Moon of Alabama Brecht quote
March 22, 2005

General Motors Junk

As you may have heard, GM shocked the markets last week with its very weak earnings, and its shares dropped almost 12% in one day. What happened on the bond market was actually more interesting, and also more symptomatic of the current state of the world economy in general and the US economy in particular.

Today comes the news that GE Capital pulls $2bn GM credit facility (FT, 22 March). The short version: the smarter rats are leaving the sinking ship.

Below, some thoughts on:

  • the amazing power of rating agencies and how they misuse it
  • too much money in the markets and the "flight to garbage"
  • the backlash

Massive problems for the ungainly giants (FT, 22 March)
(btw this article is a very interesting take on "big business is beautiful" which I recommend)
Fortune favours the large, and consolidation among leading companies is inevitable. There is no more firmly held belief in popular thinking about business. In banking and pharmaceuticals, in oil and insurance broking, in the motor industry and telephony, the future is said to lie with a small number of large global players. Chief executives across industry have followed the maxim of Jack Welch, the former General Electric boss, that unless you are number one or two in your industry, you are dead.

There used to be a phrase for it - the aspiration "to be the General Motors of this industry". Not any more. Last week, GM forecast another set of disappointing results: the latest in a 30-year history of disappointing results. The ratings agencies threaten to call its securities junk.

You have probably heard more about the drop in share prices than about that last item. For market commentators, the big news is that they are actually talking about downgrading GM. Standard & Poor's, the biggest rating agency, put GM on "negative watch", which means that they expect their next rating evaluation to go down, in that case from the lowest rung of "investment grade" to the highest of the "speculative" (or "junk") ratings. Such a rating has been seen as long overdue by many commentators (see box below), but resisted by GM (as it would increase its cost of funding) and by the market more generally (having the biggest debtor of the market downgraded would trigger massive reallocation of portfolios, with many unpredictable consequences, as many portfolio managers are not allowed, either by federal regulations, or by their own internal rules, to hold "speculative" rated paper). Markets are finally coming to terms with reality. GM's debts are increasingly unsustainable.

An inch from junk (FT, 18 March)
General Motors is teetering on the brink of a downgrade to junk bond status. This week's profits warning could push it over the edge. GM could survive a ratings downgrade. But the loss of investment grade status could force it to change the way it organises and funds its business. The impact is unlikely to be confined to GM itself. If the company is downgraded, the shock waves could rock the entire corporate bond market. GM has $300bn (£156bn) debt, of which only one-third is secured asset-backed debt. The jury is still out on whether the corporate bond market can smoothly swallow an issuer of this size.

Rating agencies have an amazing power because so many fund managers rely (blindly sometimes, it would appear) on these ratings for their investment decisions, although such ratings are made by private entities, paid by the issuers of the debt, and are not regulated in any way. This creates herd-like movements on markets, it generates unhealthy conflicts of interest (a rating downgrade is always bad news for a borrower, as it increases the interest rate applicable to its debt, and yet the borrower is the client of the rating agency, not the fund managers). When the rating has a macro-economic effect because it applies to hundreds of billions of dollars (which happens for a few countries and a smaller number of corporate borrowers), the management of such issues becomes, quite frankly, tricky, as it can be argued that these ratings influence economic policy and thus become heavily politicised.

This has happened in a context where interest rates have been very low for a long time, with the world awash in liquidity (and investors desperate to find good returns - thus investing in increasingly risky paper), but the trend is now towards a tightening of such interest rates, with the Fed widely expected to increase its rates by another 0.25% this afternoon, and there is a growing risk that the riskiest investments / the weakest borrowers are going to suffer and possibly bring their creditors with them. High tides lift all boats; we are now in the phase when the sea is going out and we will see who is really in good financial shape as oppsoed to being propped up by cheap money.

GM, oil and the turn of the monetary tide (John Plender, FT 21 March)
The combination of rising US government bond yields, a strong oil price and the threat that credit rating agencies would downgrade General Motors to junk bond status prompted a sudden loss of risk appetite. Or, in the inelegant phrase occasionally favoured by this column, the flight to garbage went into reverse. Emerging markets, with the exception of those in Asia, took the brunt of an otherwise indiscriminate selling wave. Is this the turning point in a credit cycle marked by a manic hunt for yield?

