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The US Auto Industry Crisis

Nihonkai Shimbun and Osaka Nichinichi Shimbun (November 10 2005)



Mortgage Debts




What made this possible is the housing bubble in the US, which was underwritten by the low interest policy of the Federal Reserve Board along with large-scale borrowing of funds from Japan and China. Low interest rates stimulated demand for expensive housing. Rising demand caused prices to rise, and rising prices raised expectations for even higher prices, stimulating still greater demand and higher prices. This spiral has allowed Americans to borrow greater and greater amounts of money against the apparent values of their homes to finance much greater consumption than they could afford from their own real incomes. (Perhaps "lured" is more apt than "allowed" here.)

A Decline in Consumption is Inevitable

Many analysts are predicting an end to this housing bubble. When the bubble bursts, housing prices may fall dramatically, forcing homeowners to curtail consumption in order to pay off their mortgages more quickly to avoid foreclosure. This cycle would have a huge impact not only on GM, Ford, and other auto makers, but also on all Japanese corporations addicted to the US market.

Many US mortgages are based on adjustable rather than fixed interest rates, meaning that borrowers must pay more just to service their borrowings when interest rates rise. This will exacerbate, in both speed and magnitude, the impact on consumption of a deflation (not to mention a sudden bursting) of the US housing bubble.

Laying off workers is not a method unique to the management of GM and Ford. The first things US corporations do when faced with straitened finances is to lay off workers and reduce wages and benefits to those workers they cannot lay off. GM has already announced it will be cutting fifteen billion dollars in insurance and health care fees it was obligated to pay to retirees who had worked many years for the company. If GM, like Delphi, files for bankruptcy, under provisions of Chapter 11 of the US Bankruptcy Law, it will be possible for GM also to reduce a variety of benefits to current workers. A vicious cycle may well result: reduced employment and income for US workers (along with shinking home values) reducing the buying power of American consumers, making the auto industry shrink even further.

Moreover, one would not expect US consumers to buy very many cars from companies tottering at the brink of bankruptcy.


Influence of American Capitalist Diehards



Bill Totten

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