The mantra of the day is frugality and cutback. Rightsize and hunker-down, as tougher economic times are ahead.

But graft hunkering-down on to a U.S. auto sector that has accounted for a disproportionate share of lateral innovation, and you have the makings of an U.S. innovation slump, if not a drought.

The Wall Street Journal points out that the U.S. auto sector has had a kind of dual personality with regard to innovation. The Big 3 have failed to roll-out technologies that would have made their cars more competitive on the global stage, while at the same time pushed their suppliers -- including steel makers and auto parts suppliers -- to improve their parts supplied in order to retain the Big 3's business. Further, that high-performance-bar for suppliers has benefited other industries: one example -- metal parts in cars that last longer has led to metal parts in other applications, and for other industries, that do the same.

Ford may have to abandon its plan to skip a federal loan, as slumping sales continue to weigh on company revenues.

Ford (NYSE: F) predicted that U.S. light vehicle sales will total 12.2 million vehicles. General Motors (NYSE: GM) expects to sell 10-11 million vehicles, Chrysler, about 11 million.

Economist Richard Felson told BloggingStocks Monday a 2009 U.S. GDP decline of 2% or more "would make it virtually impossible for Ford to sell 12 million light vehicles."

"A combination of layoffs and still constrained credit markets will continue to hurt the auto sector for most of 2009," Felson said. "An optimistic scenario would be a sector recovery in the second half of 2009."

Ford's shares early Monday fell 2 cents to $2.60, GM's fell 3 cents to $3.99. Chrysler is privately held.

What to make of the U.S. Treasury's extension of a $17.4 billion TARP loan to General Motors and Chrysler?

Way to go, inside the beltway gents and ladies!

Indeed, the plan, which contains performance requirements and thresholds that monitor viability, will be castigated by the right and left, by everyone from libertarians to vegetarians, but they won't sway economist Richard Felson into opposing the action.

"Arguably, this is the best economic news we've heard this year, outside of the oil price drop, and that shows you what type of year we've had," Felson said. "With a GM (NYSE: GM) and Chrysler failure, the U.S. economy would have neared a depression, with probably disastrous consequences for the U.S. stock market. Look on this loan not as an auto bailout, but as the first step in the restructuring of the U.S. economy."

Loan / restructuring package buys time

Is it the best use of taxpayer dollars? No. But who's to say this is not a good use of those funds, particularly during a national crisis?

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis and recession, said a bankruptcy filing by two of the Big Three automakers would deepen and lengthen the U.S. recession.

Roubini said if General Motors or Chrysler are forced into bankruptcy without a U.S. government rescue, the U.S. recession will extend well into 2010, Bloomberg News reported

"The economic ramifications of an outright bankruptcy would be severe," Roubini told Bloomberg News, adding that the already-weak U.S. fundamentals mean that a recovery of growth will not occur until 2010.

General Motor's (NYSE: GM) shares rose 15 cents to $3.81 on Monday at mid-day; Chrysler is privately held. Ford's (NYSE: F) shares rose 13 cents to $3.17.

Economist David H. Wang agreed with Roubini's assessment. "A GM bankruptcy would create a ripple-effect. The steel, aluminum, textile, auto parts supplier, and support sectors would be immediately impacted, resulting in large lay-offs within weeks. The credit market also would be effected, and obviously the stock market would not have a pleasant time," Wang said. "Chrysler would fold, Ford would also be hurt on a deterioration of sector confidence, and the industrial sector would experience its biggest decline in generations."

The dollar plunged to a 13-year low against Japan's yen Friday, as currency traders sensed a further-deteriorating U.S. economy on the heels of the U.S. Senate's rejection of the Big Three rescue package.

The dollar plunged more than 3 yen -- an enormous move in the currency market -- to 88.40 early Friday before recovering slightly to 89.50 yen. The dollar also fell about one-quarter cent versus the euro to $1.3375 and one-half cent versus the Swiss franc to $1.1785.

Currency Trader Andrew Resnick told BloggingStocks Friday traders sense that U.S. stock investments will perform even worse now in 2009, as a disruption / cessation of operations by General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler will further decrease commercial activity, and GDP -- making U.S. investments less attractive.

"Currency traders are running for the hills now. They're running out of U.S. investments, which is bearish for the dollar. The yen is rising primarily as a safe haven and as a risk-aversion play, as it typically has during the financial crisis," Resnick said. "Japan's economy isn't that strong, it's in recession too, but as long as it doesn't contract as much as the U.S., traders will prefer the yen over the dollar," Resnick added that he was presently long with the yen versus the dollar, and long with the yen versus the euro.

