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Economy’s turnaround: (part 2)
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by PIM of SPAIN | March 3, 2009 at 12:32 pm
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The consumer mentality of the last two decennia was one of living beyond the means that fuelled the consumer binge. Buying things one not really need with borrowed money that was not earned, pay tomorrow whether never ‘tomorrow’ would arrive, have created a very materialized consumption society, which resulted in an overstretched supply and demand state. The global manufacturing capacity has been increased to meet the supply with an ever-increasing demand. The vision was: ‘Stimulating the economy’ as it incorrectly was called. Once the credit-bubble busted the industry at present is facing an over-capacity of at least 30%. With other words production has to be reduced by the same percentage or even more, before a turnaround can take place. Cutting production capacity means closing factories that equal cutting jobs. For completeness: Not only consumers are to blame but also Governments fuelled the consumer economy as well, characteristically of the post-war every year, the implemented higher spending by creating higher deficits, which didn’t seem to matter, with the by-effect of ever rising real-term deficits as a result. All this will come to an end.
The difficulty is that policymakers are more concerned with their own bias, than to understand what actually should be done, to get the economy on the go again. Contrary to nationalization of banks, industrial bailouts are the wrong medicine. Bailing out car manufactures and other industries is entirely incorrect, it not only is unethical because of the protectionist side-effects that conflicts with the free-trade principle, but most important will not contribute to the badly needed reduction of production-capacity, thus prolonging and worsening this economic crisis!
Policymakers want to save jobs. Loosing your job is very worrisome and awful for the people concerned. Alternatively they better should move on as quickly as possible to something else for earning a descent income. Governments cannot protect jobs as they do think, but they can smooth the transition by providing some financial support through (re) schooling and tooling. Waiting too long will in the end cause an even greater personal catastrophe. Better to move first and fast before being caught between scissors.
Talk by Mr. Sarkozy to bailing-out the French car industry is wrong and counter productive, as it is bailing-out GM and OPEL. Management at GM have been complacent from the 70s onwards. What good was for GM was good for the US, was the slogan. Not anymore ever since, by hardly making profit with manufacturing, only through their finance arm that partly was sold to pay for a previous restructuring without sufficient results when the time was still good. Bailing-out mismanagement gives the wrong signal. Well-managed car manufacturers like Toyota and others would be invited to go the wrong way as well. It is totally wrong giving money to failing companies in the expectation they’ll somehow become a healthy businesses again, spending money on anything, no matter how stupid, actually will not accelerate the economy into new life. If it were only that easy, we’ll be out of this crisis soon!
If Government want to spend money, it is better to pay for a quick lay-off procedure of large number of workers. Or where possible, to initiate part-time dismissals to keep qualified workers part time in the workforce and save experience and knowledge for a future upturn.
Carmakers have overproduced huge quantities of cars in some EU countries about equal to nowadays’ full-year sales potential. In Spain for example a quantity of 400.000 cars alone are stored. The whole industry desperately is looking for storage facilities, as facilities in harbours and dealer compounds are over-saturated with unsalable new cars and large quantities used ones. Faced with an acute shortage of storage space, car manufacturer Toyota took an emergency measure to hiring a ship in the Swedish port of Malmo to store thousands of unsold cars that the depressed EU market does not seem to want. The decision was made because Malmo port facility reached its limit of 12,000 cars. Car storage is expensive, and when after years (!) those might be sold their refurbishment will add-on another expense. Better to get rid of the bulk by selling these very cheap now to people who do have the cash or financing power. It is a loss now, but much better for later as the market starts to pick-up again.
This is my personal experience as a junior executive at Ford in Europe in the down-turn of the 60s, when refurbishing expenses after 3-4 years were enormous and people did not want to buy outdated cars, finally being sold with an even larger discount. Bear in mind this crisis is not an ordinary recession but a depression and it could take many years before some new-fangled normality will occur. Nobody knows how long the process of sanitizing will take but it is realistic to count with an extended period of time, probably 10 years or longer before this depression will be over. In the event Governments continue wasting taxpayers’ money by spending on stimulation packages and bailouts it could be a much longer period of time! Look at Japan. Liquidating this stock now by selling the cars off against any price against cash is the last good option left, because it might be getting worse later. In Germany the auto industry is supported by the Government where for each new car sold a one off premium of €3.500 is offered to the purchaser, once his old car is scrapped. No storage expense and people are kept more or less on the move. Being wise, by taking advantage of this opportunity in being first before the herd starts to do the same is my suggestion. In the end the whole stock has got to be eliminated, better to cash in now and meanwhile saving on avoidable expenses in the process.
