses. You have to live somewhere! The pure shelter value of a house gives a payback that really needs to be factored into any decision. It's a subjective number, yet unlike a motorcycle or a boat or a second home, we can't choose to do without shelter.
Just a thought. Keep up the fine work, and thank you!



Thank you, readers, for such thoughtful contributions.


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