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Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under Socialism

Tyler Durden's picture





 

With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past  4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.

Bloomberg has a brief background on the story:

Europe’s second-largest carmaker announced plans to close a French factory and eliminate a total of 14,000 jobs. Peugeot is burning through 200 million euros ($244 million) of cash each month and Moody’s Investors Service placed its Ba1 rating, already junk, on review July 13 for a possible downgrade. Peugeot’s manufacturing and sales organizations had financial assets and undrawn credit facilities of 9.6 billion euros as of December 31, the last date for which they provided full data.

 

Peugeot’s cash reserves allow it to “survive for one to two years,” said Xavier Caroen, a Zurich-based Kepler Capital Markets analyst who has a “hold” rating on the company. “We hope the French government lets them cut production and shut some sites in France, or they won’t have any earnings in the future,” Caroen said.

In other words, all else equal, the company will, in its current format, go out of business in "one to two years" as it simply can not grow into its balance sheet, and because its expenses far outstrip its revenues. So what does the company do? The logical - it fires, or specifically it announces its intentions to fire, 14,000, or about 7% of its labor force: an act which in itself very well may be insufficient, but at least it will extend the viability of the firm courtesy of a modestly reduced cash burn.

Not so fast, says president Hollande.

Instead, according to the socialist, the company is wrong, and he is right, in that its top line can support its overhead. How? Nobody knows, but according to the French president, 1-2 years of cash viability is not a concern (and by that time who knows: maybe someone else will be president anyway). So instead what will happen is Peugeot will not fire anyone, and the market, convinced that the company is a goner will send its cost of debt into the stratosphere making refinancing, or loan extension, impossible. And who can blame the market: without a gun to its head, who wants to literally burn money?

So as the company gets locked up into a terminal toxic spiral of ever increasing debt costs, and ever declining cash flows, what happens? Well, in two years the company filed for bankruptcy, and instead of 14,000 people being fired today, in the process extending the viability of the company for at least a few years, the company will without any doubt, file for bankruptcy by 2014 at the latest, costing the jobs of not only the firm's employees as it gets acquired by some Chinese auto consortium merely for its trademarks (and certainly not for its unions), at pennies on the dollar, but also millions of jobs of upstream vendors as well and downstream distributors, retailers, mechanics, and all other related jobs.

So here is today's lesson in corporate viability under socialism:

  1. Lose 14,000 jobs today, while preserving the enterprise and its 186,000 remaining jobs, but losing some popularity in the process
  2. Or be hailed a hero of the people and for the people, preserving 14,000 jobs for 2 years, and watch as your entire auto industry disintegrates in two years.

This is a question we would pose not only in France, but every other place that is experiencing creeping socialism. Which incidentally is every country in the "developed" world.

 


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Tue, 07/17/2012 - 13:51 | Link to Comment mikla
mikla's picture

Let's just make this simple and stop pretending the company is run by private executives.

The new model is illustrated by Government Motors in the US.

Are you really going to make them do all the paperwork to have the Gubbermint seize the company outright?

The issue is, "unbounded forward-liabilities".  For example, that was "Unions and Pensions" at GM.  When Management (using the term "loosely") can no longer bound their forward-liabilities, then risk cannot be tied to investment, and the whole company is clueless.  Unmanageable.  Will fail.

Government, in this case, is merely the biggest vulture to pick-at-the-carcass, to select who will be the biggest "losers-among-the-losers".

Tue, 07/17/2012 - 13:54 | Link to Comment NotApplicable
NotApplicable's picture

"We had to destroy the auto industry, in order to save it."

Tue, 07/17/2012 - 14:02 | Link to Comment ACP
ACP's picture

"We had to destroy the Constitution, Democracy, Individual Rights and Capitalism...in order to save our own asses."

Tue, 07/17/2012 - 14:10 | Link to Comment Sandmann
Sandmann's picture

and the Suckers let us do it as long as they had a salt lick in the corner of the field.

Tue, 07/17/2012 - 14:27 | Link to Comment Tippoo Sultan
Tippoo Sultan's picture

Tyler, the solution is so obvious -- how could you have missed it ?

When its cash resources have been exhausted, Peugeot will be nationalized, much the same as the above-referenced GM nationalized in de facto fashion in the United States. There is no such thing as a corporate/private loss anymore; it is all public now.

Tue, 07/17/2012 - 16:32 | Link to Comment OttoMBMP
OttoMBMP's picture

The new EAISF (European automobile industry stability fund), to be funded primarily by European luxury-car makers, will happily bail out Peugeot.

Tue, 07/17/2012 - 14:26 | Link to Comment Uber Vandal
Uber Vandal's picture

Not so funny thing, I was just thinking today about the last time I heard the phrases "Job Security" and "It's a Free Country".

Tue, 07/17/2012 - 19:26 | Link to Comment Buck Johnson
Buck Johnson's picture

Bingo.

Tue, 07/17/2012 - 14:04 | Link to Comment Silver Bug
Silver Bug's picture

Sadly governments around the world seem to be going more and more towards socialism.

