Is The U.S. Turning 'Pink'?

Beleaguered U.S. auto giants G.M. and Chrysler inched towards agreements Monday, that would help them avoid bankruptcy.

Chrysler union leaders voted Monday to approve concessions that would help the auto maker ward off bankruptcy.The settlement will see the UAW union ending up with 55% of a restructured Chrysler LLC. Fiat Group SpA will own 35% and the remaining 10% will be divided between the U.S. government and several lenders.

A restructuring plan for G.M., unveiled Monday calls for cutting 21,000 U.S. factory jobs by next year and bidding goodbye to the Pontiac brand. About $27 billion of bond debt will be converted into G.M. stock. It will also offer stock to the UAW towards part of its liabilities to a union managed trust that will take care of retiree health care expenses.If this scheme goes through, the U.S. government along with the UAW union will own 89% of G.M. stock, with the government holding more than 50%. The present stockholders will be left with about 1% only.

These two companies will be the latest additions to a long list of failed business giants like AIG, Lehman Brothers, Fannie and Freddie to name a few.To get a proper idea of the scale of economic destruction over the last eighteen months, one would need to add the long list of smaller banks and companies which have simply disappeared.

The companies which have been bailed out are those which are just too large to be allowed to go under.Their annual revenues run into into hundreds of billions of dollars, larger than the GDP of virtually every nation on this earth, leaving aside about the top twenty countries or so.In economic terms the U.S. has lost more, than perhaps Russia did after the break up of the Soviet Union.

The way out of this mess is expected to be led by a massive injection of funds by the U.S. Fed into these companies with scant regard to their ability to repay the money.The money is to be given at virtually zero percent interest, while the U.S. government itself will have to borrow on interest in order to finance its almost 1.4 trillion dollar deficit in 2010. Banks have been given to understand that they have access to government funds under the preferred swap scheme whereby government loans will get converted into equity.

Although it is premature to conclude that the U.S. government has plans to nationalise important parts of the economy, particularly the banking and insurance industries, it is true that the U.S., regarded as the most capitalistic of nations, may be turning 'pink' after all.