I believe that there may well be a turning point this year and it could be traumatic. But I am not yet convinced that this is it. Monetary conditions in the US, even after the Federal Reserve's interest rate increases since last June, are loose despite the policy of "measured" tightening. A world glutted with excess savings is still awash with liquidity. While the rise in US Treasury yields has done its bit to tighten financial conditions, the bond market has not yet exercised its right to be seriously unmeasured. That suggests that, while carry traders who borrow at low rates to invest in higher yielding assets will have a less comfortable life and riskier assets may be more prone to sporadic panicky evacuations, this may not be enough to spring a systemic shock.

Could General Motors change this plot line? Since I castigated the credit rating agencies last year for failing to downgrade GM's debt to junk, they have woken up. GM paper will soon be downgraded. Such a huge addition to the junk market will cause ructions, with many smaller borrowers being crowded out. Yet the move has been so well-signalled that many market participants will surely have hedged against that eventuality. What could turn this into a trauma would be if it coincided with other shocks such as volatile behaviour by the currency or bond markets. That would encourage over-borrowed traders to engage in the time-honoured dash for the same side of the boat.

Even without a systemic shock, the turning of the credit tide will leave many participants exposed, among them some banks that made pricey acquisitions or heavy investments in branches when interest rates were at historic lows. Nor should we forget that the hefty proprietary trading profit revealed by the big US investment banks last week are largely the product of a freakish cycle in which US monetary policy has granted an astonishingly generous gift to all in the financial community. The laws of financial gravity will not be suspended indefinitely.

The real problem of GM is that it is not making money from selling cars. It has essentially become a huge consumer-credit company / pension fund with an attached manufacturing operation: it makes all of its money from lending money to consumers buying their cars, and it has, in parallel, massive pension liabilities (it has 2.5 pensioners per worker currently, and that ratio is set to worsen yet). In all logic, its management is more focused on financial issues than on manufacturing, and this shows, in terms of market share, profitability and other similar industrial criteria.

(Go read this fascinating account comparing GM to Harley-Davidson, whose market value has just overtaken that of GM, and who has been more successful in regenrating its manufacturing business by focusing on its brand: GM faces life in the slow lane as Harley roars past (FT, 21 March))

In any case, as the initial GE story shows, and as this additional story (Investors bet on GM downgrade chances (FT, 22 March)) shows, the market is beginning to price the GM risk as pretty close to "junk" already, thus underlining both the weakness of the company and increasing wariness of the rating system in current conditions.

There is so much money flying around that the macro-economic effects of changing investment patterns will be both massive and unpredictable, with likely episodes of strong volatility. The smarter investors see the dangers ahead, but worry that their movements (when they are significant players) will trigger the crisis they are trying to avoid. The fact that everybody focuses on the financial side of business means that less attention is given to the underlying manufacturing or service part of the company which makes the crisis in such activities get steadily worse, and weakens the base on which the financial games are played (I am not criticising these games per se, they do bring value, as I am paid to know... but it is a question of balance, as in everything). Equilibrium becomes increasingly hard to maintain, until....

There are so many warning signs:

  • currency movements
  • tensions on the oil market
  • all the risks associated with increasing interest rates
  • the US-China trade unbalance, and all risks of trade wars

All are linked to cheap money and reckless federal spending, feeding a consumer boom based on virtual real estate and other financial asset price increases, hoovering in imports from all of Asia, paid in federal IOUs, fuelling the growth boom of China and others which in turn creates all the current tensions on the commodity markets.

It is all unsustainable, and GM is only the biggest and weakest collateral damage, but it is a sign of things to come.

Posted by Jérôme à Paris on March 22, 2005 at 14:21 UTC | Permalink

Comments

Thanks for picking this up Jérôme (thought about it too but couldn´t write).

As Roach said on Friday this GM desaster may well be the tipping point for the markets.

Next to be being a dubious bank with an attached car repair, GM is also a big underfinanced pension fund and the US second biggest health care financer.

