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We are in a Depression... - Views on News from Equitymaster
 
 
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  • Nov 21, 2008

    We are in a Depression...

    ...if one were to go by the share price of General Motors (GM) which yesterday hit levels last seen in the days of the Great Depression. The despair surrounding the company was aggravated after hopes faded that the automakers could receive a financial bailout from the US government anytime soon.

    However, after tumbling by 38% in early morning trades, the stock managed to close the session just marginally in the red. Yesterday's low of US$ 1.7 was the lowest price recorded by the stock since June 4, 1938, when it had fallen to US$ 1.69.

    The US$ 25 bn rescue plan for the auto industry that is being desperately sought by the Big Three (GM, Ford and Chrysler) faces uncertainty as the US government has indicated that it will not even consider it until these companies produced a convincing plan to rebuild their industry.

    This led to panic across US stocks, as the S&P 500 Index closed around 6.7% down, at its lowest point since April 1997. The Dow and Nasdaq closed at their lowest levels since March 2003. Asian markets are mirroring the US, as all key indices are treading in the negative territory. The Chinese benchmark index is leading the pack of losers with a 4% decline. Markets in Hong Kong and Japan are trading weak by 2% and 1.5% respectively.

    Apart from the US government, a similar view on the bailout has been echoed by Jack Welch, the former Chairman of General Electric. In an interview with Business Week, Welch said that instead of seeking a bailout, "...the boards of Chrysler and General Motors put their companies into bankruptcy with the clear intent of reorganization and merger. As radical as that sounds, it's the best road we can see to a viable future for the industry."

    As a matter of fact, these US automobile majors have been severely impacted by a choked credit system and declining sales. As reported on Yahoo Finance, "failure of one or more of the Big Three would be a severe further blow to the floundering economy - and to many Americans' view of the nation's industrial strength - and throw a million or more additional workers off the job." Now that's what is like being in dire straits.

     

     

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