On the whole all of the over-production potential have to be reduced for at least 30% to come in balance with the diminished demand. The economy has been expanding for the last 60 years, largely by increasing consumer spending and debt. Now, neither consumer spending nor debt is increasing. In the last six-month consumers suddenly reversed their free-spending ways. Borrowers and lenders have repented too. But if this economy no longer grows by increasing consumption and debt, how does it grow at all? The thinking still is that consumption will grow from recent levels off again, but that is impossible and should be understood by everybody involved. The necessary reduction is better implemented sooner than later. Once people do accept this principle, job losers will understand that for example OPEL as independent manufacturer doesn’t have a chance to survive and any money spent on it for sure is wasted, and deteriorating a bad situation even more.
Take an example from China. After Chinese New-Year in last February thousands of factories closed because their export to the West went sour and so went belly up as consequence. Twenty million workers became jobless. Instead of full-scale protests the majority stayed or went home in the rural area and started to plough the land instead in earning some money to stay alive. It isn’t unrealistic to scope with job losses of over tens of millions in the industrial West.
It is of paramount importance for all of us to realize that markets have entered into a period of vigorous price rediscovery to find the new equilibrium between demand and supply. This process can take some years, before a turnaround point will be reached, however this course will be best served without intervention from Governmental stimulus packages for the industry.
More to follow…stay tuned.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
Most RecentMost Recommended Comments (18)
at 12:29 on March 9th, 2009
As an observer view the crisis this way: The world economy is in a period of negative growth. Even better: It's in a period of positive collapse! Writing history explaining why the Great Depression was so great, after all. Seeing what's positive about this depression, that is clearing away a generation's worth of liars, mistakes, mis-allocations of resources and mislaid confidence.
at 15:47 on March 3rd, 2009
Thanks for this follow-up piece.
I am in two minds whether to save teh car industry or not - the amount of jobs that would be lost would be staggering and I'm not sure the economy could handle it or ever be able to bounce back.
On the other hand, why should we bailout any industry that didn't have good business practices in the first place? Won't the same thing happen again?
at 16:32 on March 3rd, 2009
Let not save the Auto industry and convert those factories to build solar panels and wind mills instead. Saves the jobs and make cheep renewable energy for all house hold and businesses.
at 19:07 on March 3rd, 2009
Good point, Paschen. When one of the car factories in Britain was threatened with closure in the 70s, the workrs got together with the local university and brain stormed other useful products they could and, I believe, started out on that road. One of the dimlemmas of capitalism is that it produces a lot of useless stuff in preference to really useful thibngs that may not offer so much in profits. But we do need those factories if everyone in the world is to be fed.
at 01:05 on March 4th, 2009
Hello folks I'm really pleased with your comments and the discussion about this topic. It is awful to lose yr job, but as Darwin already had discovered is the 'survival of the fittest', and now we will witness this again very lively every day to come in the foreseeable future. As stated in my first publication: This recession end in depression: Innovation is the best way out. This new environment will prickle peoples' minds to come up with clever innovative ideas and applications to be put in practice. I love it that people shall become motivated to open-up alternative ways of earning a decent income. We'll go back to the performance society of the 50s and 60s. I hope we all together will create a more livable society where satisfaction through achievement will be awarded. In my next issue I'll deal with that, analyzing and explaining the Micro Economy. Cheers for now, but continue this discussion please.
at 21:31 on March 4th, 2009
There needs to be a law that bans unemployment, that also bans a recession, and bans a depression. Unemployment Insurance should be used to create new jobs....not a handout in the form of a welfare check. No one should be left unemployed...and there should be a law that prohibits a recession and the decline of the Stock Market. It has to do with trading and making the Law state all companies that make profits must put their money into companies that are seeing growth and creating jobs. They can not hoard money in special funds, but must make money always available in the economy. All people doing this....makes the psychology appear that we can not hang on to money, but must use it so we are not breaking the law. Big Corporations will no longer be able to sit on money reserves....they have to put it into the economy. If they do not they are fined, and taken off the Stock Market listing and unable to trade again until they pay their fine and distribute their profits into trade on the Stock Market. This law would assure no more resessions, and no falling or failing stock market. The people who make profits must reinvest, and of course people who lose stock value because people are not investing in their company have the right to make their stock prices lower, so people will buy them..affording them a profit to invest as well. No company will ever gain a monopoly, because they are forbidden to hang on to their money... They must use it, or lose it..