When GM breaks (and it will) the costs will be socialized like always and the tax payers will have to blead again

Posted by: b | Mar 22 2005 14:43 utc | 1

Having owned nothing but Honda motorcycles, I find this sweet:

As a result both companies came close to bankruptcy - Harley in 1985, GM in 1992. In the aftermath of their financial crises, both adopted Japanese lean manufacturing techniques, particularly kaizen, or continuous improvement.


"Rice burners" rule.

Posted by: beq | Mar 22 2005 14:58 utc | 2

good one Jérôme

Posted by: slothrop | Mar 22 2005 16:10 utc | 3

Normally, GM stocks equalled to junk means the whol company is toast and will go down soon. Then, the whole rating system is indeed quite dubious to me. It'll be interesting to see if there's any meddlng from Bushco (on behalf of campaign donors) to change it, which would just ruin the credibility of the whole system.

"The smarter investors see the dangers ahead, but worry that their movements (when they are significant players) will trigger the crisis they are trying to avoid"
Read China

Trade wars? Well, apparently the US admin is stupid enough to want to go after Airbus right now. This may be a bad idea for the US; US has a trade deficit with China that is far bigger than with EU so they're not the biggest threat, and forcing EU to raise tariffs on US goods in retaliation would be silly since EU growth is weak thanks to anemic domstic consumption - making US imported goods more expensive would just make EU goods a little bit more appealing to EU customers (and Chinese goods far more appealing).
Though I may be completely off base in this analysis.

Posted by: Clueless Joe | Mar 22 2005 16:28 utc | 4

Jérôme and others, what do you think about this FT article. Why would Germany, France and the UK also rate bad with the Standard&Poor. I can understand the the problem with the US, the deficit and all, however, I thought that the budget of the other countries were more balanced. Or am I missing something?

US, Germany, France, UK face junk debt status

By the way, interesting post on GM!

Posted by: Fran | Mar 22 2005 16:31 utc | 5

Thanks, Jerome. I wondered when you would weigh in on this story since reading Roach's article on Friday (linked by b). This may or may not be a tipping point, but it is certainly a benchmark historians will note. "What's good for GM is good for the country" they used to say. Hope this is still true.

Posted by: lonesomeG | Mar 22 2005 16:45 utc | 6

Akio Morita, the founder of Sony, once described the difference between Japanese and American companies saying that "they have economists, we have engineers". If you abstract all those layers of financial & managerial issues, you come down to what really matters: is your product desirable? If not, all the rest is irrelevant because you're doomed anyway.

It seems to me a general problem faced by American manufacture is that, with the exception of high-tech gadgetry, most of what it makes today is viewed elsewhere as expensive, flashy and inefficient. In the automobile sector that's particularly evident. American cars - which were for many years everybody's consumer dream - have become technologically outdated, fuel-thirsty beasts. The worst sin of all, however, is that they are invariably ugly (Brazilians call them "batmobiles"). Apparently the taste of the American public has so distanced itself from the rest of the world that it's no longer feasible to make a product which will please both markets.

Harley-Davidson solved their problem not by improving their bikes or streamlining their baroque design, but by creating (with a good help from the movies) a mythology around them. Ultimately, a Harley it's an outdated & overpriced status simbol. This, however, is a tough trick to pull, notwithstanding the attemps by Chrysler & others to overhaul their old dream machines.

The question I'd like to pose to my fellows here is, given no cash restriction to buy a new car - any kind you choose, a luxury car, a sports car, a second car for your family - would you buy American? The answer probably tells us more about the fate of GM than its current financial hardships.

Posted by: pedro | Mar 22 2005 17:22 utc | 7

excess production capacity, overaccumulation solved by the usual assymetric exploitation of resources and labor by the global capitalist class. So many reasons for the war(s) can be explained by the logics of capital accumulation.

Posted by: slothrop | Mar 22 2005 17:26 utc | 8

pedro

would you buy American?

what does "american" mean--even Harley's commodities are an aggregation of "foreign" labor and resources.

