Silas the Doomsayer: The scenario I worry about

At some point, the developed world is f'ed, unless they start on a politically unpopular course. On what do I base my particular doomsaying? Thought you'd never ask.

It's the entitlement explosion crisis. (Post will be light on links, but I'll substantiate this later.) Governments have promised huge benefits, such as pension and health care for the elderly, that they cannot possibly finance. These obligations aren't counted in national debt figures, but are enormous and would made developed countries look a lot further in the red than the currently are.

Now, I'm sure you've heard the figures about how, oh, this entitlement program will be running a deficit in this year, it's trush fund will be exhausted in this year ... the problem is that the crisis will have to hit before those times, and with less warning, because of a dangerous (positive) feedback loop:

At some point, governments realize, gosh, we can't pay for what we've promised. So, they somehow suck more out of the productive class: higher taxes, worse government services, inflation ... it doesn't really matter which route. Then, some of those workers, probably those with the most mobility, say, "Hey -- this is stupid. I can just move to $SAFE_HAVEN, and have a much higher after-tax real income." So, he moves. And so do others in that situation.

Uh oh! Now that's a smaller groupe to gore to pay for the obligations! So, they have to do it again: gore them at an even higher rate, cut benefits, etc. Then more workers are in a position that they're better off by fleeing. Then you need a higher tax rate until there's no one left to gore and those expecting payments, or still working are left "holding the bag" -- they're very little wealth to go around.

We've already seen miniature versions of this happening at corporations that tried run their own little entitlement system: they realized, all to late, that no one has to give them anything: they can go "work" for others who won't ravage their pay to cover other people's entitlements. Some view the USA as being different in that, gosh, you kinda don't have a choice ... but you do, just as people had a choice not to help fund GM's welfare system, and they exercised that option, despite such a scenario seeming impossible.

Needless to say, I don't want to be the one holding the bag.

Here's the kicker, though: none of the financial markets in these countries seem to have price in this near-inevitability. So are they insane, or am I insane? And to where would I flee? So far, it looks like Singapore, China, and Australia are the only developed or near-developed countries protected from this upcoming crisis.

PS: Cheer up! Don't forget about the pizza party! Eat, drink, and be merry, for tomorrow we will sure have outrageous entitlement taxes.

Why I can't stop laughing at GM

Because they just posted a large quarterly loss.

...greater than their entire market capitalization. (market cap being ~$6.5 billion)

...by more than a factor of two.

...for a second time.

...in under a year. (check the Q3 2007 column)

Did I mention their uncovered obligation to contribute $46 billion (7 times their market cap) to cover legacy costs?

And the steadily high cost of fuel scaring people away from their only profitable line of cars and forcing them to close plants (though this post will NOT get the oil label, since I think we all know they would be f'd even if magic fairies gave everyone free oil)?

And how they're so desperate they may even sell Hummer -- when its value is at a historical low?

And the subprime mortgage crisis ripping up its other formerly-profitable arm, GMAC?

And how they think dumping the brains behind the cars is the way out, since they can't touch unionized factory workers?

HAHAHAHAHAHAHAHAHA!!!!!!!!!!!!!!

Okay, okay, I can breathe again. Ah, that felt good. Now, for part that will scare the hell out of you:

First, given all the costs GM has to cover, there are only two reasons anyone would pay a positive price for GM shares:

a) because they can turn around and sell it to another sucker on its next upswing, and

b) because expect GM to be able to stiff their pensioners -- not have to pay the full legacy costs, courtesy of a lenient bankruptcy court judge (oh, no, no, can't think about bankruptcy of GM, can we now?) and an undercapitalized Pension Benefit Guarantee Corporation.

And second? GM is listed on the bluest-of-blue-chip Dow Jones Industrial Index.

I think I'm going to cry now.

GM cutting dividend, jobs, irresponsibility

Well, it looks like GM is going to finally suspend its dividend.

Gee, you mean we have to pay the wages for labor performed fifty years ago before the enterprise's residual income claimants? Who'da thunk?

This is something I've been demanding for a long time.

They will also be trying to cut jobs. They had some "success" with their buyout program in which they tried to pay all their US workers to go away and shut up about their guaranteed jobby. As the eminent Winterspeak was clever enough to point out, the people most likely to take the buyouts are the competent workers. They get the buyout money, plus the income from their next eager employer. Anyone who refuses to take the buyout -- and you know, is putting together your next car -- knows damn well he can't rook anyone else to pay him for what he does.

And for those of you with GM warrantees needing work? Well, I hope you'll like getting in line behand granny's life support money. I'm sure you'll look real noble.

Setting GM and corporate pensions straight

So apparently GM is back in the news. Mark Thoma does his usual thing of posting a lengthy quote without his own analysis, of a New York Times piece in which Roger Lowenstein discusses the history of GM and the legacy costs that are currently bringing it down.

Many, many people think it is legacy costs or bad management or fuel costs that is causing GM to falter. While I've said this in many posts across the internet, it's time to set things straight on this blog: only the legacy obligations can account for GM's poor health.

Why? It's simple. Even if you were to go in and replace whoever you think is a fool at GM, with whoever you think is capable of doing a superior job, that still wouldn't save them. Because those very same supergeniuses would just get bid away buy someone that doesn't have to dock off the legacy costs from the supergeniuses' pay!

Failure to recognize this insight has led to some monumentally stupid analyses of the issue. For example, the perpetually hate-able Malcom Gladwell blames GM's problems on the magical dependency ratio, ultimately claiming that when a company can do the same tasks with fewer workers, that makes it harder to pay retirees!

What happened in GM's history was this: management convinced the unions to accept lower wages in the present, in return for guaranteed pensions later -- that is, deferred compensation. And where would the money for those pensions come from? "Durr, well GM's always going to be superprofitable, no matter how many people they have to support, right?" Well, that's what the unions had to be thinking in order to accept such a deal, in which they didn't have oversight in the (non-existent) pension fund. (It would have made much more sense just to take the higher wages and divert them to a union-controlled pension fund, but I guess if you think GM can't fail ...)

Today, such practice of having an unfunded pension -- or, in effect, stuffing the pension fund with low-grade GM bonds -- would get management thrown in jail, and only recently are they making them actually, heaven forbid, fund the pension.

The upshot is, GM should have taken the wage savings and invested them in a diversified portfolio. But instead, they saw the cheaper labor as free money and threw it off as dividends. And that, my friends, is what enrages me about the whole thing. As deferred compensation, the pension is effectively a wage and thus should have priority over debt. Yet even up to today with an underfunded pension, GM is (and has long been) throwing off dividends. No dividend should be paid until GM has bought a third-party annuity and health insurance plan for everyone they've promised those things to.

The surest sign GM's going to face bankruptcy? Check out this AP article:

The chief executive of General Motors Corp. dismissed speculation that the largest U.S. automaker might soon seek bankruptcy protection ... Comments in the past week about a potential bankruptcy are "not at all constructive or accurate," Rick Wagoner said Thursday.

That certainly sounds like a weasel! "Not constructive"? Right, because it's our job to help you rook people into trusting that you'll be around for a while. And people thought I was crazy for avoiding GM in fears that the warranty promises are a joke...