We need a law like this in the USA... This will prevent the problems of unemployment... Unemployment will also be against the law, which means companies need to do things to help the employee become employed again.... CEO pay will be based upon full employment opportunities, not cutting employment to make their profit margins appear higher.
How can we do this?
Rev. Jermano
at 01:32 on March 5th, 2009
With interest read your proposal. Unfortunately that is not going to work, because not only of the difficulty of implementation, but what you suggest is Communism. As we know that doesn't work either. I have a better suggestion that I will present in my next issue part 3.
What has to be done is creating an environment where people become self employed through their own initiatives, motivation and to degree of performance are awarded. So we have to return to a performance society, where hard and clever work are honored in relation to performance achieved. The other day I was watching a reportage from Russia about abandoned cities, because their local economy where mono cyclistic. People where dependent on just one employer, mostly a large steel factory, that was closed. All the houses and buildings stayed empty, the city was eradicated from the geographical map. The Russian way to solve crisis. People had to move to another place.
at 04:45 on March 5th, 2009
Obviously my idea is not a communistic plan....because I said nothing about collective ownership. People who have nothing materialistic do have a right to have employment. In the Capitalist system they who do have the ownership can shut-down because they do not make enough profit...but they have enough money to maintain themselves.....but they don't care about the worker who worked for them. You mean to tell me Markets like this seizure? They like the fall of the Stock Market? They like being unemployed, with the banks never giving out any money? You think self employment is going to work when we live in both a capitalists and socialist market place?
Really you suggest we work for ourselves in the sense that we only maintain...without profitability so we can't own a house instead of renting one.
It is quite apparant here in China PIM......There are over a billion people here with everyone you can say is self employed in the State. There are so many little shops and stores that sell the same stuff, and basically at the same price....is pathetic... Everyone is in on the game....but .no one can earn enough...The only thing that happens is people get discouraged and close the shop so someone else can setup their own forth coming failure....A complete waste of time. I have seen shops open and change hands at least 3 times in less than 4 months.
If we had laws that were designed to make employment and laws that worked to prevent recessions....as management controls production to meet the real consumption...you claim is communism? If everyone agreed on it, and voted it into law....I do not think it is communism. I suppose everyone owning a home is communism too right?
The aspect of over saturated markets is who's fault? Capitalists? I think so; because the greed prompted them to over produce. And the products they make no one can afford? I suspect PIM you are still trying to recover from your mistakes with your job (This is my personal experience as a junior executive at Ford in Europe in the down-turn of the 60s, when refurbishing expenses after 3-4 years were enormous and people did not want to buy outdated cars, finally being sold with an even larger discount. Bear in mind this crisis is not an etc) for having mismanaged per your quote.... and the same repeats itself in today markets as well.... Thereby forcing people out of their jobs.... And who never gets anything are the people who can't afford the education, can't afford to buy the products that were so overly massed produced that it put the product makers out of business....and still the poor people can't use the product....is a terrible crime.....
If there is a production saturation problem then they need to recycle reuse right? Come to terms with the times of the day...come to terms with the environment... Maybe the truth is things are so good right now....that nobody needs a job. We certainly have been giving the environment the screw job...and so when we give something back by slowing the production lines....it is a recession.....instead of an environmental upgrade? I just think we can have jobs that promote the environment and make the market place work for people. What the bank won't give me 1 million to make my own electric car factory, but will give me 1 million to grow a hardwood forest somewhere? Seems odd......the bank wants security.....but it doesn't know what security is anymore.....because they claim everything has no value outside their assets of control.
Whatever you may label it I think it is a good idea....At least my idea lets the market work...instead of the bailouts that are going on around the world...to prop up failed industries that did not have the courage to make positive change for workers....while not being so greedy at the Top. They are wrong.......not me.