Posted by: slothrop | Mar 22 2005 17:29 utc | 9

@pedro I wouldn't buy any car. if I had no cash restrictions, I'd buy land...

but I see your point. American cars, like American movies and American culture, are suffering from the steroidal Rambo-cult timewarp the US is living in ... a kind of suspended moment of (closeted) size-queen fantasy, a homoerotic dream of giant muscles, giant dicks, giant weapons, giant McMansions, giant Happy Meals, giant CEO salaries, giant imperialistic floor shows, and all the rest -- some kind of compensatory fantasy for a lot of ageing rich guys struggling with male menopause? -- and it's all butt-ugly and crude and sordid as hell, and every artifact of the culture reflects the Zeitgeist. they oughta call them dickmobiles -- as in Cheney, or just on general principles. or "tonker trucks." sheesh.

there's nothing much scarier than a very heavily armed adolescent boy with an intense fantasy life and no experience of the real world.

Posted by: DeAnander | Mar 22 2005 17:35 utc | 10

@slothrop I have just been handed a really good book this weekend -- Kofsky, Harry S. Truman and the War Scare of 1948, St Martin's Press. I am only a short way into it (first read the Appendices and then started properly at the beginning). It was written in the early 90's, but its relevance to the Bush regime starting 2000 is blazingly obvious.

He tells the story of the US aircraft industry, left to twist slowly in the harsh winds of the free market after the war, and how its owner/manager class managed (through the usual revolving doors and old-school-chum connections) to convince influential persons in government and military that it "needed saving" -- at the taxpayer's expense. Kofsky makes a very cogent case that the war scare of '48 was intimately related to the "need" to stimulate aircraft purchases and rescue the industry which was, at the time, on the verge of collapse. Kofsky is a sprightly writer and it's (so far) a good read. If I can get the time to do the typing, I'll transcribe his Appendix on conspiracy theories and post a URL to it -- excellent stuff.

Posted by: DeAnander | Mar 22 2005 17:46 utc | 11

DeA - no scanner around?

Fran - I have seen the article (it was on the front page of the FT yesterday), it made me laugh. I was planning to use it as an exhibit on the "anglo-saxon" bias against continental Europe, or maybe to write about the follies of the rating agencies (I used the GM stuff instead), but I came up instead with two questions:

- why no mention of Japan? Because, using their logic, it would already have been downgraded significantly, which is something they have not dared do;

- who would have a AAA rating when the US government is rated as "junk" in 2030? (i.e. who has a better capacity to generate dollars than the entity that prints them, literally and figuratively?)

It(s just horseshit, or a propaganda coup, but I have not really identified whom it benefits. (the asset management industry who would supposedly make a better job at manageing pension liabilities???)

Posted by: Jérôme | Mar 22 2005 18:47 utc | 12

DeA - no scanner around?

Fran - I have seen the article (it was on the front page of the FT yesterday), it made me laugh. I was planning to use it as an exhibit on the "anglo-saxon" bias against continental Europe, or maybe to write about the follies of the rating agencies (I used the GM stuff instead), but I came up instead with two questions:

- why no mention of Japan? Because, using their logic, it would already have been downgraded significantly, which is something they have not dared do;

- who would have a AAA rating when the US government is rated as "junk" in 2030? (i.e. who has a better capacity to generate dollars than the entity that prints them, literally and figuratively?)

It(s just horseshit, or a propaganda coup, but I have not really identified whom it benefits. (the asset management industry who would supposedly make a better job at manageing pension liabilities???)

Posted by: Jérôme | Mar 22 2005 18:49 utc | 13

Slothrop, I mean "American" as it would be perceived by a buyer who is making a car choice and is unaware of the underlying interconnectios you mention. Basically, it's brand & design (based on the somewhat strained assumption that there is an identifiable American school of car design). Of course it's not that simple - for instance, I believe GM owns Opel, which definitely wouldn't pass as American in this test.

Anyway, what I was trying to point at is that, for reasons that have nothing to do with politics, there seems to be a growing disconnection between American consumer goods manufacturers and the choices of the buying public outside the US. This is particularly visible in a developing country like Brazil, where some 20 years ago owning American-made stuff was the utmost in status among the rich but now is considered bad taste. As DeAnander puts it, perhaps ugliness is impregnating the objects. This loss of ellegance and efficiency becomes painfully clear, for instance, when you compare a 1968 Mustang to its 2005 equivalent.

