Car Industry is One More of the Financial Crisis Casualties

The car sales are falling so fast that no car companies waited to have such a terrible situation. For the car business it is perhaps the worst hard land that they have ever had. How they get into this nightmare is what I will try to explain in the following paragraphs.

What do we need to cook something similar?

First of all, the companies produced relatively more expensive cars to be bought by the American middle class. The automakers produced these kind of cars because the demand for these vehicles were strong enough. The supply was following the demand, and theorically it was correct in average. The financial crisis showed that no everything was right; the consumers pressed the break pedal suddenly wrecking the American automakers. The business car is very competitive, and nowadays the Asian companies are leading the busineness in my opinion. The Asian automakers were investing a lot of money in more efficient and more affordable vehicles, and these characteristics will make them to better support the current crisis.

Logic Consumer Reaction

Now the American consumers, who have been spending more than they can afford, are decresing their expenses, especially the more expensive ones. For example, houses, cars, jewels, and electronics would be the more affected products. The consumers strategy would be to save money to pay their debts and deal with the very uncertain future.

What do American Automakers have to do?

First, the American companies have to manage to pass the bad weather; they have to cut unnecessary outlays and privileges, reanalyze their objective market, offer a wide variety of options to the market, and improve their competitiviness through a agressive investement policy with the help of new expert partnerts.

Officially, The United States is in One Year Recession

I have known for a while that The United States was in recession, but I have never thought that it began in december 2007. Economists use many indicators to predict when we get into this stage, but many of them failed to assure this in this time. In my opinion, I believed that USA has been in recession since june 2008 because the industrial production still showed year-over-year growth in the first semester of 2008 although the other indicators such as unemployment rate, nonfarm payrolls, and personal disposable income less goverment transfers have given us signs of economic weakness. I was convinced that to be in a meltdown period is necessary to have all components in red.

Misleading Indicators

In june 2008, the industrial production grew zero percent in a year-over-year period, and after this month this variable showed negative values. Other indicadors such as retail and total sales gave me the wrong impression of being still out of this period in the first half of this year. On the other hand, employment indicators and personal disposable income have given the contrary evidence since the end of 2007. In addition, consumer confidence, leading indicators, and house indicators have been drawing this bad picture.

NBER Gave Us the Initial Point, But...

The NBER said today the American economy reached its peak in december 2007, and now the problem is to forecast when it would get its trough. Many economists said this period would last one more year , and I agree with them because the real macroeconomic indicators do not exhibit any recuperation sign yet.

There Would be an Inflation Rebound in USA

Is it possible that in the United States the inflation rise again?. In september 2008, Kenneth Rogoff compared the economic problem in the United States with an emerging market country crisis which at the end will suffer of an inflation problem.

Let's try to think about this possibility.

First of all, let's check historically what happened with the inflation in a recession period. We can observe that most of this time the year-over-year price variation increased in each economic slowdown period. This outcome would be the product of the reduction of the interest rate that usually was applied as a policy monetary tool.

In this moment, the inflation, which was very high as a consequence of a strong leveraged demand, is now decreasing by the financial crisis. The financial crisis makes this recession special, because in my opinion it would multiply the common recession effects.

In my analysis I want to focus in one economic indicator, the money supply. Why do I care this variable?. Because the inflation is a monetary concept and has positive correlation with money supply. What has been happening with this indicator?. The monetary base (B) has been increasing rapidly to help the financial institutions, and although monetary supply (M2) does not show a big movement, this apparent discrepancy between B and M2 is due to M2 show the deleveraging process of the current crisis. The inflation problem will occur when present-day crisis impacts will disappear, and M2 will reflect the increased monetary base effects.

Monetary supply will increase in the near future and will impact over the inflation. I know that today there are other problems to deal, but we need to start thinking how to counter this new problem.

The USA Low Personal Saving Rate Would Make the Perfect Storm

Many important economists have been saying that The United States is a liquidity trap. I can summarize the concept of liquidity trap as a situation where a monetary policy has no effect in the economy. It happens when the interest rate is so low that any change in it does not make any difference.

What do we need to the monetary policy work?. The reduced interest rate helps companies to invest more money because of the reduced money price, and the increased investment impacts positively in the gross domestic product and so on. We can see how the monetary policy usually helps to reactive the economy by the supply hand. On the demand hand, the reduction of credit interest rate and the money abundance push consumers to buy more in a normal situation.

What is now wrong in the equation?.

Many things happens to arrive to the current situation, but I can sum up in only one indicator that in my opinion expresses the real problem, and it is the very low saving rate. Never historically was this macroeconomic variable so low, inclusive getting in september 2005 a negative value. The historic mean of the variable is around 7%, and in this new century the ratio is around 1.5% now recovering to a level of 2%.

Now The United States is in a recession, and the Federal Reserve has been reducing the target interest rate. The question is whether the monetary policy will be effective enough. My answer is not because the demand hand won't work. My response is based on the idea that the consumers are now leading with many problems. First of all, they are losing their main revenues, losing their jobs and looking how their main actives value are falling. Second ,many of them have debts to pay, and finally because they have very small savings. I think the present monetary policy won't help the economy, and the consumers will have to shield themselves through increasing savings and reducing consumption.

Finally, I agree with many economist's opinion that the economy recovery would take long, and a fiscal policy is necessary to help pass through this difficult moment.

Tough Time For the OPEC Countries

The OPEC has been having a very good time since 1999 because the oil price had a positive trend and reached its maximum level of US$ 145 the barrel in july 2008. Their macroeconomic indicators show this fact. For example, in the period 1999-2008 the OPEC gross domestic product has been growing 5% in average, its current account has been adding up 120% of its GDP, and its per-capita GDP has been increasing three times. Now the price is around US$ 50 the barrel since it plummeted from its highest level. The OPEC is not ready for this event because many countries have been increasing their expenditures with the expectative that the price will remain high or get the US$ 200 the barrel. In this way, they are facing a future big reduction in their revenues and perhaps the future of the cartel continuity.

In my opinion the real problem of the OPEC countries is an unexpected deep oil price fall because of a demand drop. This fact nobody forecasted makes these countries to vary their strategies. For example, they must cut their oil production, reduce their outlays, increase their investment to reduce production costs, change the cartel goals and wait until a rebound of the price. Although the present-day price is more or less the third part of its peak, this price is higher than the historic price of US$ 20 the barrel, so they still have a gap to benefit and to make the necessary improvements to not be affected by the low price.

United States Current Account

I used the WEO database Oct-08 to extract information of the current account of the United States and other important countries. One can easily see how the United States has been financed mainly by China, Japan and other Asian countries since 1990. I have some questions in my head. First, is it possible that a country can live forever with a current account deficit?. Second, what will happen if this situation continues?. My teacher of International Economics told me that in an economy of flexible exchange rates and free flow of capitals a current account deficit is compensated by capital flows.

I always thought that USA was one of the best places to invest money, and this is not only by its zero exchange rate risk but also by its financial system soundness. But now the present crisis makes me doubt about this believe. In this difficult moment funds in this difficult moment bought treasury bonds in USA because nowhere could they find a safe place to invest. For example, all commodities, that were used as reserve value after technological burst, have been going down with the present-day crisis. I think when the water makes calm, investors will have serious problems to evaluate where to put their money. The United States must work hard to improve its macroeconomic indicators.

The Stock Market Big Falls

It is difficult to predict how much time the stock market will continue its down trend. The great crash of 30's was not only the biggest in fall but also the longest in time. It took three years to reach its bottom level.