 

http://ericsprott.blogspot.ca/

Tue, 07/17/2012 - 14:43 | Link to Comment _ConanTheLibert...
_ConanTheLibertarian_'s picture

Nancy Pelosi could have said it

Tue, 07/17/2012 - 13:44 | Link to Comment firstdivision
firstdivision's picture

That means buy as much equity in Peugot as one can.  This shit is going to the moon!

FYI: WTI about to break north of $90.

Tue, 07/17/2012 - 13:55 | Link to Comment Dr. Engali
Dr. Engali's picture

Kind of like GM right?

Tue, 07/17/2012 - 14:28 | Link to Comment Debeachesand Je...
Debeachesand Jerseyshores's picture

And returns back to $70's when the crude oil markets realized the pipelines have been completed to deliver crude oil to tankers avoiding the Straits of Homus.

Wed, 07/18/2012 - 11:30 | Link to Comment BigJim
BigJim's picture

Those pipelines - are they buried nice & deep?

Very, very difficult to defend long pipelines from missiles, suicide bombers, etc

Tue, 07/17/2012 - 13:47 | Link to Comment Never One Roach
Never One Roach's picture
Not again! Ford, Volvo announce new recalls By Paul A. Eisenstein, The Detroit Bureau

A total of 8,266 2013-model Ford Escapes impacted by the new recall were sold in the U.S., the rest going to Canada and Mexico.  It’s unclear how the news will impact the otherwise well-reviewed crossover.

As for Volvo, its recall impacts just 1,469 S80 models from the 2011 to 2013 model-years.  The maker says faulty software can prevent the automatic transmissions in those vehicles from downshifting from fifth to fourth gears.  In turn, that could lead the vehicle to stall and possibly result in an accident, according to the NHTSA.

 

http://bottomline.msnbc.msn.com/_news/2012/07/16/12773407-not-again-ford...

Tue, 07/17/2012 - 13:59 | Link to Comment GeezerGeek
GeezerGeek's picture

There they go again, blaming the problem on the software guys. It's really the engineers' failure to think things through. Steering and brakes should continue to function normally whether the engine is running or not, just like they did in the 1940s. And who needs an automatic transmission with five speeds? If two forward gears was enough for the old PowerGlide, it should be enough for any Volvo. This modern world is getting too complicated for its own good. Let's turn technology back 100 years to 1912.

Bonus: no Federal Reserve in 1912, either.

Tue, 07/17/2012 - 16:39 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

 

GeezerGeek:

"And who needs an automatic transmission with five speeds? If two forward gears was enough for the old PowerGlide, it should be enough for any Volvo."

What do you think about the 4-speed Hydramatic which was introduced during the model year 1940 as optional equipment for Oldsmobile (Cadillac´s were offered with the Hydramatic for ´41)? I guess the Hydramatic is too modern for you, :D .

As regards Volvo I think they should have tried to buy the rights to the 4-speed Hydramatic which was discontinued in 1964 or -65. It would have been perfect for the small B36 V-8 which they never used in the 164 (instead they used it for a commercial truck!).

Tue, 07/17/2012 - 13:49 | Link to Comment Debtonation
Debtonation's picture

Bullish on shoes?

Tue, 07/17/2012 - 13:52 | Link to Comment doc_in_the_house
doc_in_the_house's picture

spx @ 1364 = shorted!!

just added my FIRST LAYER of shorts.....been PATIENTLY waiting since i covered my spx 1370-1360 shorts last week @ 1326-1328....i knew that there would be more pumps before going to 1100ish....

Next layer of shorts @ 1375+...thank you MUPPETS !!! LOL !!!!!

Tue, 07/17/2012 - 13:56 | Link to Comment francis_sawyer
francis_sawyer's picture

nobody fucking cares... (cept for the algos)

Tue, 07/17/2012 - 14:37 | Link to Comment fuu
fuu's picture

He seems to think that the muppets are still in the market.

Tue, 07/17/2012 - 13:54 | Link to Comment Dr. Engali
Dr. Engali's picture

Every day is another step closer to the final implosion.Watching these clowns would be funny if one likes to watch a Greek,in this case French, tragedy.

Wed, 07/18/2012 - 11:33 | Link to Comment BigJim
BigJim's picture

Watching these clowns would be even funnier if their propaganda and actions weren't destroying our societies.

Tue, 07/17/2012 - 13:55 | Link to Comment timbo_em
timbo_em's picture

Francois Hollande the new Über-CEO of France. Since car sales in France are pretty solid, what is he going to do? Give money to Spain that they then buy more German cars?

Tue, 07/17/2012 - 13:55 | Link to Comment bagehot99
bagehot99's picture

Nationalized Automakers have got just an AWESOME track record. Ask Triumph, Austin, Morris and all the other British automaking titans how British Leyland worked out for them. Hint: Hindenburg, Pearl Harbor, etc.

The idea that the prescription for fixing what Socialism broke is more Socialism makes me smile, followed by the desire to throw up. People are fucking stupid.

