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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
19 December 2008

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