Are American consumer goods losing ground internationally? I have no idea, but I would suspect so. Specifically in the vehicle market, SUV's seem to be the only sector where US manufacturers still have the upper hand. Having acknowledged that, it's also where GM appears to be placing most of its bets.

Posted by: pedro | Mar 22 2005 18:59 utc | 14

My brother used to always buy American because he could fit his hands inside the engine to do repairs. But after years of scorning them, he buys Japanese now because it costs less in both irritation and dollars to maintain. Even the committed switch when the evidence costs directly.

Honda is one of the only makers that will not sell to rental fleets, which means that even in years when Ford's lead car has outsold the Accord, it was the Accord that U.S. consumers tended to choose over all other automobiles. And if you're paying attention, Honda is the most American car in existence. Honda R&D uses its R&D expertise to make as many parts as possible in this country. Want to support your local industry in the U.S.? Buy Honda.

Posted by: citizen | Mar 22 2005 19:15 utc | 15

Thanks Jérôme!You confirmed my impression.

Posted by: Fran | Mar 22 2005 19:45 utc | 16

So the Fed raised the rates by a quarter percentage point agin today. This was expected. But all the day up to the decision the stock market was in positive territory and bonds where up (rate expection expressed in bond values were down) and the Dollar did fall again. I didn´t understand these movements but maybe some folks thought the Fed will care about GM´s problems.

Now the Fed says they will raise and raise further because there might, just might be some inflation luring.

Idiots are in the marketes and within the Feb. The Producer Price Index (PPI) did rise 0.4% last month (That's a fat 4.8% inflation per year - how big is the wage rise?). Some people said don´t worry. The "core rate" did only rise 0.1%. The core rate of course is without "volatile" food and energy costs. All right we do not need food and energy do we? These dumb things always move volatile. (Unfortunatly mostly to the upper side.)

Now after the Fed decision the stock markets are down, the bond market is down and the Dollar is up (because of the positive rate difference to other markets and some misinterpreted comments from China. Don´t hold your breath - this will change again in some weeks.)

GM's refinancing costs will rise. Their debt will be downgraded to junk. General Electric (another financial accident waiting to happen) did say it will cut a finance line for of 2 billion from GM today. They backtracked this afternoon and emphazised "not today". The cut will occure on June 30 anyhow. GM still has enough cash and unless they are made to correct their books to reflect the correct pension and medical care obligations they may even survive without chapter 11 for another few month. But don´t hold your breath.

What today has shown again is that the market actors are totally unaware of reality. This smells like spring 2000.

I´ll update my shorts now.

Posted by: b | Mar 22 2005 21:01 utc | 17

Call me a chicken, bwaaaaak-bwaaak-bwaak, but I sold almost every mutual fund and bond and stock I had about 6 months ago, except for a paltry sum left in a very diversified 403 account (hedging my bets). I don't know anything technical about investing but felt my hard-earned retirement fund was safer in a savings account than being gambled on the tottering US exchanges. Even the savings account will be worthless if the US dollar really-truly tanks before I can touch the money, but at least I won't lose it by trying to outguess the insiders on Wall Street. Maybe this is a stupid thing to do -- ostrich-like retreat from risk -- but what can I say, I'm financially risk-averse.

Jerome and B, and some of you other folks, are power-players compared to the financial ignorati like myself :-) Is there anything else you smart-money guys would advise the hapless amateur to do, in an attempt to reduce the extent of our personal risk at this scary juncture? With the new Dickensian bankruptcy laws looming over everyone who lives in Amurka, this is not a good time to lose one's life savings.

A while ago we talked briefly about comparing survival strategies for the next few tumultuous years. If anyone else is as worried as I am about being able to feed and house self in the ironically-named "golden years," I wouldn't mind comparing notes. Might be a good LS topic more than MoA material actually, being kinda personal and all...

Posted by: DeAnander | Mar 22 2005 21:34 utc | 18

It's always good to update one's shorts daily.