Tue, 07/17/2012 - 15:39 | Link to Comment Sandmann
Sandmann's picture

Volkswagen didn't do badly.......

Tue, 07/17/2012 - 13:56 | Link to Comment americanspirit
americanspirit's picture

Has anybody mentioned that Peugeot makes really clunky cars? I know there are fanatics who love them but like a lot of French technology they are an engineering nightmare. If you have never done it and have a chance to do so just pop the hood and imagine trying to find whatever might need fixing much less getting to it. Wires and tubing everywhere - designed to provide maximum income for mechanics. I'm not at all sure that the world would miss the Peugeot any more than we miss the Yugo - for different reasons of course. Their trucks aren't bad, but not world class either.

Tue, 07/17/2012 - 14:08 | Link to Comment The Final Countdown
The Final Countdown's picture

That's just stereotype BS, there's little to no difference between the build quality and reliability of similarly priced cars these days. It's not 1960 anymore.

Tue, 07/17/2012 - 16:21 | Link to Comment css1971
css1971's picture

http://www.anusedcar.com/

TÜV reports. An unbiased look at reliability. The faults may not be big ones, i don't know but they've been reported. Price almost certainly comes into it.

Tue, 07/17/2012 - 14:10 | Link to Comment Sandmann
Sandmann's picture

Peugeot has no trade in value. Buy one and you are stuck with Peugeot

Tue, 07/17/2012 - 14:33 | Link to Comment Nobody For President
Nobody For President's picture

Yeah - French engineering. They even managed to make some ugly airplanes, which is hard to do because form (usually) follows function. (Couzinet 70, Bleriot 125, Dewoitine D 338 fer example.)

They make up for it with their women, however. 

Tue, 07/17/2012 - 14:53 | Link to Comment insanelysane
insanelysane's picture

French women???

Tue, 07/17/2012 - 16:27 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

Americanspirit:

"Has anybody mentioned that Peugeot makes really clunky cars?"

Peugeot actually has a good reputation for rugged and durable mechanics, especially the diesel models. The Peugeot 404 and 504 built a good reputation for Peugeot in that respect. But they were more rust-prone than - for instance - the Volvo 140. Nor were the mechanics as durable as for Volvo, but quite OK compared to many other brands.

Today, Peugeot/Citroen and Renault make elegant cars that in many cases look more expensive than they really are. But the quality reputation and the quality feel is not as good as for Volkswagen, for instance. Therefore, French automakers can not charge the same prices as Volkswagen. They have to compete with brands like Kia which is hard if you have to pay French wages.

Furthermore, it seems as if Americans are more sensitive about the kind of quality problems which are typical to French cars. Peugeots are not bad in all respects as regards quality. Mechanical durability can actually be quite OK, even though the old rear-drive models were more competitive in this respect. But I guess that´s not enough for American consumers. They prefer Japanese style quality.

 

Tue, 07/17/2012 - 13:59 | Link to Comment The Final Countdown
The Final Countdown's picture

No problem, we'll just let Hollande bail out Peugeot, so we can all bail out France later. We'll just fire some more people over here, we're kind of used to subsidize uncompetitive French industries so they don't have to scale down anyway.

Tue, 07/17/2012 - 13:59 | Link to Comment Richard Head
Richard Head's picture

Peugeot probably hasn't even begun channel stuffing.  It's got legs.

Tue, 07/17/2012 - 14:00 | Link to Comment Saro
Saro's picture

"We hope the French government lets them cut production"

Love the use of the word "let", as in "We may or may not let you go out of business".

Directive 10-289 for everyone! No one can quit their job!  No one can go out of business! Everybody just freeze!

Tue, 07/17/2012 - 22:29 | Link to Comment jez
jez's picture

It's so long ago now that I can't be sure it really happened, but I seem to remember that in the 1970s, the lunatic President Idi Amin of Uganda solved his country's unemployment problem by making it illegal to be unemployed.

 

But France is not Uganda, I do realize.

Tue, 07/17/2012 - 14:03 | Link to Comment Joe Davola
Joe Davola's picture

Well they could follow President Choom Wagon's lead and eff-over the greedy bondholders, then still run it into the ground.

Tue, 07/17/2012 - 14:03 | Link to Comment oldmanagain
oldmanagain's picture

The author's take on the GM successful bail out, is counter factual.  The far right are like turtles on their back trying to get back on their legs but don't know which way is up.

Tue, 07/17/2012 - 14:28 | Link to Comment Central Bankster
Central Bankster's picture

Let me clue you in here. This left/right bullshit, yah its you idiots on one team, free market libertarians on the other. You fucking socialists/fascists are tearing society apart.

Tue, 07/17/2012 - 14:04 | Link to Comment GeezerGeek
GeezerGeek's picture

I'm certain that sales and profits would improve if Peugeot could simply acquire rights from GM to produce the Volt.

Tue, 07/17/2012 - 14:09 | Link to Comment Sandmann
Sandmann's picture

It would improve if Peugeots lasted longer than the car loan

Tue, 07/17/2012 - 14:05 | Link to Comment hugovanderbubble
hugovanderbubble's picture

Hollande

Ur banking system is going to crash...

