Sounds pretty dramatic but that is the headline of a story on the front page of the Washington Post today. Maybe a bit exaggerated, but that the subject even comes up is amazing. None of the candidates are passing out the collected works of Marx and Lenin yet, but the next President is in for what candidates love to call (but hate to make) "tough decisions." It is far more likely that the scary phone call will come at 3 P.M. rather than 3 A.M. and will have to do with which other industries have to be nationalized to save them from going belly up.
For example, General Motors stock was off 31% to $4.76 a share yesterday. The Bush administration has turned the budget surpluses inherited from Bill Clinton into massive deficits financed by borrowing money from foreigners, especially in Asia. This means that Asian countries, especially China, own hundreds of billions of dollars worth of treasury bills. Now suppose the Chinese government decides it wants to get into the car manufacturing business so it makes a deal with Toyota, now the world's largest car manufacturer, to buy GM outright for a song and move its factories to China to be operated by Toyota but employing Chinese workers. All they keep is the U.S. dealer network and millions of American jobs are lost. If the next President nixes the purchase of GM, the Chinese sell their treasury bills and the dollar collapses. This is not science fiction any more. Which candidate is better prepared to deal with stuff like this could determine the election.
Auto sales slide as much as 50% and auto dealers go out of business as prospective buyers with impeccable credit could not get a car loan in the single digits last month. In response, even Toyota's credit arm begin offering 0% loans up to 72 months. That has long been the domain of the poor struggling Big Three (perhaps to become the Big Two in short order), but to see Toyota resort to giving away automobile credit is a stunner.
Newspaper companies -- they of the twenty- and thirty-percent profit margins not long ago -- cannot pay even the interest on their debt, and continue to shed employees (as do companies in all industries). And retail businesses are failing right and left:
Sharper Image filed for bankruptcy protection in February, and has since been liquidating itself, getting even lower prices for its assets than it had hoped. Several other well-known retailers have since gone bust. Steve & Barry’s, a casualwear retailer that is a core tenant of numerous shopping malls, terrified commercial-property investors when it entered bankruptcy protection in July. It emerged in August with new private-equity owners and a plan to close 103 of its 276 stores. Linens ’n Things filed in May, and at first hoped to reorganise itself and leave bankruptcy. After the collapse of a planned sale to Cerberus, a private-equity firm, it now plans to liquidate itself, with closing-down sales due to start at its remaining stores on October 16th.These failures have contributed to a rise in bankruptcy filings in 2008 that is showing every sign of accelerating. Even before September’s record-breaking financial-sector bankruptcy of Lehman Brothers, with assets of well over $600 billion, and the technical bankruptcy of Washington Mutual en route to its acquisition by JPMorgan Chase, there had already been more bankruptcies this year than in 2007.
For every store closing, for every company liquidating its assets, for every business bankruptcy filed, there are suppliers who don't get paid and who thus become the next business faced with insolvency. And there are employees who lose their jobs and their health care benefits, and who can't meet their mortgage payments.
It becomes a vicious cycle, as more and more people fear for their jobs and drastically curb their purchases, which leads to more stores closing and more layoffs for manufacturers and suppliers. The shippers who transport all these goods start to lose business as consumer spending dries up. And the businesses that provide services find that their clients can't or won't pay their bills. Bankruptcy lawyers and collection firms are busy, sure, but they can't sustain an entire economy. They are getting rich off those who still have the cash to buy stock and properties and inventories and other business assets at rock-bottom prices. We are entering the vulture stage of the Crash of 2008. And it could last for a very long time.
And I don't think more tax cuts for the rich can fix this, do you?
Is Barack Obama prepared to be this century's FDR? We have to hope so. Because we're just not going to be able to drill our way out of this one.