Henry Ford's model runs into the sand

Global production of cars is coming to a standstill. This is just the most dramatic and immediate result of a rapidly deteriorating crisis which has paralysed the global financial system and rapidly sent the world economy into recession.

Chrysler has halted production at all 30 of its factories for a month or maybe longer. The closures affect 46,000 workers directly, but, should the temporary closure become permanent, repercussions throughout the industry and the rest of the economy will affect millions in America and worldwide.

GM has suspended work on its $370m engine factory in Michigan, dashing hopes that climate change offers a route to a profitable future. It was planning to build a new small car engine, working towards fuel-efficient and all-electric cars, but the market for cars has disappeared along with all of the other things people used to buy, as unemployment rockets upwards.

The demand collapse is trashing all car manufacturers. GM said it was shutting down 30% of its North American production. Also on Wednesday, Ford announced it was to extend the normal two-week Christmas shut-down at 10 of its North American plants for an extra week.

The Canadian car parts sector, which employed 120,000 people in 2006, expects to see its profits tumble by two-thirds next year, and employment levels plunge 20% by 2010. Almost 600,000 jobs in Canada would be at risk from a collapse of Chrysler, Ford and General Motors. It’s no different in the UK where car sales are in meltdown and manufacturers are closing their factories well into the New Year and even longer.

Bourgeois economists and analysts have been brainstorming solutions now that everything tried in the last year has failed. Their problem is they can’t see beyond the constraints of the system which depends on capital expansion to generate profits. And right now there’s not much profit-making going on.

The fewer goods people buy, the less the profit made in production can be realised, and as prices begin to drop everything just gets worse. Even the oil-producing nations’ plan to cut production hasn’t prevented the price from falling below $40 a barrel from its peak of around $140 earlier in the year.

With a downward spiral of deflation beginning, governments and central banks are now prepared to consider just about anything that will make us buy the products they employ us to make. Interest rates are dropping towards zero, already a strange enough concept that opens the door to new possibilities.

The one which is perhaps at the same time both easiest and hardest to understand is looking the most popular just now. Instead of pouring taxpayers’ money into banks which just hold on to it to rebuild their reserves, costing each of us many thousands of pounds in the future, the new big idea is that governments and central banks start issuing new money – just printing notes, creating the stuff out of thin air and giving it direct to us in the hope that we’ll go out and start spending it.

Must be the Christmas spirit, you say? No they really mean it. The really, really wonderful thing is that with zero interest rates, the cash bonanza would be a no-interest giveaway. Trouble is – there’s always a catch – printing money devalues the currency and eventually leads to runaway inflation. Higher prices are, in any case, bound to follow the uncontrolled slide in sterling – unmatched in size since 1931, when Labour prime minister Ramsay MacDonald took the pound off the gold standard. Devaluation on this scale could also lead to a flight of capital from Britain and a collapse of the currency, some are warning.

Whichever way you look at it then, the capitalist economy is well and truly broken. In 1908, Henry Ford gave the world the Model T and the production line for cars. A century later, it’s time for a revolutionary new model.

Gerry Gold
Economics editor

Thinking the unthinkable

Despite Gordon Brown’s notions of saving the world – let alone Britain – the pound is now falling to its lowest-ever levels against the Euro. It is currently trading at 1.04 euros to the pound at some bureaux de change. Things are so bad that insiders are thinking the unthinkable – jettisoning Sterling and adopting the Euro!

The dollar too is falling at the rate of 6.6 per cent a year as new data revealed serious declines in household worth and mortgage borrowing. The dollar slid to its lowest in 13 years against the yen this morning as the Senate rejected a £14 billion bailout for General Motors, Chrysler and Ford. Unprecedented interest rate cuts, gigantic taxpayer-funded bank rescue packages and promises of government infrastructure spending – including the biggest in the US in half a century – have done nothing to stop the financial and economic meltdown in Britain or the US.

Production in the US is forecast to shrink by 4.1% this quarter and by another 3.4% and 0.8% in the first and second quarters of next year. "The news from the economy is bad. The recession that we had previously hoped to avoid is now with us in full gale force," says one report. By late 2009, the US unemployment rate is predicted to reach 8.5%, compared with 6.7% in November, as employers shed an additional two million jobs over the next year. In the UK, the CBI reported a five-year-low in export orders despite the advantages offered by the decline of the pound.

The worldwide collapse in demand has turned the economy upside down – from commodity speculation producing inflationary price increases in food and energy, to prices falling across the world. This side of the pond, current forecasts are suggesting that unemployment across Europe may rise from 17 to 21 million next year. In a debate organised by the Financial Times Friends of Europe group, Poul Nyrup Rasmussen, president of the Party of European Socialists, said he feared that there would be “a further dramatic increase to the other side of 25 million”.

The crisis is so deep and UK trade union leaders so short-sighted that they are offering to cut their members wages by 10% in the remnants of the UK steel industry – adding to the downward deflationary spiral. Former TUC leader John Monks, now head of the European Trade Union confederation, and steel union leaders instead of standing up for workers’ rights, are prostrate before the employers. The three steel unions have offered pay cuts of 10% on behalf of their members. What a curious state of affairs when the employers’ spokespeople are less gung-ho about wage cutting than the union leaders!

The Daily Telegraph – not known as a campaigner for workers’ rights – warns against widespread pay cuts: “Should [pay cuts] become widespread, they could contribute to a deflationary spiral as employer after employer cuts their workers’ pay. A 3% pay cut, if extended across the entire population, may not necessarily mean lower real incomes, but it does mean a higher debt burden. Debt, after all, retains its nominal value, regardless of our ability to pay. Given that the mountain of borrowing is precisely at the heart of the current crisis, such an outcome would be truly terrifying,” it comments.

Even the bosses’ very own newspaper, the Financial Times, argues caution: “No one should pretend that a pay cut is a panacea”, its leader says today.

Meanwhile, with interest rates approaching zero, the authorities, doing whatever it takes to save the system, are obliged to open up the next Pandora’s box. In case anyone is paying attention, they call it ’quantitative easing’, to throw you off the scent. It means increasing the money supply. Printing money. It’s been tried before. Many times. It doesn’t make things any better. Look at Zimbabwe. Or Germany in the 1930s.

Gerry Gold
Economics editor