Tue, 07/17/2012 - 14:06 | Link to Comment hugovanderbubble
hugovanderbubble's picture

General Motors II

PEUGEOT BAILOUT Plz...

Tue, 07/17/2012 - 14:08 | Link to Comment Sandmann
Sandmann's picture

Peugeot tried to offload its car receivables onto the ECB......you mean it didn't succeed ?

Tue, 07/17/2012 - 14:11 | Link to Comment Turin Turambar
Turin Turambar's picture

What a bunch of dolts running Peugeot.  All management needs to do is ramp up production and channel stuff it onto its dealers.  Happy times are here again!  Record sales!  LOL  Worked for GM  ;-)

Tue, 07/17/2012 - 14:17 | Link to Comment Bastiat009
Bastiat009's picture

Peugeot is badly managed and didn't refuse the government's bailout money a few years back. That said, communist unions and uneducated employees cannot help.

Tue, 07/17/2012 - 14:18 | Link to Comment loveyajimbo
loveyajimbo's picture

Minor issue... the cars SUCK

Tue, 07/17/2012 - 14:24 | Link to Comment Testudo321
Testudo321's picture

Quote:

" So here is today's lesson in corporate viability under socialism:

  1. Lose 14,000 jobs today, while preserving the enterprise and its 186,000 remaining jobs, but losing some popularity in the process
  2. Or be hailed a hero of the people and for the people, preserving 14,000 jobs for 2 years, and watch as your entire auto industry disintegrates in two years. "

Tyler you forgot:

3.  Pump enough public money into the enterprise to survive not only 2 years but your entire elected mandate; become even greater hero; collect kickbacks in secret and when money runs out under next president and company goes belly up - it is not your problem any more...

Tue, 07/17/2012 - 14:27 | Link to Comment Hype Alert
Hype Alert's picture

Time for some Cash for Clunkers and more broken window economics!

Tue, 07/17/2012 - 14:31 | Link to Comment Pancho Villa
Pancho Villa's picture

I think Peugeot has a bright and shining future. It simply needs to be retooled to produce solar powered electric cars.

Tue, 07/17/2012 - 14:43 | Link to Comment Central Bankster
Central Bankster's picture

I see what you did there. :)

Tue, 07/17/2012 - 14:35 | Link to Comment Spastica Rex
Spastica Rex's picture

I learned to drive in a Peugeot 504 diesel sedan. Great car, but IIRC, 0-60 was about 30 seconds.

Tue, 07/17/2012 - 14:38 | Link to Comment Nobody For President
Nobody For President's picture

Just for fun, Google Peugot and go to the top entry - their home page. The Peugot home page in english:

http://www.peugeot.com/en.aspx

and see what you get.

I get an all black page.

Whadda expect, with a company that starts with Pee-You?

Tue, 07/17/2012 - 15:28 | Link to Comment css1971
css1971's picture

Hmm... France is going to have it's own British Leyland.

Wed, 07/18/2012 - 02:56 | Link to Comment Rogue Trooper
Rogue Trooper's picture

Now that worked well... but this time I'm sure it will be different.

Genius.... by Design by CommiteeTM

http://www.youtube.com/watch?v=73rKQXCRHeA

Tue, 07/17/2012 - 15:33 | Link to Comment fpajak
fpajak's picture

Ici Paris, France.

Let's put things in perspective:

- Peugeot has been built 2 centuries ago , in 1810 and have successfully survived 2 world wars, severals wars in Europe, douzens of governements, monarchies, dictatures, republics, global crisis => it is still here and bigger than ever.

- Why is that ? because the company is backed by ... France, the whole country. Ouch... Better to be with Peugeot than against it. Thank you French Socialism: Peugeot will probably be bigger and still here in 50 years, this is the highest probability.

- Holland doesn't say "You won't layoff", he says "Yes you can, but help our workers to find another job". Clear, it is more elegant than the american method (massive layoff: just die we don't care) ... that's what makes France classy and unique...and that is what USA is lacking (sadly): social poetry.

- Peugeot is the 2nd automaker in Europe and has only just started its international expansion => huge potential, they just have to learn english before...

- People (growing population) won't stop buying cars until we invent teleportation=> huge future for electric car sales (there is no oil in France)...

Bye Bye

Tue, 07/17/2012 - 15:45 | Link to Comment Spastica Rex
Spastica Rex's picture

Très Bon, +1

Peugeot has also done well in WRC, not that many Americans would even know what that is.

Tue, 07/17/2012 - 17:10 | Link to Comment fpajak
fpajak's picture

 

 

 

Tue, 07/17/2012 - 15:56 | Link to Comment css1971
css1971's picture

The UK tried this during the 1970s. Basically destroyed the entire industry in the UK, handed it over to the Japanese. There are zero... i.e. No mass British car companies left.

You are better off with many small to medium companies where failure is not catastrophic. Big monolithic companies tend to implode in on themselves and take everything down with them.