Posted by: biklett | Mar 22 2005 21:51 utc | 19

thank you biklett.

Posted by: citizen | Mar 22 2005 22:46 utc | 20

DeA,
I am no economist so I say gold if you want security. Mankind has had a longstanding affection for the stuff and I do not think it will change any time soon.

Posted by: A swedish kind of death | Mar 22 2005 23:08 utc | 21

DeAnander


If you can score some high quality smack and stash it, or even put aside a goodly quantity of prozac or something similar, you'll clean up when the great depression hits. People need dealers at a time like that and you'll be making a handsome return on your investment and performing a valuable social service into the bargain. Cyanide capsules are worth watching too and valium has always been a solid little performer. I wouldn't touch Ecstasy as the Rapture buffs think they have the market cornered insofar as that commodity goes. Another possibly lucrative outside bet is to invest in bottles of clean, pure water. A Remington 12 bore pump action shotgun and a plentiful supply of cartridges is also worth considering, just for those awkward moments when mobs of rampaging, starving looters in the final throes of radiation sickness stage a desperate assault on your neighborhood in search of clean water and drugs.

Posted by: Job's comforter | Mar 22 2005 23:18 utc | 22

@Job's-comforter [just wait until the new Faith-Based-PR agencies trademark the phrase to brand a new high-tech coverlet or eiderdown...] -- snark appreciated, but I'm fearing more Argentina, or US ca 1930... not quite so MadMaxian, meself. If we end up overrun by starving hordes of drug-crazed radiation victims, then tired old farts like me are more likely to end up on the lunch menu than successfully bartering our way to post-Apocalyptic prosperity with secret stashes of expensive white powders or pretty pastel pills. That's one reason why I really hope things don't come that far unglued... I don't have the skills or connections to thrive in a grassroots warlord economy.

Posted by: DeAnander | Mar 22 2005 23:30 utc | 23

@b - I´ll update my shorts now.

Even before GM, look for DAL to file ch11. 12-15-05 7.7% DAL bonds were trading 92's a month ago; closed 70.20 today.

Not that this will be a surprise to the mkt, but it's not the kind of thing that looks good into a DOW slide.

Posted by: mats | Mar 23 2005 0:49 utc | 24

b @4:01: thank you for the statement about how The Powers That Be always manipulate the inflation numbers by trying to exclude fuel and food ...those pesky "volatile" elements. Like normal people don't need them. That always irritates me in mainstream business reporting in the U.S.


DeA: wow, it worries me when I see you have gotten out of stocks....I alway view you as a sage observer, so now I'm really worried. I have the same basic dilemma as you, but no answers. Meanwhile my backyard is filling up with coffee cans...:)

Posted by: Maxcrat | Mar 23 2005 1:03 utc | 25

@maxcrat, I am a sage observer (if at all) of human folly, weather, tides, and the behaviour of bees... I even have something to say now and then about literature or film, and I can do basic math and visualise moderately complex data sets. I've read a little history.

But what I understand about finance and investment you could write on the head of a very small pin with a very large marking pen. As far as I can tell it comes down to placing bets on chaotic systems :-) just another Vegas casino.

So I would not use myself as any kind of market indicator! All I have ever managed to do financially is not lose my shirt and stay out of debt (except for the mortgage); apart from that I admit freely to being monetarily/financially stupid, in the same way that some people are tone-deaf. I Just Don't Get It -- it's all cowrie shells to me. Real value to me is stuff you can eat, wear, live in, or use to make stuff you can eat, wear, or live in. "Futures", "shorts", "leveraged buyouts" and all the rest are gibberish to me.

So don't take it as any kind of wisdom if I have put my pathetic nickel and dime collection into the piggy bank instead of the market! That is an ignorant peasant's response to uncertainties and flutters of panic in a banking/business system I no longer trust or kid myself that I understand. It is just one step away from "gold under the mattress," and I expect to be humorously rebuked by those fearless surfers of the financial waves, B and J.

Posted by: DeAnander | Mar 23 2005 1:41 utc | 26

Well, maybe so, DeA, but as one ignorant peasant to another....YIKES!

