Sunday, December 14, 2008

Money For Nothing - Part 3

I've ranted about "money for nothing" several times before. If, by chance, you missed it, or you just want the sheer joy of experiencing it again, you can read it here, here and here. But last week, it actually was literally true: The U.S. government auctioned $32 billion in four-week T-bills at 0% interest Tuesday, the lowest auction rate ever. In the after-market, the price rose, and people bought T-bills at a negative rate of interest, apparently extraordinarily gleeful to lock in their losses.
This insanity is a result of the fear that investors have of taking any risk at all. For nothing is seen to be safer than T-bills, which will be repaid in their entirety with new, crisp, freshly printed, dollar bills. If the government needs some more dollar bills, it simply prints more of them. No limit. No questions.  Pretty clever, eh? (as our Northern neighbors might say).
Well, all this leaves me completely baffled. Normally when a government runs its currency printing presses overtime, the inflation rate soars and suddenly wheelbarrows are required to haul around all the paper needed to purchase a loaf of bread. But it seems that every country in the world is hyperactively churning out paper money. Nobody's money is worth more than the next. You don't bail out of the dollar for Yen, Euros or Pounds because they're devaluing too. Even the Chinese are printing and spending like mad.
So, what does this all mean? Apparently, that there's no limit to the size of the government stimulus (sounds erotic, doesn't it?) programs that suddenly are now possible. Both namby-pamby Democrats and hard-hearted Republicans can hardly contain their excitement.
The U.S. has made commitments so far of upwards of $8 trillion in an attempt to halt the economic slide. Is there an upper limit? Beats me. Even the Bush Administration is now saying they are ready to pump untold billions into the moribund US Big Three auto companies before the Obama Administration gets their wack at doling out more of the cash.
By the way, Detroit seem to be pretty scared of using the word "bankruptcy". What's all this nonsense about getting the government to negotiate with the "stakeholders to share the pain" so they can avoid bankruptcy? Sharing the pain is just what a bankruptcy judge does in a chapter 11 filing. The difference is that the judge is doing the pain sharing pursuant to the current law, while the government actions being proposed don't pass my smell test for legality at all. They're more akin to simple extortion that's probably unconstitutional anyway (The Fifth Amendment). 

Anyway, back to the topic, in bankruptcy the auto companies continue their day to day operations. They, along with all their employees, don't disappear overnight. It's pure hogwash to say that people won't buy cars if the manufacturer is in bankruptcy. Anyone who has been paying any attention at all to the pleading on bended knee in Washington knows by now that the Big Three are in serious financial doo-doo. 

And, if you'll allow me just one more "by the way," I heard a great line which referred to the $8 billion General Motors paid last year for retirees' and current workers' medical bills. The talking head on CNBC said: "General Motors is a health care company that just happens to make cars."
I also recently read an  economist's apparently serious proposal to revive the housing market (remember, this is what the whole mess is about) that struck me as something Lenin would adore. He proposed that the government just buy everyone's existing mortgage and refinance it at a 1% interest rate. The government would also offer new mortgages to new buyers at the same rate. 

While we're at it, how about if the government solved the auto companies' problems by offering auto loans at 1% interest to anyone who had or could obtain a driver's license? Why stop there? How about 1% loans to buy computers and networking gear so Silicon Valley doesn't implode? You get the idea. Since the money is for nothing, nothing is off limits. Just propose it and it is no object.


Greenleaf said...

I have been surprised and disappointed by the argument that "nobody will buy cars from a bankrupt company" because I feel that many consumers recognize that, bankruptcy or bailout, there are enough issues with the big 3 (esp GM and Chrysler), and enough other good cars on the market, that they might steer clear of the Detroit cars anyhow.

Incontrovertible said...

You are right. Consumers have been voting with their pocketbooks for years by buying an ever increasing share of foreign branded cars.

Also, if the Big Three go away or are combined into a fewer number, the domestic manufacturing jobs won't necessarily go away too.