Tue, 07/17/2012 - 16:38 | Link to Comment Tirpitz
Tirpitz's picture

Apparently the Brits didn't make the final step, towards too big to fail status, which guarantees endless supplies of taxpayer funds in well-connected industries.

But then, who needs a manufacturing base in a world where people live off the service industry?

Tue, 07/17/2012 - 15:58 | Link to Comment AvenoSativo
AvenoSativo's picture

The article wrote: <<Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM,...>>

 

I am not sure this is accurate. Hollande specifically said that he won't pump money into PSA (Peugeot). What he indicated as possible actions were to encourage people to buy French cars; one of the meansures implied was to increase sales tax on expensive cars (presumably German cars), which the German newspaper Die Welt said is a new form of protectionism within a supposedly "common market". It is also a measure that the French newspapers said won't work because rich people don't care about paying a bit more to get the social status of having the prestige to own an expensive (German) cars.

The "discussions" between Peugeot and the French Socialist government is still on-going and nobody knows exactly what Hollande is going to do about Peugeot's announced plan to lay off 8000 workers that he "judged as unacceptable" (in the July 14, 2012 interview).

 

Wed, 07/18/2012 - 11:42 | Link to Comment BigJim
BigJim's picture

It just shows you how bizzare 'capitalism' has become when the government can tell a (supposedly) private company it's 'unacceptable' to lay people off.

Tue, 07/17/2012 - 16:00 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

Article:

 

“The logical - it fires, or specifically it announces its intentions to fire, 14,000, or about 7% of its labor force: an act which in itself very well may be insufficient, but at least it will extend the viability of the firm courtesy of a modestly reduced cash burn.”

 

 

My comments:

 

I suspect that PSA wish they could fire more people. Especially if they intend to merge with Opel and get lots of redundant engineering and production capacity. Remember that it´s expensive in France to fire core employees. I don´t know whether the problem is that they can not fire core employees. But if that is the problem I think that the smartest thing Hollande could do in the short term would be to let the government create a new, artificial auto company (which perhaps could say that it intends to develop environmental friendly cars or some kind of electric cars) that could absorb the workforce PSA wants to fire.

 

I suppose that the least expensive solution for the French tax payers would be to create some kind of dummy corporation that would let the blue-collar workers sweep the factory floor and let the white-collar workers to sharpen lead-pencils or something like that. If they actually would do something and then hand over the results to PSA and Renault I guess that could count as illegal government subsidies. Perhaps they could elude such regulations if universities hire the engineers for some kind of research project and also let them teach engineering students a few hours per year.

 

I don´t know whether the French tax payers would be better off if Hollande would subsidize PSA one way or the other. I suspect that the French society in the end would be better off if Hollande would help PSA cut costs and thereby avoid bankruptcy. But I´m not so sure that Hollande intends to make it less costly for PSA to fire people and shut down plants.

 

The best solution for French tax payers would of course be if PSA could fire all the people they wanted to and if all these people almost instantly could find new jobs and would not need any unemployment benefits. But there is no way that is going to happen in a country which has had an excessive supply of labour for decades. If you don´t have an excessive supply of labour a lot less people need unemployment benefits. Therefore, excessive supply of labour is bad for the tax payers, provided that you don´t let these people starve to death. The problem Hollande is facing as regards PSA is an example of the consequences you get if you have a chronic, excessive supply of labour. But I don´t think that Hollande cares about the problem with excessive supply of labour. But there are actually examples of socialist politicians and trade union leaders that have pointed to the problem of excessive supply of labour. In the late 1960s, the Swedish trade union economist Hans Hagnell called attention to this problem. I have also heard that some American trade unions in the 1970s made futile attempts to inform the general public about this problem.

 

I think that Sweden in the 1970s is an example of the benefits of restricting the supply of labour. In those days Sweden had a very bad climate for entrepreneurs. The only thing that happened if you created a successful company was that the government confiscated all your dividends or almost the entire company if you died. The only way to accumulate wealth for you and your family was to move abroad. And many did that. But despite this climate for entrepreneurs, ordinary people continued to make more money than in other, more capitalistic countries. The Swedes drove significantly bigger and more expensive cars than other Europeans and had bigger homes. Limited supply of labour forced big business to replace workers with robots to a more significant degree than in any other country. Productivity increased. The only ones who really suffered in Sweden in the 1970s were rich people who didn´t move abroad or didn´t hire good tax lawyers. I don´t know whether this system would have worked in the long run. My assessment is that you get less companies like Microsoft and Apple in an economy like Sweden in the 1970s. But Sweden in the 1970s is also an example of how you can maintain a high living standard due to limited supply of labour despite tax regulations which almost everybody today consider as disastrous. I think that this highlights the benefits of limited supply of labour and how bad excessive supply of labour really is. It shouldn´t be a problem if a company like PSA has to fire 7 % of its workforce.

Tue, 07/17/2012 - 16:33 | Link to Comment Tirpitz
Tirpitz's picture

Guess the Nordic countries aren't as overrun by trash swamping across the Southern borders as France and Spain and Germany are, providing for a constant stream of 'cheap labor.'

