How to lose billions of dollars: trust the US government

America was at the top of the world in 1955.

World War II had been over for ten years. Soldiers had come home to GI Bill mortgages in brand-new suburbs. Detroit was building cars faster than anywhere else on the planet.

And the economy was booming— in fact that year a milkshake-machine salesman named Ray Kroc had just franchised his first McDonald’s on a roadside in Illinois.

Half a world away, in a country still rebuilding from the rubble of that war, a scrappy little Japanese company called Honda was selling cheap motorcycles to people who couldn’t afford cars.

That year, 1955, was the last year that Honda lost money. Starting in 1956, and for seven decades after that, the company became one of the most consistently profitable carmakers on the planet.

Until now.

A few days ago, Honda announced billions in losses for the first time since Eisenhower was President. And the reason isn’t because of a major scandal, financial crisis, or moonshot bet on flying cars.

Honda’s executives had simply made a sensible business decision to believe the US government.

When Joe Biden promised that America was going all-electric, Honda took him at his word. That promise has now cost the company roughly $10 billion in writedowns and impairments and pushed Honda into its first annual loss in decades.

Biden’s plan was carrot-and-stick. The carrot was part of the poorly named Inflation Reduction Act in the form of a $7,500 federal tax credit on every new EV sold.

The stick came from sweeping new regulations requiring roughly two-thirds of new vehicles sold in the US to be electric by 2032. Either automakers built EVs, or they got regulated out of the American market.

In the background, Biden squeezed the oil supply to make driving a gasoline car more expensive.

He canceled the Keystone XL pipeline on his first day in office, paused new federal oil and gas leases a week later, and in his final days withdrew more than 625 million acres of US offshore waters from any future drilling.

To automakers, this EV push looked like a once-in-a-generation opportunity; Washington was writing checks, mandating the switch, and selling the whole thing as permanent. So, Honda, along with Ford, GM, and Stellantis, built the EV factories.

Consumers didn’t cooperate. Less than 10% of new cars sold in America were electric.

Then the rules changed.

When Trump took office, his administration’s EPA sensibly rolled back the emissions rule. Congress (rightly) killed the $7,500 tax credit. And automakers’ EV math collapsed overnight.

Ford swallowed a $17.4 billion hit on its EV business. Over at Stellantis, the parent of Jeep, Ram, and Chrysler, a $29.7 billion writedown produced the first annual loss in the company’s history.

GM has chalked up another $7 billion of EV-related losses. Add it up and you get roughly $64 billion of real capital that was incinerated in less than a year.

Automakers weren’t designing cars for customers; they were designing cars for subsidies and regulations. When the subsidies and regulations went away, the profits went with them.

And it isn’t Honda’s fault either. They made the call on the best information available, which was supposedly a “permanent” change in how the US government rewarded and punished automakers.

It’s sad, really. Biden cooked up a stupid policy, Trump reversed it, and the companies lost billions.

What it teaches every CEO in Tokyo, Seoul, Munich, and Detroit is to think twice before trusting Washington again. That’s the exact wrong message for a country that desperately needs continued capital investment from abroad.

Reagan saw all of this coming forty years ago. “Government’s view of the economy,” he said in 1986, “could be summed up in a few short phrases: if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Four decades later, that’s still the entire playbook.

There’s only one path out of America’s debt trap, and it’s less government. Cut the rules, cut the spending, and let markets— not Senate committee chairs and EPA administrators— decide where capital flows.

GDP has to grow faster than the borrowing, and that won’t happen if Washington keeps torching $60 billion of industrial capital every time it changes its mind about which industry to bless.

They never learn. Which is exactly why it makes so much sense to have a Plan B.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/how-to-lose-billions-of-dollars-trust-the-us-government-155177/