On first analysis it would seem that the survival or not of
the American automobile manufacturers will have little direct effect on the
dollar. The United States economy is no longer a manufacturing economy,
less than 15 % of GDP is directly tied to producing goods. Though the US
is still the worldâ€™s top manufacturing nation by total value, autos are not a
US export. In 2005 the value of US produced goods was $1.5 trillion, 1.5 times
the value of the production of the next country Japan. The US leads the
world in productivity per worker, in productivity gains, and in the flexibility
and responsiveness of its economy.
The US has a successful, growing and very productive auto
manufacturing sector, it is simply not in Detroit, not in union plants and it
is not owned by Ford, GM or Chrysler. Almost every major German, Japanese
and Korean car company has factories in the United States. In many cases
the imports that Americans buy are manufactured in the United Sates. Cars with
industry leading quality ratings from Toyota and Mercedes Benz are the product
of American hourly workers.
The potential demise of the Detroit car industry is not due
to lack of automotive ability. Ford and GM are not unable to make cars. They
both have thriving and profitable overseas operations, manufacturing and
marketing cars based on local designs and facilities. Their problems are
tied to the North American market, to the cost structure that has evolved with
its unions and to the impositions of regulators. The American
manufacturers are not competitive in their home market but they are extremely
so in Europe and China.
The greatest threat to the US economy of an auto
industry bankruptcy lies in its unpredictability. That is the primary reason
the big three will get their loans. If the Detroit factories close there will
be unforeseen consequences.The
bankruptcy of Lehman Brothers was a warning. When Lehman was permitted to close
shop it was thought to answer the moral hazard problem.If failed firms are not subject to the
culling of the marketplace there is no market discipline. The government cannot
rescue every badly managed financial institution. But the failure of Lehman
brought on the acute phase of the credit freeze in September and October. And
that credit freeze pushed a weakened economy and consumer into serious
recession.The incoming administration
will not dare take such a chance with Detroit.
Automobile manufacturing employs 200,000 or so workers
directly with perhaps two million more throughout the supply chain. Even if
half of these jobs were lost through the consolidation of chapter 11, the
difference is one of timing and not amount. Whether employment in the auto
industry shrinks through the enforced decisions of a judge or voluntary
accession as part of a government loans, shrink it will. Congressional
legislation cannot restore the profitability of Detroitâ€™s North American
operations. Congress will set some type of viability standard when it
provides the automakers with loans but without a wholesale restructuring of
their production costs the US car companies simply cannot compete with their
newer, more efficient, less unionized rivals.
The risk that the collapse of Detroit poses to the American
economy and by default to the dollar is not one of fact but of
Until now the dollar has not suffered any penalty for the US
recession. Though the US economy is in no better shape than the Eurozone the
dollar has gained a huge advantage. Because its policy makers recognized the
severity of the financial crisis last August and began corrective measures
while the ECB slept, the European central bank has a much longer repair to
undertake. Once it became clear that the economic downturn would be worldwide
and deep, and the Europeans could no longer pretend otherwise, the euro and the
yen crosses sold off rapidly.
The currency markets have reached a rough equilibrium
between the dollar and the euro. The ECB and the Fed now have the same
rate policy; the economies of the Eurozone and the United States are in
recession. The dollar has benefited from the early comprehension of the
Federal Reserve and the Treasury and their willingness to use their powers to
ameliorate the crisis. These early actions combined with the resilience and
adaptability of the US economy are behind the assumption that the US will
surmount the recession first. A prolonged and well publicized bankruptcy
in Detroit, with its potential for unforeseen and unpleasant consequences could
undermine the US recovery first scenario. Undermine that idea and the
dollar could suddenly become very weak.
IMPORTANT NOTICE: These
comments are for information purposes only. Past results are not necessarily
indicative of future results. FX Solutions, LLCÂ® believes that customers should
be aware of the risks associated with over-the-counter, spot Forex. Forex trading
is highly speculative in nature which can mean currency prices may become
extremely volatile. Forex trading is highly leveraged, since low margin
deposits normally are required, an extremely high degree of leverage is
obtainable in foreign exchange trading. A relatively small market movement will
have a proportionately larger impact on the funds you have deposited. You may
sustain a total loss of your funds. Since the possibility of losing your entire
cash balance does exist, speculation in the Forex market should only be
conducted with risk capital you can afford to lose which will not dramatically
impact your lifestyle.
To the best of our
ability, FX Solutions believes the information contained herein is accurate and
true. We reserve the right to make corrections and/or update the material when
deemed necessary. Therefore, FX Solutions assumes no responsibility for errors,
inaccuracies or omissions in these materials.
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