Tue, 07/17/2012 - 17:01 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

Tirpitz:

"Guess the Nordic countries aren't as overrun by trash swamping across the Southern borders as France and Spain and Germany are, providing for a constant stream of 'cheap labor.' "

My comments:

I hope that the readers are able to overlook your racist remarks and concentrate on what you seem to consider as facts as regards supply of labour in France compared to Sweden.

There is not more excessive supply of labour in France than in Sweden. The fact that the unemployment figures seem to be better for Sweden is primarily due to a very limited household savings rate and excessive household spending in Sweden.

 

Wed, 07/18/2012 - 11:57 | Link to Comment BigJim
BigJim's picture

 ...But there is no way that is going to happen in a country which has had an excessive supply of labour for decades.

You might want to examine some of your premises here. First off - what's an excessive supply of labour? I look around and I see no end of things to be done... but that cannot be done at current wages. So what we have is not an excessive supply of labour, but a supply of excessively expensive labour.

Imagine back in the 1920's, and buggy-ship manufacturers' revenues are declining. Well, imagine the government back then saying it was 'unacceptable' for those companies to lay off staff. From our vantage point today, we can see this would be a ridiculous King Canute-like attempt to stop industries rise and fall as market demand changed. But for some reason, no, our current industries must be protected, whether they can compete or not.

Now, we have a situation where excess credit has created an unsustainable boom in purchases of things like cars, and now, instead of liquidating assets and allowing real price discovery to determine what people (ie, the market) wants, you want to prop up the mis-allocation of capital with yet more misallocation of capital. And where will the money for this come from? Deficit spending... and even greater sovereign debt.

I'm sorry for the (now) redundant Peugeot auto workers. It may be very hard for many of them to get another job that pays as well. But that doesn't mean I'm entitled to extract wealth from other people to continue paying them to do something the market won't do on its own... and which ultimately will lead to even greater economic ruination for everyone else.

Wed, 07/18/2012 - 15:37 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

BigJim:

 

“You might want to examine some of your premises here. First off - what's an excessive supply of labour? I look around and I see no end of things to be done... but that cannot be done at current wages. So what we have is not an excessive supply of labour, but a supply of excessively expensive labour.

 

Imagine back in the 1920's, and buggy-ship manufacturers' revenues are declining. Well, imagine the government back then saying it was 'unacceptable' for those companies to lay off staff. From our vantage point today, we can see this would be a ridiculous King Canute-like attempt to stop industries rise and fall as market demand changed. But for some reason, no, our current industries must be protected, whether they can compete or not.

 

Now, we have a situation where excess credit has created an unsustainable boom in purchases of things like cars, and now, instead of liquidating assets and allowing real price discovery to determine what people (ie, the market) wants, you want to prop up the mis-allocation of capital with yet more misallocation of capital. And where will the money for this come from? Deficit spending... and even greater sovereign debt.

 

I'm sorry for the (now) redundant Peugeot auto workers. It may be very hard for many of them to get another job that pays as well. But that doesn't mean I'm entitled to extract wealth from other people to continue paying them to do something the market won't do on its own... and which ultimately will lead to even greater economic ruination for everyone else.”

 

 

 

My comments:

 

I don´t know whether you don´t understand what I´m saying or whether you pretend not to understand what I´m saying.

 

I agree with you that we have a situation where excess credit has created artificial demand in the economy. Low savings rates due to low interest rates have also contributed to create some kind of artificial demand.

 

I also agree with you on the buggy-ship manufacturers. The government should not try to prop up markets for goods which people don´t want to buy. But if there is not excessive supply of labour in the economy, workers at buggy-ship manufacturers can find work elsewhere. Therefore, excessive supply of labour is bad.

 

The difference between you and me is that I think that excessive supply of labour is a problem. Even if you lower wages rather than increase unemployment I think that is bad. I prefer to live in a society where everybody makes at least $15 an hour. I just can´t see the point in having excessive supply of labour which drives down wages to $5 an hour. The “best” argument for this which I have seen so far is that “if some people make just $5 an hour rather than $15 an hour I feel so much richer since I only make $20 an hour”.

 

I can´t see how any country benefits by increasing supply of labour so that the bottom 20 % of the population makes $5 an hour rather than $15 an hour. Who benefits from making your country poorer on the average? Big business? I doubt it, although I agree that some people who are associated with big business want excessive supply of labour, but not because they want to make more money. If the bottom 20 % make less money they have less money to spend on things big business sell. For a while, that can be compensated with less saving and more borrowing, but not indefinitely.

 

You get a much nicer society without really poor people. You get less crime, less prostitution and less need for subsidizing poor families. People that make $5 (or official minimum wage in the US, which is a little bit more) pay almost no taxes. So schooling for their children is paid for by others. Furthermore, they don´t contribute to roads, the police authorities, the fire brigades and so on. Even without socialized health care, like in Europe, more poor people are a burden to other tax payers. Therefore, other people do not benefit from increasing the share of poor people in their society. I know that many people just can´t understand that. Therefore, I think that the best solution would be if people who are incapable of understanding very basic economics would get a country of their own and that people who understand very basic economics also would get a country of their own. Unfortunately, that will not happen.

