GM auditor raises spectre of bankruptcy

Link: http://www.cbc.ca/money/story/2009/03/05/gmannual.html

Summary
Again, General Motors Corp. is facing a financial issue. GM workers are in fear for their jobs as they are facing a high chance of bankruptcy. A hint from the General Motors Corp.'s auditors said that they have raised "substantial doubt" about the troubled automaker's ability to continue operations. It is a reasonable prediction as GM has been facing recurring losses from operations, even after the bail out. Hence, it is a likely situation that GM will go bankrupt because of its inability to generate sufficient cash flow to sustain its operations. Currently, General Motors Corp. is finding bankruptcy protection and other solutions to overcome the situation if they again, fail to restructure a plan. Moreover, workers are still being laid off. Another total of 47,000 workers will be laid-off.

Relationship

As we all know, General Motors Corp. is facing another severe financial issue that may cause them bankruptcy. The question "why?" can be easily explained with the relationship to chapter 6's circular flow of money diagram. Referring to the flow chart, we can see that "household" and "business" are interrelated. When there is a lack of spending from consumers, businesses are not making any profit. As a rule of thumb, economic activity will always try to achieve equilibrium in GDP. In this case, due to increase of people investing and saving, businesses will lay off workers to regain balance in economy. Thus, this explains why there is a massive job loss in the company. This also refers to the paradox of thrift. The paradox of thrift explains the significance of attempting to save money and how we actually end up saving less. Reason for this is because less money is injected into the circular flow of money. In order to prevent anymore job losses, people need to spend more or at least provide GM with more money. In this case, the government has generously offered a bail-out not too long ago, but as we can see, it's not helping. People are still unwilling to purchase cars, not even from foreign countries. If foreign countries are unwilling to purchase cars, than we are unable to export goods. This is crucial as exports cause GDP to increase. Our GDP will only increase if the total amount of money injected into the circular flow exceeds the leakages from the circular flow, the level of GDP will increase. Hence, when the level of GDP is increasing, spending is up, jobs are being created, and the unemployment rate is likely to be low. However in today's economy, we are spending less, so less jobs are being created and the unemployment rate is high.

Conclusion
Due to expectation of future prices and job losses, it is evident that people will definitely spend less and save more. Although this may seem to be the right thing to do, Chapter 6 proves that this is actually something we need to avoid. Already, it is explained why we need to spend more instead of saving as it leads to job losses. To prevent this situation, we first need to provide more money for businesses so that they will maintain or create more jobs. To show the significance of an individual's spending (Expenditure Multiplier), I will use "Bob" as an example.

• Bob purchases a $1000 audio equipment (GDP=$1000)
  
• Owner may use the money you spent on other purchases (+ (MPC) x $1000)
• Another person will be the recipient of this spending and will, in return, spend part of what the individual receives (+ (MPC) (MPC) x $1000)
  
• GDP increases more than $1000. (+ (MPC) (MPC) (MPC)....x$1000)

The same effect results when government lowers the rate of tax because consumers and businesses will have more money to spend (tax multiplier).

Secondly, more government involvement such as lowering interest rates for loan will increase borrowing and spending rate. Currently, some auto dealer shops such as Honda are doing this. They are offering 0.9% interest towards any car you buy for a limited time. Moreover, government should deduct tax %. It doesn't make much sense to take more money out of people's pockets, especially to people who are currently laid-off at times like this. All in all, GM and GM workers will be defendant on consumer's spending patterns. We need to spend more and save less.