GM has been through this kind of near-death experience before. I remember reading about a time in the early 90s when GM execs were crowded around a fax machine, waiting for word of a credit downgrade. If it came through, they were going to declare bankruptcy. This time, however, I believe GM has a crapload of reserve cash to tide it over for a fair while yet.

I would tend to think only a casual glance at the UAW would give some clues as to why GM and Ford are starting to crumble. Being from Michigan, and knowing secondhand some of the benefits and perks of being a GM employee, I can't see how GM makes any money at all.

The first point worth mentioning is that we are just spectators, our car industry (with the exception of a few niche players) no longer exists.
The second point is that Ford and especially GM are barely car manufacturers in the old sense of the word. The bulk of their earnings comes from finance, derivatives trading and banking. That other old manufacturing giant General Electric is in a similar position.
I'm afraid that I am of the view that these houses of straw, built on layer upon layer of debt are a disaster waiting to happen, and when the innevitable happens we will not escape the fall out.
The deficit in the US is currently around 6% of GDP, a level where lesser economies approach collapse. Their debt is still accelerating, growing by around $1 trillion per year, and nobody, but nobody bothers to save anymore.
How can anybody be optimistic when they look through the spin and at the facts?

So they've finally downgraded GM have they, and thrown in Ford for good measure? Well nobody can say it wasn't well known to be a likely prospect. The last article I read on the subject (also in the Economist, I think) was actually beginning to question whether S&P was placing fears of the fallout ahead of an honest rating, for not having done this sooner.

Nonetheless, this is a big deal. GM have astonishing amounts of debt issued, so this is obviously will have knockon effects in the bonds markets. And a lot of collective investment funds won't invest in corporate bonds (or even equities) where the company isn't rated "investment grade" by S&P and Moody's--or have a mere 15% or less of the fund set aside for such "high risk" investments. It'll be interesting to see what happens to the price now: if such institutions have been able to offload most of what they need to then the price won't slump all that much, which will be a comforting relief to those of us that know enough about this to be worried, but not enough to know the answer.

John East writes:

"The second point is that Ford and especially GM are barely car manufacturers in the old sense of the word."

Indeed. I recently heard GM described as an international pension fund with a small subsidiary business that makes cars.

When you refer to the 'British car industry' you do of course really mean the 'British-owned car industry'.

The British car industry is doing quite well, making more cars than at any time since the early 70s and exporting a very large percentage of those cars. The fact that the companies making these cars are foreign owned is to me, as a free marketeer, pretty irrelevant. I suspect it's also pretty irrelevant to the component manufacturers supplying them.

Rover went under because they made terrible cars (mostly). Other companies that make terrible cars will also go under or wil go under because they are pushed out of business by manfacturers exploiting the comparitive advantages of lower cost economies. A disaster for the people working for them indeed but not for us consumers.

"The deficit in the US is currently around 6% of GDP"
(I thought it was around 3.5%, but that's still too much).

How long before S&P downgrades US Treasury Bills to their correct status - junk ?

Jacob, so long as the federal government has the means to extract taxes from thee and me, the payment on those T-bills is as rock solid as anything in this economic universe.

"so long as the federal government has the means to extract taxes from thee and me..."

That condition is not enough. There must be a "thee and me", and we must be affluent enough to be able to pay those taxes. Government possesing infinite power is not enough. Power doesn't create wealth. If the debt is too big relative to the wealth of the people, the US commitments will go unpayd. See Argentina. It will happen to the US too, given current trends. The question is only when.

As to Ford and GM, their case isn't hopeless. They could start to make good attractive cars, for a change. That isn't impossible ...

The deficit in the US is currently around 6% of GDP, a level where lesser economies approach collapse.

Inaccurate, really. See for example here. It was 3.5% last year, and is on track for narrower than that this year; current estimates have it around $370 billion, and around 3%.

US-owned car companies do indeed have everything to fear. One man in Europe who will make a difference is Carlos Ghosn, now head of Renault and Nissan. PSA are also doing very well thankyou.

Oh and making cars isn't tough. Selling them is.

One blip on the horizon is the large increase in steel due to Chinese use - this could either make or break some of the other car manufacturers.

Jacob, my point was that US T-Bills will be the last economic instrument to go underwater, not that they would never go underwater.

By the time the US economy and tax base collapse to the point where the T-Bills go under, well, T-Bills going under will be the least of our worries.