The Living Dead

The GM saga reminds me of the American cult movie, the Return of the Living Dead. The 1985 comedy horror film has so far spawned four official sequels and several more unofficial ones.According to Bloomberg, 5pm New York time today (Friday) is the deadline for an “unspecified” percentage of GM bondholders to agree to agree to a revised deal, which offers them up to 25% of the car company once it emerges from the planned Chapter 11 restructuring. Previous offers to bond owners gained the acceptance of only 15% of these creditors, and it’s far from clear that this one will work either.

The Financial Times reports that the US government is committing US$30 billion in additional financing, on top of US$ 20 billion of loans that have already been given. Meanwhile, in Europe, there was night-long horse trading on Wednesday between representatives of the German finance ministry and government, Fiat’s boss, and a US Treasury delegate who was widely reported as “too junior”, over the fate of GM’s European operations. 50,000 European jobs are at risk.

Bloomberg adds that, “in the rosy scenario, the new [GM], armed with vehicles from GM’s Cadillac, Chevrolet, Buick and GMC divisions, plans to begin making money again within 60 to 90 days, while a bankruptcy court sells or liquidates unprofitable brands such as Saturn and Hummer.”

This sets the stage for the Living Dead sequels. Will it be Cadillac 2011, Opel 2012 or Buick 2013 that we get to bail out next? Or even Porsche 2010? After all, there are plenty of other car makers at risk. The fundamental problem of the car industry is overcapacity.  According to Darryl Siry, former head of marketing at electric vehicle maker Tesla, “car supply has exceeded true demand for many years. This shouldn’t happen in efficient markets but this imbalance was perpetuated by the availability of essentially free credit which allowed consumers to overbuy and overspend.”

And there we have it – a textbook illustration of the credit bubble’s inevitable fallout.  here really is no way out except to cut industry capacity dramatically and drastically, says Siry. Propping up inefficient producers, rather than letting them disappear, will simply weaken the remainder of the industry. Do we have politicians willing to confront this unpalatable reality?  No.  Are they willing to wreck their own government finances through bailouts, until the markets call a halt to that too? Apparently, yes.

To me that’s the real story behind what’s been going on in the government bond markets this last week or two. Investors are beginning to take real fright at the prospect of further deficit expansion, and the shifting of yet another major debt burden from the private sector to the state.

It feels as though there are still plenty more twists and turns to come in this unedifying saga. But the desperate attempts by governments to resuscitate failed companies resemble more and more an exercise of shifting chairs on the decks of the SS “Debt Titanic”.  And the whole debt structure may end up going down – private and public, combined.

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