Let’s start with GM. Instead of talking about its autos, I’ll just focus on the numbers. Over the past decade, GM’s gross profits have declined from $40 billion to $22 billion, while its debt has increased from $199 billion to over $450 billion, all during a period of historically low interest rates.
The low rates won’t last forever, though. Just over the past three years, GM’s interest expenses have risen 77% from $9 billion to $16 billion and are projected to rise to $18 billion this year. Rates are still very low by historical standards.
One of the reasons the Federal Reserve cuts interest rates is to make it easier for companies to get the cash they need to finance growth. Unfortunately, free-flowing cash also makes it easy to dig yourself into a hole. GM supposedly took on all that debt to get its profits back on track, but as you can see, the opposite has occurred.
The simple truth is that GM can’t make enough money selling cars to pay for its overhead, upkeep, salaries and dividend payments. Its solution has been to take on more and more debt, rather than spending its cash reserves, so that it can show a “profit” on quarterly income statements. In other words, GM is kiting checks all over town, using its MasterCard to pay off its Visa, burying itself ever deeper under a crushing mountain of debt.
At present margin levels and interest rates, it will take more than 20 years to pay down its debt load. Imagine what will happen when rates return to their long-term average level, as they inevitably will. With inflation looming, the Fed will have no choice but to raise interest rates at some point. It’s only a matter of time.