Posted by: Maxcrat | Mar 23 2005 1:59 utc | 27

Speaking of cyanide, I find it hard to believe that holding gold is even considered in polite company. The ecological destruction caused by gold mining and refining is beyond belief. The allure of gold should be put on the same shelf as belief in human sacrifice.

Posted by: biklett | Mar 23 2005 2:40 utc | 28

DeA, yes a discussion at LS would be good. In addition to being another financial know-nothing, I don't know about acquiring hard-core survival skills starting at 62. (I followed your links to peakoil.org and have been reading along with increasing dismay.) Maybe cyanide is the ticket in the worst-case scenario.

Posted by: liz | Mar 23 2005 3:01 utc | 29

I'd invest in slightly sloped terrain near the coastline & a few meters above sea level.

Posted by: pedro | Mar 23 2005 5:43 utc | 30

As I said I've been trough one financial catastrophe in Serbia that had it's peak in 1993 and I learned how to survive hard way...Me and my husband were not in to the black market business (it was reserved for Milosevic's people anyway) but luckily we had some other kind of small business where we were able to work for cash and we excepted DM only. Small business - small money but enough to survive.
At the time I started to read again all those old books of German authors explaining about great inflation in Europe in 1930-ies.Experiance we had was totally the same one. I wouldn't know where to start explaining it but I suggest everyone here read German authors ( or Americans for that matter) writhing about that specific time.
Bear in mind that people in Serbia didn't have any debts (individually) like mortgage or Visa or any loans (non existing at the time in Serbia). Actually everybody had certain amount of DM set aside for “rainy days”...or “black days” as we say…
At first we were able to have foreign currency accounts in our banks which we all had. It was possible to keep foreign money in the bank and if you wanted to take it out of your account the same day it was OK. Until one day when they said I need to wait for a week to get my hands on my money. It was indicative for me and I said to my father who was working as a clerk at the one bank that “They are going to take our money from us”. He said “No, they wouldn't dare". I took all my money out in a week and after few weeks my father said to me: "You were right, they are going to take our money”. Of course they did. At some point people who wanted their money were simply told that "there is no money left in the bank". That didn't make banks go to bankruptcy (or what ever was the word for it in their "communistic" language).
Later they "invented" pyramid banks to take from people what ever we hide "under the mattress".10% monthly interest in foreign currency that they gave people, was too tempting for almost anybody especially at the time when inflation had reevaluated people’s earnings to some 10 DM monthly. . Until one day “there was no money left” in these pyramid banks also. Those bandits even made people think that they are doing all this to help our brothers in Bosnia. They certainly helped THEIR MAFIA BROTHERS in Bosnia...
Urggghhhh...
In 1993 there was nothing left but black market and all kinds of (Milosevic's) dealers on it? Inflation run in hundred of thousands percent...Dinar (our currency) disappeared nowhere to be seen.
On January 24 1994 when I left Serbia "new Dinar" and new economic policy suddenly took place.
I wouldn’t know how to advice you.
For us it was stable DM that made us a little bit safer. I wouldn't know about gold. I remember my grandmother telling me how she had to give up on all her family silver and gold and valuables and give it for food in WWII...
I wouldn't despair too much. What ever is about to come will come anyway and I'll bloody do what ever I can think of as smart at that time…in the main time try to live decent life so you have something to remember, haha.

Posted by: vbo | Mar 23 2005 6:21 utc | 31

@biklett, thanks, you said it so I didn't have to...

Posted by: DeAnander | Mar 23 2005 7:01 utc | 32

DeAnander,

Stocks are for the big boys, as is most professional investing. Bit players are just as well to buy a CD at a bank.

If the US economy falls, the world goes with it. Everyone is invested in our deficit spending, which is why it will go on longer than seems possible. And the crash will be ugly. Europe's economy is weak, Japan is within a decade of stagnation. China feeds off of us.

Buy arable land for food production, remote and not overvalued. Hate to sound like an end-timer, but the whole system is rotting. Avoid debt. That's what I'm doing.

Posted by: jeff | Mar 23 2005 8:44 utc | 33

The ecological destruction caused by gold mining and refining is beyond belief.