 

Perhaps France and other European countries should be divided into three different countries:

 

Country A: Excessive supply of labour. High minimum wages dictated by the government or strong trade unions. The government subsidizes unemployed people on a large scale. High taxes.

 

Country B: Excessive supply of labour. Low minimum wages or no minimum wages at all. Most people find work although some can barely survive on their pay-checks or starve.

 

Country C: No excessive supply of labour. Minimum wages not needed. Supply and demand results in $15 an hour or more. Limited need for subsidizing the bottom 20 %. Even if you do that (subsidize), the cost is small for the rest of the population since poor people make almost enough to pay for their own health care, education and so on. The net cost for the rest of the population may be smaller than in Country B due to less crime and less need for police officers and prison guards. And if the bottom 80 % makes more money and can save more they get less jealous of the top 2 % and more willing to accept low capital gains taxes, no death tax etc.

Tue, 07/17/2012 - 16:01 | Link to Comment Titan Uranus
Titan Uranus's picture

Yeah, "classy and unique," that's it, that's what I'd call the aroma you enjoy when you climb aboard a french bus in the summer...classy and unique.  Indeed. 

Tue, 07/17/2012 - 16:44 | Link to Comment falak pema
falak pema's picture

Peugeot' probable default has nothing to do with pseudo socialism. It has to do with bad capitalistic planning :

1° Peugeot has refused to invest big time in export markets like its competitor Renault-Nissan. It is totally a prisoner of the european market.

2° It has specialied in mid-range products which is the most saturated, oversupplied, competitive, stagnant segment in Europe. Its corporate competitors have specialised upmarket (BMW, Audi, MB, Toyota) or down market (Fiat, Renault/dacia, Nissan, VW).

3° It is behind in hybrids and electric vis a vis Nissan, Toyota.

4° Its operating margins are now negative in down turn in Europe and it has NO alternative strategy in BRIC markets.

This is the result of a twenty year corporate strategy that has never been corrected. Too late to correct now, as there is world wide overcapacity. 

SO tell me how has pseudo socialism, coming now to France since JUly 2012, affected a corporate situation that has been bubbling for twenty years? 

Its like saying the current financial crisis of the "pseudo" Libertarian age (I say this to appease ZH zealots who say the past 20 years were NOT libertarian in nature), aka Reaganomics et al.,  is the product of Keynesian logic.

Sorry, I have to say on this issue  : my ass! 

Zh has an ideological bend of reasoning I don't buy. 

 

Tue, 07/17/2012 - 17:07 | Link to Comment CTG_Sweden
CTG_Sweden's picture

 

falak pema:

"1° Peugeot has refused to invest big time in export markets like its competitor Renault-Nissan. It is totally a prisoner of the european market."

 

My comments:

Renault/Nissan has better economies of scale than PSA and does not depend on the French and the European markets to the same extent. That is probably the most important difference between PSA and Renault/Nissan.

 

Wed, 07/18/2012 - 12:09 | Link to Comment BigJim
BigJim's picture

 Peugeot' probable default has nothing to do with pseudo socialism. It has to do with bad capitalistic planning :

You appear, somehow, to have failed to grasp Tyler's point.

Peugeot's inability to compete does indeed reflect bad decision-making on the part of its management (though the additional costs of high taxation and uncompetitive wages are directly attributable to what people like to characterise as 'socialism', but which is just government interference in free markets)

However, Tyler's point is that, with the government preventing Peugeot from firing 7% of its workers in an attempt to get its costs down, the risk of Peugeot failing completely and having to fire 100% of its workers is much greater.

You can argue that this is, strictly speaking, not socialism per se; as such interference in privately owned businesses is, technically, more characteristic of fascism than socialism (where Peugeot would be owned outright by the state).

But so what? The actual 'bend of reasoning' is completely correct, even if the terminology is a little wayward.

Tue, 07/17/2012 - 16:28 | Link to Comment Tirpitz
Tirpitz's picture

"today's lesson in corporate viability under socialism"

Yeah, but why would Peugot be a socialist enterprise? The ownership structure looks decidedly capitalist:

http://www.psa-peugeot-citroen.com/en/finance/the-peugeot-sa-share/stock...

 

Tue, 07/17/2012 - 16:51 | Link to Comment Martin T
Martin T's picture

It is not only Peugeot facing serious deflationary headwinds. The whole European car industry is facing difficult years ahead impacted by exploding unemployment for youths as well as aging populations. The average age for a French new car buyer is 51.5 years old, it was 50.5 years old in 2009...

http://macronomy.blogspot.be/2012/04/european-clunker-european-car-sales.html

Youths in Europe are in the front line in relation to repaying the massive debt accumulated by the previous generation as well as maintaining the pension system. We have indeed an interesting toxic cocktail mix, which not only doesn't bode well for the car industry (with a saturated market), but doesn't bode well either for the "relations" between generations and trigger a "generational conflict" with the increasing worrying trend in youth unemployment. The evolution of the economic situation in Europe, could well lead to a European "Fall", in the footsteps of the Arab "Spring"...

