And now, it’s broke. And even politicians think they know how to run an auto company. Just read the papers. “Obama insists on changes,” says one headline.

Normally, the politicos should hold their tongues…and let an industry’s owners run their businesses. Alas, as of a few days ago, the politicians ARE the owners.

Here’s a question:

When the government takes a majority stake in the auto business you know you are:

A) In a bad dream
B) In a bad way
C) In a bad country
D) In France

Correct answer: well, we we’re not in France. But as for the rest, it could be any of them…or all of the above.

Here’s an easier question. Who will the U.S. government put on the board of directors of General Motors?

A) A political hack
B) An industry hack
C) A far-sighted maverick who will shake up the business and put it on the road to growth and prosperity

If you answered “C” – you are from another planet. There is a reason neither governments, nor workers should own businesses. In the following, roundabout way, we explain why…

But first, a bit of news. As far as we can tell, the bear market rally is still on. The Dow rose 44 points on Friday. Oil closed at $53. The dollar is still sinking. And gold lost $3 to end the day’s trading at $888.

Thirty-two banks have shut down so far this year in the United States. Little, mismanaged banks go broke. But big, mismanaged banks get federal money. With these subsidies and bailouts, the big banks get larger…and live to foul-up another day.

Poor Warren Buffett seemed a little discouraged at his annual shareholders’ fest in Omaha. He must be nearing the end of his career. And consumers just aren’t buying as much furniture, cola, and candy as they used to, he told the faithful. (NYSE:BRK.A/BRK.B) Berkshire Hathaway’s profits were 10% below those of last year.

Swine flu seems to be disappearing from the front pages. Has it gone the way of Y2K and terrorism? Has another great disaster been averted? Might be too early to tell…

Oh you doomers and gloomers, cheer up! There’s always some other disaster waiting for a headline. How about this? The Seattle Times looks at Las Vegas and sees what it calls “the next global crisis.” After 10 years of drought, Las Vegas is running out of water.

The city fathers are thinking of all sorts of solutions – except, of course, for the obvious and effective one. They’re planning on huge pipelines…hundreds of miles long…and sucking water out of aquifers millions of years old. But, according to the paper, Las Vegas charges only about a tenth as much for its water as Atlanta does. The simple solution is to let free enterprise provide water…so that it could be priced correctly.

Colleague Chris Mayer has been following the water crisis story since the introduction of his newsletter, Mayer’s Special Situations, in 2006.

“Water is not just a problem in Las Vegas. The lack of sources for fresh water is a problem facing much of the American West, though the problem is particularly acute there and in the state of Nevada generally. Nevada is the most arid state in the union,” says Chris.

“The tight water supply has implications all over the West. In Arizona, you can’t build a residential development unless you find a ‘designated assured water supply’ that can sustain that development for 100 years. I could go on and on about this kind of thing. Suffice it to say, the American West faces a water crisis.”

Maybe the increase in water prices would discourage people from planting Georgia-style grass lawns in the Nevada desert. Or maybe it would discourage people from moving to Las Vegas in the first place. But that’s the thing with capitalism; it doesn’t take people where they want to go…it takes them where they ought to be. That’s also why people hate free enterprise so much. Where they ought to be is, often, where they least want to go. In the present example, people think they have a right to water – practically for free. They think there’s a ‘water clause’ in the Constitution that says government is supposed to provide them as much water as they want at a price they can afford.

Most things work better when they are run by private enterprises. Too bad. Free enterprise is out of style. The days of privatizing are over. Now, everyone wants the government to take charge.

What a turnaround from a few years ago – when people thought they could solve practically every problem by privatizing it. And then, the voters would buy shares in the newly privatized companies…and we’d all get rich!

“For water, the really bad stuff hasn’t happened – yet,” says Chris. “As investors, it’s a good place to be for a long time.”

Now, over to Addison for a look at this year’s federal deficit:

“Panic over the financial system is no longer crowding out discussion of the federal deficit here in I.O.U.S.A.,” writes Addison in today’s issue of The 5 Min. Forecast.

“Even the New York Times is noticing the deficit as a percentage of GDP will likely shoot above 10% this year – a post-WWII high.

“Bond investors caught onto this even sooner than the Times. They’ve driven yields on the 10-year Treasury note to their highest since last November – above 3%.

“Ben Bernanke and Co. can keep short-term rates as low as they like, but the bond market clearly sees signs of trouble on the longer end of the yield curve.”

“‘The reality remains that the United States is struggling through the most severe post-World War II recession with a rather compromised credit system,” writes The Richebächer Letter’s Rob Parenteau, “and the only sure area of rising final demand over the next year will be coming from fiscal deficit spending.’”

And back to Bill, with more thoughts:

The proletariat began buying stocks in the ’80s. The ‘shareholder nation’ was a dream of Maggie Thatcher and Ronald Reagan: Everyman a Capitalist.

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds…or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers – who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn’t mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich…and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the ’80s, realized how it worked, he was outraged; ‘they make money in their sleep,’ he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. “Buy stocks,” thundered Wall Street.

And so…the little guys piled in….and stocks soared.

