Thread: $73 an Hour
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F. George McDuffee F. George McDuffee is offline
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Default $73 an Hour

On Fri, 12 Dec 2008 18:09:59 -0800 (PST),
Yes, I have wondered about this, but was told my limited knowledge of
Economics was at fault, that I didn't comprehend that for you and me,
if we wanted a cup of coffee, we had to pay $2 upfront. In the
business world, you just promise to pay at some later date, and are
given pieces of paper as securities. Which may turn out to be

There is nothing wrong with your understanding of
economics/finance. In this case what was actually happening was
ignored because it was dressed up as something else, in this case
an ERISA "pension plan."

What was happening in reality was that the Detroit automotive
management in the 1970-1990s were funding a large part [c.
20-30%] of their real current labor costs by operationally
issuing "zero coupon" bonds, at a very high rate of interest and
30-40 year maturity. Not only was this portion of the cost of
the labor differed for years, but considerable tax benefits for
both the corporation and employees were generated, so this "gift
horse" was scarcely examined by anyone. [This also again proves
the maxim "When something seems too good to be true -- it is."]

The balloon payment for these "bonds," along with a ton of other
collateralized and unsecured debt, has started coming due. The
creditors are refusing to roll any of the debt over [accept new
additional debt at higher interest as payment for the old debt --
PIK], accept stock in lieu of cash [debt for equity swap] and are
demanding payment, as in "show me the money."

The core of the problem is that you can't get blood out of a
turnip, and the legitimate debts and obligations of GM and
Chrysler, including the accrued pensions and health benefit
obligations which represent a significant part of their 1960-1999
labor costs, are now widely understood to far exceed both their
assets and any plausible future ability to repay. [I.e. the
management plan submitted to Congress to invest in lottery
tickets and win the grand prize does not count.]

It is becoming more apparent by the day that a large part of the
American economic "progress" over the last generation was not
real but rather a "Ptomken villege" or stage set founded on and
sustained by ever larger amounts of increasingly sophisticated
"check kiting," AKA "creative finance" or "financial
{see circular kiting in particular}

Unka' George [George McDuffee]
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).