Tue, 07/17/2012 - 17:10 | Link to Comment fpajak
fpajak's picture

Ici Paris, France:

- In France, saying NO to someone is the fundation of the dialogue, the social interaction, and partly the business interaction,

- Street Protest is an essential part of the social theater but it means "I understand you but I don't agree" it doesn't mean "We won't absolutely let you do it": Hollande is the perfect example,

- Business meetings in France are first dedicated to solve problems/opposition,

- When the President says NO it means "Yes but" not a real "NO" (see above); I have personally met François Hollande 15 years ago, he never says "NO" for real to anybody => this is how he became President, by compromise.

- Peugeot have plenty of time (not 2 years, not 5 years, more...the eternity) and is not in a hurry, it has been 200 years in business with ups and downs. But money (cash flow, sales etc ...) doesn't count so much; people, ideas, identity, education and faith do. The Peugeot family know that perfectly since 1810 and Varin the CEO to.

- Bloomberg, CNBC, the four or five english Hedge Funds and JPM shorting Peugeot since its alliance whith GM can't understand that...they just look at figures...they should look at History...

 

 

Tue, 07/17/2012 - 18:35 | Link to Comment exartizo
exartizo's picture

"Hollande is an idiot."

I tried to post that line on Reuters and the bastards censored me.

Hollande has a lot of nerve. But then he IS French.

What business does he have getting involved in private sector business decisions? (Oh, I forgot, they're socialists)

Only American Politicians can get away with that.

Peugot should be allowed to go bankrupt.

 

Tue, 07/17/2012 - 18:51 | Link to Comment lizzy36
lizzy36's picture

Peugot should become a TBTF bank.....they are never allowed to go bankrupt.

Tue, 07/17/2012 - 19:12 | Link to Comment shovelhead
shovelhead's picture

PSA doesn't lay off, spends the cash and belly-ups.

Everyone losing their job is much more egalitarian.

Socialism in action. C'est bon.

Hollande is a genius.

Tue, 07/17/2012 - 20:05 | Link to Comment duckarooni
duckarooni's picture

Who buys all these cars anyway. Damn roads are full of them.

Lt Col. R. Gardenhoser
Mars.

Wed, 07/18/2012 - 03:39 | Link to Comment sUccRAM
sUccRAM's picture

@fpajak

Lehmann had been for 158 years in the market, french troll, and? Time is running out, even for someone state pampered like Peugeot...



Wed, 07/18/2012 - 04:48 | Link to Comment fpajak
fpajak's picture

I agree with you about Lehman. But banks and car makers are in two different business.

I am not a specialist of banks but I think since the complete virtualization of the financial system with computers (starting in the 80s) (100% of the money cycle is electronic) a merchant bank like Lehman is 100 % based on a single activity: clicks on computer keyboards. Where are the physical dollars, where is the physical gold, the real assets ? there is none. 99% af the assets of these virtual banks (including shadow banking) are a few lines of code in a database the size of the flash memory of an iPod. Not much.

Banks don't use real assets (factories) to build real things (car). Bankers just click on keyboards all the day, like in an Internet Start-up. As a consequence you can erase 99% a of bank asset with a single click. Impossible to do with a car maker.

Being 99% virtual in a world of real things and people with real need is risky.

Moving your body with a car is a real need, credit is not.

Wed, 07/18/2012 - 06:17 | Link to Comment EmileLargo
EmileLargo's picture

Here's another auto sector story but a very different one. This is the problem. The French are being eaten alive by German competition. Even in a shrinking market the Germans manage sales growth! The Germans sell superb cars that are well engineered, usually quite reliable with excellent and top of the range electronics and to top it all they finance the purchases for their customers at ridiculously low interest rates.

Hollande the economic illiterate thinks that "leaning" on Peugeot is going to put an end to this. The auto business is a cut-throat horrible business with poor margins (except for the super-luxury segment and that is small). In a cut-throat business like this with massive overcapacity, how do you survive if you're not simply the best? Against the juggernaut of VW, BMW and Mercedes, the French cannot survive because they are not better on any measurable yardstick. For the life of me, I cannot believe that France still has a car industry. Given the fact that you have open compeititon within the EU, it is amazing that they have managed to survive the German onslaught for this long. But not much longer I guess.  

The future of the auto business does not look good. Many of the weaker players are going to get eliminated. This is just the start. At the end of the process, a small number of German automakers will likely survive along with Honda and Toyota. The rest will get crushed. In India and China, given the level of protection for domestic producers, players like Tata and Geeley could also survive. The future is not going to be good for any that are weak and vulnerable.

Wed, 07/18/2012 - 07:16 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

an auto is every tax unit's right. it's in the constitution right next to the right for healthcare.

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