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Bailout Nation: Ford on the Federal Dole, Too

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The idea that Washington has successfully rescued the auto industry is nothing but propaganda.

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So a question might be fairly asked. We previously had it from Barack Obama himself that 98% of the American people are to be shielded from tax increases, and that entitlements and domestic social programs are sacrosanct. Now we learn that even corporate welfare like Ex-Im loans and the $100 billion that's been spent on the auto industry via TARP and the phony fuel-efficiency subsidies are also high priority and integral to economic recovery. So it's virtually certain that in the decade ahead, another $10 trillion in Federal bonds will be issued on top of the equivalent amount which will be outstanding at the end of fiscal year 2010. The question is, who's going to buy them and at what rate of interest will the market clear -- once it becomes apparent that these massive debt emissions can't ever be repaid.

Finally, the South Side plant episode underscores the Orwellian propaganda that's come to substitute for truth in our Bailout Nation. The US auto industry is a disaster waiting to erupt once again in the not-too-distant future owing to the inexorable laws of supply and demand. For decades the US auto industry feasted on a diet of cheap consumer credit. This resulted in the sale of about 17 million vehicles annually between 1999 and 2007 -- a figure that was millions in excess of what the American public could actually afford or sustain. Consequently, the "park" in American garages and driveways is now swollen with nearly 250 million vehicles or more than one vehicle for every driving age person. So it will take years of sales at levels below the 14 million annual scrap rate to shrink the fleet down to an economically sustainable size.

At the same time, $100 billion of Federal bailouts has prevented any material shrinkage of North American production capacity -- to say nothing of 3 million existing vehicle imports plus potentially a further wave from China's burgeoning small car and electric/hybrid vehicle industry. In round numbers, the American car market faces upwards of 20 million units of visible supply and is still struggling to reach even 12 million of annual sales. Accordingly, price competition will be fierce and profits punk for a long time to come.

To be sure, GM just went through the Chapter 11 accounting car wash, meaning that it now has billions in hidden reserves to absorb cash operating costs -- at least for a few quarters. It's not that hard to make a billion per quarter when you can report essentially "expense-free" revenues.

Likewise, using taxpayer money, GM has recently acquired a sub-prime auto lender. So now it can resume stuffing the garages of lower-income households with new cars they can't afford, paving the way for a "twofer" when both loans default. And as long as the Fed's free short-term money lasts, fleet operators may continue to inventory more vehicles too, creating the illusion of sales gains. In fact, GM's YTD sales through July to actual retail customers are down 1% from last year -- which in turn reported the lowest sales rate since Beaver Cleaver got his driver's license back in the 1960s.

So the American auto industry is "back" alright -- back to the accounting games and sales gimmicks that led to its most recent near-death experience. And yet so thoroughly entrenched is the propaganda machine of present day crony capitalism that it will soon trot out our President to pronounce the auto bailout a success, and to suggest that the taxpayers who were fleeced two years ago will soon get their money back -- that is, they'll get repaid as soon as enough prospective GM shareholders can be fleeced for the $50 billion still owed to Uncle Sam.

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No positions in stocks mentioned.

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