Corporate Bailouts North of the Mason Dixon Line – Part III

In part two of this series, I joked about northern auto workers moving south as carpetbaggers, but the truth of the matter is the south is no different in her positioning during these hard economic times.  This is shown by our southern leaders who talk with a draw, but spend our tax money like they are on a shopping trip in Manhattan with someone else’s credit card.  See these southern Senator’s votes on the other bailout packages.  With the new auto numbers released today, I fear the stand a few southern Senators are taking is less likely to be based on a moral high ground and more likely to be jockeying for position and holding out until funds can be added for their constituents as well.  

Clearly the big three auto makers, bogged down with the overhead of socialistic unions, are loosing big, but all the automakers, including the foreign companies now located in the south are sinking fast.  Toyota said they will be halting production for 11 days next month due to the sales numbers and as the chart below indicates every one took a loss in the latest numbers. 

August U.S. Auto Sales (from WSJ)

Company Sales % Change
General Motors 307,285 (20%)
Toyota Motor 211,533 (9.4%)
Ford Motor 155,117 (26.5%)
Honda 146,855 (7.3%)
Chrysler 110,235 (34.5%)

The real difference between the two groups seems to be business models that plan for rainy days verse business models that build in an exaggerated expectation of a federal safety net.  In the end, the safety net, built upon the future prosperity of our children, will be extended to all that ask.  This is the nature of the economic system we have, it can be no other way.

Of course the real problem is us.  We may be late to the game and slow to learn but we are beginning to awake to the mess we have before us.  That happens when our investment and retirement accounts take a 40%-60% hit. 

As I was reviewing the Wall Street Journal on the auto industry I came across this article, Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes, which ties everything together rather nicely.

You see the “thought leaders” in our country tell us there must be a federal bailout to save this industry or that industry and they play on our emotions showcasing all the workers and families that will suffer if our tax dollars do not bail them out. 

While, it is sad to see people forced to look for new work, that is a fact of life.  That is the nature of the economic system we have.  When you sell yourself to someone else to make a living you are dependant on the business practices they have and their ability to keep you employed.  Even most self-employed folks are dependant upon the corporations spending money with them.  We are tied to this American economic system and as it collapses around us, it causes us to readjust our priorities.

Because we are re-adjusting our priorities the government must take our tax dollars and bailout the corporations.  The consumers are not going to bail them out by continuing to spend hard earned dollars on over priced low quality products.  As we look to the future we stop spending for today.  Consider the following from the article:

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

“The idea that the American family will quickly spend us out of this recession is a fantasy. It won’t happen,” said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government’s Troubled Asset Relief Program funds.

What kind of false economic premise are we operating under that would be damaged by families saving money?  As Gary North points out in Closet Keynesians Emerge published last Friday, this is Keynesian economic theory.  He summarizes it great in the section entitled, Wealth Through Thrift:

To tell American consumers that they can improve the productivity of the economy merely by going out and spending money is Keynesianism. It is utter nonsense. The only way to increase the productivity of the economy is through thrift. The money generated by this thrift must then be invested wisely, in terms of future conditions, so that the company or fund making the investment can reap a profit. If economy cannot do this through increased productivity, it will eventually find itself incapable of raising additional capital. Without additional capital, there can be no increase in productivity.

Economists are supposed to know this, but ever since the Great Depression and the publication of Keynes’s magnum opus, most economists have not believed this. They believe that we really can spend ourselves into prosperity, either through personal spending or through government spending. The Keynesian system is opposed to investing during recessions.

I can remember the slogan that was promoted by the government in 1958: “you auto buy now.” It was preposterous then, and it is preposterous now. The government today is lending money to Chrysler and General Motors because American consumers are not buying the output of those two companies. The government understands that it cannot afford to give every citizen enough money to go out and buy a new General Motors or Chrysler car, so it uses tax dollars to offer below-market loans to companies that would otherwise go bankrupt. This is the government’s alternative to relying on the general public to go out and spend money in a way approved by politicians…

You may have seen this spoof ridiculing the folly of the current line of thought as well.  While Fred Thompson does not identify the economic theory he is poking fun at it is Keynesian economic policy:

httpv://www.youtube.com/watch?v=RKc4XFK0iVY

Friends when we discover such an unjust system, that is harmed by people saving money, it needs to go.  This system has been in place for a long time and has brought a promise and even an appearance of wealth.  But as the curtain is being pulled back we are seeing for the first time the shackles that come with this system and the true value of the wealth it provides.  It is going to be a hard road as the inflated prices for our goods are adjusted and many companies will fail.  But this is the time to change directions.  This is the time to throw off the shackles and to learn to walk in freedom once again.  Freedom comes with responsibility for one’s self, and a duty to help your neighbor.  You can only do that if you are financially free.

 Gary North ends his article with investment advice to “Save now.  Buy later.  Buy assets that will rise in price because of increased monetary inflation. ”  Someone asked me what I thought those items might be.  The thought that immediately comes to mind is the proverbial wheelbarrow of money to buy a loaf of bread in Russia when her economy failed. 

Traditionally, the things that people buy when they have little capital is food, shelter, and clothing.  The real estate debt bubble and the over building it produced will keep the shelter market prices down for years to come, and I think there are plenty of second hand blue jeans to go around.  Although you can expect to see over reaching tyranical attempts by the government to limit the availability of second hand items so that people will be forced to “buy new”.

About the only thing you can not buy second hand is food.  So the person who can produce food is going to be a popular fellow in his community.  I mentioned previously, we invested this last quarter in tools for production.  It may not produce huge profits as an investment, but I am hopeful it will feed the family and keep us on the farm.

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