American's buy somewhere between 10 and 18 million cars and trucks a year. Most of those cars and trucks will be built in America once the costs are less than importing them from overseas plants. The Japanese, Koreans and Germans are all increasing their manufacturing capacity in the US.

SpecRider on the Storm said...

Not that we in the north believe in bailouts either - but it is guarantied that if the USA bails out the Big 3, that we will also kick in a proportional share.

The Canadian government has done this many times in the past with companies like AVRO (which eventually went bust), Bombardier (which has had to stop building airplanes - because of faulty landing gear), Airbus (which we no longer are partnered with), not to mention previous bailouts to the auto industry, which were supposed to save jobs that eventually got relocated to Mexico.

Point is - once a bailout occurs there is no incentive to make the necessary changes to improve plant efficiencies and (dare I say) improve the product - make it into something that someone wants to buy. Not bailing them out will have consequences - but so does running a company into the ground so that the big cats at the top can walk home with their big bonus'.

If your government - and ours - is willing to give away money, it would make better sense to me to pay the unemployed auto workers for retraining, relocation and other incentives to put them into a more rewarding (less volatile) career.

I know this sounds somewhat simplistic... but the auto industry will survive. Honda, Hyundai, Toyota and Nissan all build cars in North America - and you do not see them coming for a handout. They are more automated and have a different manufacturing process, and they build cars that people want (go figure).

There was an interesting article in the Detroit News that pretty much summed up the problem located at - there but for the grace of the innocent would we go given a chance to start from the ground up again.

You are absolutely right about free money - in the end it is only worth the amount of value that it is given. Money should be treated as a rare resource - perhaps a return to the gold standard is in order?

Incontrovertible said...

Your points are well taken.

I'm all for a return to some convertible standard value for money. It doesn't have to be gold. It could be cows, belt buckles, watermelons, whatever. The main point is without some tangible asset, money is just a concept, not a real store of value.

Incontrovertible said...

I just viewed the video ( about the Ford plant in Brazil. It is amazing!

Perhaps the most telling thing is when the narrator says: "This is the type of plant that Ford would like to build in the US, if only the UAW would allow it."

If a union has the power to stop this kind of innovation, the company its members work for will die. Other companies will surely arise that are free to build plants like this one without union interference.

Anonymous said...

The overwhelming fear is that the tail(UAW) is wagging the dog (the government) and nobody has the the ability to turn this around for fear of seeming unfeeling about the workers.
Forget printing money lets go back to bartering. Wampum anyone? NMI

hedgeyourbets said...

I think we agree on this, but I am not sure.

If anyone thinks the ability to borrow at zero means there is no cost, just ask someone in Japan to check your logic. You’ll pay for it, in the form of a lower dollar, higher inflation, or both. You’ll pay.

By the way, one reason it actually makes sense to buy short-term Treasuries despite the ridiculous yields: if I have my money at a broker-dealer that files for bankruptcy, my cash might be commingled, but my securities (i.e., Treasuries) should be segregated. That is a lesson of Lehman Brothers. The low yield is a symptom of fear, not only of virtually every asset class, but of the financial health of all broker-dealers.

Incontrovertible said...

I think we agree.

Under normal conditions, you get inflation and/or a lower dollar. But, as I state, all the major countries (including China) are printing money like mad, so the normal effect is muted substantially.

Your point about short-term T-Bills is correct for large sums of money where it is impractical to place the money in bank deposits or CDs in $250K chunks, which are already insured by the FDIC.

hedgeyourbets said...

Of course, it is possible that all of these currencies depreciate (against gold) and that you get global inflation.

Incontrovertible said...

I wonder why gold was the "gold standard". Why wasn't it Vestal Virgins, or something equally rare?

hedgeyourbets said...

Gold for the same reason that cigarettes are currency in a prison—tradition. In Poland after the fall of the Polish government in Sept. 1939, I am sure gold could get you papers or a plane ticket.

Also, try sneaking Vestal Virgins across the border….