Sorry, did not know that. You learn stuff here every day. Are the other high-priced metals and jewels as bad? Maybe DeA can keep buckets of rubys, would look nicer than gold anyway :)

Posted by: A swedish kind of death | Mar 23 2005 8:47 utc | 34

it is not just ugly cars -- but as someone pointed out american cars suck quality wise.
cars are no longer simple machines in which a guy in his backyard can change the oil on the weekend they are incredibly sophisticated machines.

toyota and honda have made their bet on hybrid vehicles - meanwhile the US bet of SUVs and Hummer seems to be the wrong bet

Posted by: smartone | Mar 23 2005 14:39 utc | 35

Dirty Gold

Posted by: biklett | Mar 23 2005 16:23 utc | 36

I always buy American cars and love them. My 99 Chevy Lumina is still running great with over 100,000 miles on it, and I haven't had to repair it much. My Ford Escape is also a great car-two years old and no repairs. The worst car I ever had was a Madza 626, may it rot in hell. Sometimes I get upset at my fellow lefties because they make alot of noise about helping the less fortunate, but can't be bothered to buy American products. Smacks of big time hypocrisy.

Posted by: la | Mar 23 2005 16:50 utc | 37

Sometimes I get upset at my fellow lefties because they make alot of noise about helping the less fortunate, but can't be bothered to buy American products.

Especially wrt cars, this comment makes no sense. afaik, no "american" car exists.

Posted by: slothrop | Mar 23 2005 16:58 utc | 38

slothrop,

Honda Civic
Honda Accord

Posted by: citizen | Mar 23 2005 20:45 utc | 39

citizen

just trying to remind myself the global interrelatiins needed to make cars. Reich's Work of Nations lays this out pretty well. the point is not so much domestic production relying all too often on tariffs, but the global organization of labor needed to confront capital.

Posted by: slothrop | Mar 23 2005 21:41 utc | 40

The Honda domestic production strategy is a product of past threats against Japanese hollowing out of the auto industry and also Honda's commitment to being viewed as a good citizen of its host country and host regions. It also duplicates the pattern of Toyoda City where almost every single supplier is in the same region as the factory.

Gee, where can we get a few more companies like that? Not from MBA programs. I have to laugh at the GM debacle. Years ago I looked at going to business school to get into manufacturing in the States and EU. Every person I spoke to said I would be a fool to go into manufacturing. "Everybody" was going into finance and consulting. The problem probably isn't the talents of people in manufacturing. It's that they're "nobody."

Posted by: citizen | Mar 23 2005 21:58 utc | 41

Good link. Thanks biklett.

Well then, if bullion is out of the question, maybe savings accounts in different countries and currencies? Spread the risks around a bit.

Posted by: A swedish kind of death | Mar 23 2005 22:14 utc | 42

The ratings agencies are peculiar, it's true. I think S&P will not rate any state-owned entity above B, no matter how well run. That seems an ideological trope to say the least.

As for gold being a safe bet, the Swiss central bank has just sold 1,300 tonnes of the stuff on account of not needing it for reserves purposes - proof that even banks are delinking from the idea of wealth being in anything solid these days. Virtual wealth (aka debt) is where it's at. God help us all.

Posted by: Ineluctable | Mar 24 2005 16:58 utc | 43

@Inelectable the Swiss central bank has just sold 1,300 tonnes of the stuff on account of not needing it for reserves purposes

hmmm - so who did buy 1,300 tonnes of Gold for what purpose?

China? Russia? Japan? For what purpose?

I am sure that 1,300 tonnes did NOT go to the industrial market.

Posted by: b | Mar 24 2005 18:17 utc | 44

@b - I'm afraid I don't know who bought it (I queried the figure because it seemed so huge - tonnes! - in a report I was working on recently, but had to make do w/ a general market analyst's confirmation that it was so, rather than the author/editor, who was away). And I'm not sure the Swiss are terribly forthcoming about such things in any case.

Apparently a lot of central banks, incl Bank of England, have been selling gold of late. I guess it's because they think they can make bigger $$$ playing the forex markets these days? I really don't know.

Posted by: Ineluctable | Mar 24 2005 19:28 utc | 45

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