Rev. Jermano
at 02:58 on March 6th, 2009
Hi djermano. Thanks for yr comment. First I have to put right a few misinterpretations. I came at Ford Europe after the fact of storage had happened and was in charge to clean out the mess of previous made, as later turned out, incorrect decisions. That’s why I warned not to make this same mistake again.
About Communism: I see now that I have been incomplete with my remark. I intended to say it looks like, making the distinction better. Sorry for that.
Organizing a market by law, if I understood correctly (?), is impossible. Capitalism is based on initiatives, entrepreneurs who are willing to take a risk with their own money. In general out of ambition and not with the prime intention to make a large quantity of money. In the end they have to be rewarded otherwise this process stops. The success one entrepreneur is an example for others. Being an entrepreneur is not for everyone. You need the right kind of blood and some adapted entrepreneurial cleverness. If others fail they were not cut out of the right entrepreneurial wood. As being an entrepreneur myself you have weighed each risk at the time and to learn from the made mistakes and that is not everybody is able to do.
When entrepreneurs fail they have made the wrong business plan or decisions. Most workers are better off as employee. For entrepreneurs it is rewarding to employ people and have them motivated in doing things they never thought they could do. At least that’s my experience. If laws governs this process it will not work, because it kills the initiative and thus motivation. Kind regards PIM.
at 18:29 on March 6th, 2009
I disagree....the law would enhance creativity and allow more success to be be born in the market place....
Rev.
at 04:56 on March 7th, 2009
That's a good thing we disagree, however my sympathy for you remains the same.
Have a nice day. Pim
at 16:13 on March 7th, 2009
Does it not seem odd that the old ways of doing things don't work, and when something new is suggested....people kick it in the dirt? Funny......who needs sympathy? When we need bread. !
Rev. Jermano
at 01:30 on March 8th, 2009
In general the industrial structure is very conservative and not open for innovation, (see the example of GM in trouble now because of that). That hopefully will change as a result of the crisis. At least that is my opinion. Further we'll go back to the old management phylosophie of compensations to performance merits. Reverend djermano please try to be more positive, I understand you deal more with the poor and that has my sympathy or if you prefer admiration. People have to understand that the social welfare party has come to an end and only their own initiative, creativity, performance and achievement will bring the needed bread!
at 01:51 on March 8th, 2009
Seems to me you are the people who created this crisis...and are the big shots who say one thing one day and eat your own words the next.... You go on saying we need entrepreneurs, and then in your next breath you are claiming you will maintain your conservative structure which leaves no room for innovation!
You said: "In general the industrial structure is very conservative and not open for innovation."
And really that is the double speak philosophy you people live by.....lie in one hand and shit in the other and see which one fills up first.
I am as optimistic as the next guy....but when I see people lying through their teeth, and saying just about anything that meets the occasion...as most politicans do.......leaves one to wonder just what the hell are they talking about?
Essentially you don't support entrepreneurism...but advocate indoctrination to a system that keeps the Rich guys rich and the Poor guys poor....There is no compensation for performance.....because the rich live by their fork tongues and how well they can aim their guns of persuasion at a person who has another idea.
The poor do more work than you can shake a stick at.....and you have that wrong...the capitalists system has come to an end.....and it will be humbling to see the Rich people actually do some work for once in their life.
God Bless,
Rev. Jermano
at 02:02 on March 8th, 2009
If you start to tell me that I'm a lier, we better stop this conversation. Apparently you are an expert in misinterpreting my words. w.k.r. Pim
God Bless
at 02:45 on March 8th, 2009
No expert....just a great observer. And why stop the conversation? Are you afraid to explain...why you say one thing and say it another way? Is that a lie, or just the way things are at the moment? You know I am aware that Politicians are liars, I am sure you will confirm that....and because the people are stuck in their lie....sometimes the words that come out of peoples mouths reflect the history..
Rev.
at 04:43 on March 10th, 2009
Ha !!! PIM I like your last comment. I always realize that no matter what happens there is always a positive side to things....We just need to find it.
Rev. Jermano
at 04:52 on March 10th, 2009
Keep smiling and walk the Sunny Side of the Street (one of my favourites!)