“Buy and Hold,” the pros told them. “Stocks for the Long Run,” wrote professors of finance.

Of course, some people wanted to make money faster. So ‘day trading’ became popular in the late ’90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the ’80s and ’90s, too, people began to believe that you could motivate workers by giving them “a piece of the upside.” And the workers, too, believed they might get rich if they had a stake in their employer’s company. Especially in the financial sector, ‘results-based compensation’ caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened…well, that would be the owners problem, wouldn’t it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners – including the new capitalists – wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits – so they could exercise their stock options and pay themselves big bonuses. They were all ‘capitalists’ – but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high…he’d want to move to a lower-cost production center. And if the managers asked for too much – he’d fire them and get new ones.

But neither the working stiffs nor the suits shared the owners’ interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries…GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn’t allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century – suppressing earnings in the short term in order to make the company stronger later on – its bonus-seeking, option-driven managers wouldn’t permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you’re wondering what that means in today’s world, you’re not alone. We’re wondering too.

Until tomorrow,

Bill Bonner

Source: How Unions and Governments Destroy Businesses

With an economy that’s advancing at an average annual clip of better than 11%, $1.7 trillion in currency reserves, and an emerging middle class that will soon be the world’s largest, China represents the future to globally focused investors and businesses alike. But there’s always been a concern about just how resilient China’s economy actually would prove to be.

Rogers urged investors to dump such concerns.

In fact, according to Rogers, when it comes to the Red Dragon, only one thing could cause this powerful expansion to wash out: A major water crisis.

“China has a huge water problem,” he said. “In Northern China, they’re running out of water. They know this and they’re working on it, big time. But if they don’t solve it, or if they don’t solve it in time, then China – as you put it – has failed.”

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first truly global investment vehicle, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers “retired” in 1980 that the public first really got to see him in action. After traveling the world on a motorcycle, Rogers penned the best seller “Investment Biker” – and gained the moniker: “Adventure Capitalist.” And he’s used the “on-the-ground” insights he gained on that trip and others that followed to make some truly historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent to other investing “experts,” and he subsequently foretold of the powerful updraft in global commodities prices that is continuing to fuel a year-long bull market in the agriculture, energy and mining sectors.

In his newest best seller, “A Bull in China,” Rogers writes about China and the commodities boom, and details dozens of ways investors can profit from these trends.

Given Rogers’ prescience – not to mention all the uncertainty that right now surrounds the U.S. economy – we thought it was well worth a sit-down with the noted guru, even if it meant traveling all the way to Singapore, where he now lives with his family, to do so.

During that hour-long interview at his home in Singapore’s exclusive Orchard Park district – with the two of us talking as he pedaled his exercise bike furiously, despite the morning heat – Rogers also said that:

• Oil prices are only going to go higher.
• That Russia will continue to “strip itself” of assets, meaning it will never emerge as an economic force.
• And that the U.S. dollar’s woes will continue.

Let’s take a look at some of the highlights of the Money Morning interview with investor and author Jim Rogers.
Keith Fitz-Gerald (Q): Can you see an instance where China fails?

Jim Rogers: Of course. Anybody – and everything – can fail. But [let’s consider] the main problem first.

I don’t worry about war or epidemics or depression or even political upheaval. Everybody has had that. America had horrible problems. We had a terrible Civil War. We had political leaders regularly assassinated 125 years ago. We had massacres in the streets. We had no human rights. We had no rule of law. You could buy and sell congressmen. You can still buy and sell congressmen in America, but they were much cheaper in those days.

America had many disasters, and yet it became the great success story of the 20th Century. As recently as 1907, the entire system went bankrupt in America: The government, Wall Street, everything. And yet, America came out of that and went on to big things.

All of those things can happen in China and would be temporary setbacks. I don’t consider any of them being the end of the China story.

The only thing that worries me permanently about the China story is water.

I’ve been around the world twice. I’ve seen many cities, societies, [and] nations that disappeared because the water disappeared. China has a huge water problem. In Northern China, they’re running out of water. They know this and they’re working on it, big time. But if they don’t solve it, or if they don’t solve it in time, then China – as you put it – has failed.

By the way, Northern India has the same problem, only worse. Many places have it now. Water is becoming a huge problem worldwide. The same is true in the Southwestern United States. You know, you may have Arizona going to war with California. Some sections of Nevada, Colorado …they’re desperate there.

So it’s not just China – but water’s the main thing that worries me about China.

As I say [that] civil war would be a terrible thing in China, but it’d be a temporary setback, as would epidemics, as would economic setbacks, [and as would a] depression. But China will come out of all that and keep going forward. Now, I don’t anticipate war in China – even civil war – but I’m suggesting that if it happened, I don’t see it as the end of the story any more than it was the end of the story in the United States.

Q: There’s a confluence of money flowing into and around China. Do you believe that the United States, with all its current problems, will get left out of this powerful and important trend?

Rogers: Absolutely.

The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.

Q: Is the Chinese Renminbi the next great “liquidity haven” if the U.S. dollar fails? Or do you see the Euro rising to the occasion?