Splainashun of America's mighty manufacturing enterprises debt woes. They cannot sell cars to peeple except at 0 interest rate, but they must pay more than that.. there has to be a crunch. What is at the root of all this, is peeple cannot afford a North American lifestyle who live here. A simple solushun fer this, is to replace them with peeple who kan!
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This is a kwote. I kant rite this gud. I kan't even think this gud. This guy, John Lee is rite awn. But I think he meant Bernanke, not Greenspan below. Slite diskombobbl here since this was written oct 10 2008.
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An explanation on how GM / GE ends up with so much debt and so little cash is in order.
GM's labor and parts are to be paid in cash. When someone buys a car on credit or leases a car from GM, the sale price of the car is booked as revenue; "financing receivables" is bumped up by the same amount. However GM receives no cash upfront to cover the cost of production; it takes 36 to 60 months of collection to fully convert inancing receivables to cash. Over time, GM borrowed more and more cash to sustain operation, while maintaining sales (earnings) by getting rid of inventory by any means, and subsequently is now stuck with those giant "financing receivables" (last counted at over $200 billion) which it hopes to collect. GM's $3-billion-a-year earning barely makes up 1% of its total debt outstanding. For every 1% increase in interest rate, GE / GM somehow need to make extra $3 billion+ per year just to cover interest payments. Despite its positive earnings, GM has not been able to generate positive cashflows.
GM makes $1 billion from selling cars, $1 billion from auto financing, and $1 billion from mortgage financing. In reality GM is a loaning institution with big labor and plants overhanging. The same for GE, which derives some 50% earnings from financial services and over 75% of its $800 billion "assets" belong to the financial services arm.
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Note from ed: GM WON'T be makin no extree 3 billion/year iffen interest rates goes up 1%. (thay will go up - nevair feer) Unless the US gov't takes them over, which mite happen as they need them to build tanks or sumpin'. They will lose more money but we will pay for it. By the time the interest rate is 15% (2010) we will be paying $45 billion a year for GM's losses, so Uncal Sam cain git Bradley tanks. By that time too, some Airab villager will have invented a home maid pea shooter that goes rite thru one of them metal monsters.
Sad balance sheet ensues.. GE, which Warin Bufit vested in, looks like it is 10% lite bulbs, and 90% lones. Grate, iffen use makes any monee on dem lones. Thissen mite be part uv dah problem.
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ge.com
When interest rates rise, not only would the liabilities go up due to higher interest payments, the revenue will go down since their financing business is highly dependent on benign interest rates.
Fannie Mae - America's engine for growth
Now, let's look at America's largest debt issuer (besides the US government) - Fannie Mae. Fannie has at last count, a mortgage portfolio of over $900 billion, against which it issued $1.3 trillion worth of notes (called mortgage backed securities, or MBS). Fannie has little over $40 billion in cash. $40 billion cash for $1.3 trillion liabilities, talk about leverage. I suppose, the entire financial system is treading on thin waters, and you see why Greenspan is ever so careful in raising rates, ready to pull the brakes at the first sign of distress, and distress is mounting. A 5% increase in long term interest rates will mean the end of GM and GE, which in themselves are not a big issue - the banks that issued the loans will be in trouble as the their assets will be halved when marked to value. The existing MBS will be sold at as little as 50% of face value, so would over $8 trillion of US treasury notes. With over 40% of US treasuries notes and hundreds of $billions of MBS in foreigners hands, there will be a mass liquidation of US treasury/MBS and US dollar. Now you see why debt liquidation will be bad news for the dollar and (consequently) good news for inflation. A bit of history, Volcker in 1980 forced short rates to exceed long rates to cool the economy, which meant the 4,000 savings and loans (thrifts) then were no longer able to borrow short to lend long. This forced the closure of 962 of those 4,000 thrifts in 3 years in early 80's. If today's financial system couldn't even withstand a small LTCM hiccup which required federal bail out, imagine if 1/4 of US regional lenders close doors in today's economy (more history in the next section).
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