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i thought it was worth revisiting a prescient column by bill gross, written 3 years ago, in may, '06.
http://www.pimco.com/LeftNav/Feature...O+May+2006.htm
a few highlights [emphasis added]:
"... General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. GM commands the headlines today, but as General Motors goes, so goes the nation. Following their progress over the next few months and years will be like getting a 2010 Wall Street Journal in June of 2006.... If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the uncompetitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. That is not to say that other automobile manufacturers or countries don’t share similar characteristics: they do – but GM and the U.S. are compared here because of their historical dominance and therefore the influence that they will have on investment markets as they struggle to adjust. If GM is a canary, let’s hope for the canary’s long life, but be mindful of its chirping deep in the mineshaft of future events that speak to broader implications for the U.S. economy.
Because diminished labor cost competitiveness and excessive future unreserved liabilities are descriptive of both GM and the U.S. economy, GM’s efforts to survive and ultimately prosper should be our own as well."
and
"The current attempt on the part of GM to address the high cost of its labor draws a comparison to potential future U.S. efforts to do so via currency devaluation. While a company must deal directly with its employees and or its unions in order to lower wage/benefit expenses, a country – certainly a capitalistic oriented one – goes about it in another way. By depreciating the dollar, U.S. Treasury or Federal Reserve policies aimed in that direction explicitly do the same thing."
and
"Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1500 of every GM car sold in dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions."
and
"Owners of these liabilities (either existing/future debt holders, or tax paying corporations/citizens) will likely be the sacrificial lambs of the future. Investors, therefore, should factor in an increasing propensity for higher inflation in future years as debt principal is eroded much like the shaved edges of a Roman coin. Higher taxes, as well, are just around the corner. Finally, currency devaluation effected through a low Fed Funds policy vs. competitor nations and/or global policy coordination should apply the coup de grace for foreign holders of U.S. liabilities. Chinese, Japanese, OPEC, and other substantive holders of U.S. Treasuries will have two ways to lose in future years: they will watch U.S. inflation erode their principal and on top of that the real dollar value of their global purchasing power will decline as the dollar sinks. Actually, the same applies to U.S. citizens although the decline in global purchasing power can be masked by domestic asset appreciation in the short-term (houses, stocks)." [or not-jk]
http://www.pimco.com/LeftNav/Feature...O+May+2006.htm
a few highlights [emphasis added]:
"... General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. GM commands the headlines today, but as General Motors goes, so goes the nation. Following their progress over the next few months and years will be like getting a 2010 Wall Street Journal in June of 2006.... If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the uncompetitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. That is not to say that other automobile manufacturers or countries don’t share similar characteristics: they do – but GM and the U.S. are compared here because of their historical dominance and therefore the influence that they will have on investment markets as they struggle to adjust. If GM is a canary, let’s hope for the canary’s long life, but be mindful of its chirping deep in the mineshaft of future events that speak to broader implications for the U.S. economy.
Because diminished labor cost competitiveness and excessive future unreserved liabilities are descriptive of both GM and the U.S. economy, GM’s efforts to survive and ultimately prosper should be our own as well."
and
"The current attempt on the part of GM to address the high cost of its labor draws a comparison to potential future U.S. efforts to do so via currency devaluation. While a company must deal directly with its employees and or its unions in order to lower wage/benefit expenses, a country – certainly a capitalistic oriented one – goes about it in another way. By depreciating the dollar, U.S. Treasury or Federal Reserve policies aimed in that direction explicitly do the same thing."
and
"Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1500 of every GM car sold in dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions."
and
"Owners of these liabilities (either existing/future debt holders, or tax paying corporations/citizens) will likely be the sacrificial lambs of the future. Investors, therefore, should factor in an increasing propensity for higher inflation in future years as debt principal is eroded much like the shaved edges of a Roman coin. Higher taxes, as well, are just around the corner. Finally, currency devaluation effected through a low Fed Funds policy vs. competitor nations and/or global policy coordination should apply the coup de grace for foreign holders of U.S. liabilities. Chinese, Japanese, OPEC, and other substantive holders of U.S. Treasuries will have two ways to lose in future years: they will watch U.S. inflation erode their principal and on top of that the real dollar value of their global purchasing power will decline as the dollar sinks. Actually, the same applies to U.S. citizens although the decline in global purchasing power can be masked by domestic asset appreciation in the short-term (houses, stocks)." [or not-jk]
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