Further, Resnick said he expects the dollar to fall to 75 yen, if public policy efforts aren't revived to save the U.S. auto sector.

The U.S. Senate's rebuff of the rescue plan for the Big Three has re-shifted the oil equation back in favor of the oil bears.

"The bulls tried to mount a mild charge on the likely large production cut by OPEC and possibly Russia, but a collapsing auto sector in the United States will further sap demand, so it's lower oil prices for the immediate future," Energy Trader Jim Dietz said Friday. "We're likely to see lower auto sales, falling consumer confidence, and of course, ripple effects in the economy. For the auto makers, bankruptcy looms because of some Washington Bo-zos."

Those ripple effects include workforce cutbacks in the steel, aluminum, textiles, auto parts, and auto dealerships sectors, and in collateral sectors, such as service sectors, like food services that benefit from auto manufacturing activity, he said. "All of that means less oil used and a deteriorating business climate. Oil will fall sharply in that kind of climate," Dietz said. Dietz added that he was currently short oil and unleaded gasoline with monthly contracts.

Oil began that selloff late Thursday night as soon as traders received word that a segment of U.S. Senate Republicans opposed the bill and had enough votes to either defeat it or filibuster it to its defeat. Oil had fallen $3.22 to $44.76 per barrel as of Friday morning.

Can the U.S. auto sector re-claim technological supremacy in the global auto market?

True, innovation, breakthrough technology, and supremacy are not exactly words that come to mind when one currently hears the corporate names 'General Motors,' 'Ford,' and 'Chrysler.'

The auto sector as an asset, even now?

But Columbia University Prof. Jeffrey Sachs forecasts that the U.S. auto industry can return to greatness, in the nation that's championed innovation and ingenuity during the modern era -- if Congress passes a comprehensive rescue package for the Big Three, C-SPAN reported.

Sachs is doing what academics do best: looking down the field -- to what macroeconomic conditions and global commerce -- and auto demand -- will look like 5, 10, 20 years from now.

General Motors Corporation (NYSE: GM) rose 69 cents to $4.77, while Ford Motor Company (NYSE: F) added 53 cents to $3.25 per share in Monday afternoon trading. Chrysler is privately held.

What are likely to be Congress's performance conditions for any rescue package for Big Three auto manufacturers General Motors, Ford, and Chrysler?

First, it should be noted that many Americans oppose any auto maker rescue/bailout, and the stance contains a legitimate point: that underperforming private companies shouldn't be rewarded for operational errors.

Still, a stronger argument holds that a cessation of U.S. auto company operations would severely hurt an already weak U.S. economy - - with an unacceptable increase in unemployment, particularly in the Midwest U.S., and other negative economic ramifications. Hence, Congress is very likely to pass and either President Bush/President-elect Obama will sign a performance-based rescue package.

The plan's performance metrics are likely to include:

• a credible, coherent plan for auto manufacturer viability and profitability;

• wage, benefit, and payment sacrifices by all stake holders: management, unionized employees, suppliers, dealers, contractors, shareholders, and creditors, etc.;

• the elimination of executive and management bonuses, if certain metrics are not me;

• a next-generation vehicle platform that reduces U.S. dependence on oil and that radically increases fuel efficiency/miles per gallon;

• debt-to-equity options, perhaps in the form of convertible bonds, that give the U.S. government the option of purchasing shares, should federal oversight officials choose to do so, to enable the government to share in any automaker's success;

• senior debt status for any U.S. government loans;

• full General Accounting Office access to auto maker financial records and business plans for the duration of the rescue package.
  

The first rule of public relations is never get in a fight with anyone who buys ink by the barrel. And a major tenet of investing is don't take a stock position in conflict with Congressional policy, once Congress has committed to a program.

The wisdom behind the second adage, like the first, is obvious enough: Congress has the ability to suddenly and substantially change the investment landscape.

Case in point: Congress, which is currently hearing testimony on a performance-based rescue package for General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler, could end up further funding reform by the Big Three by buying millions of the companies' vehicles for the U.S. government's auto fleet.

'Catching three fish with one cast'

Economist David H. Wang says the tactic has appeal in several areas -- economic, industrial, energy.

"It would help the three companies retain essential employees while transforming their operations, it would keep more industrial spin-off jobs in the U.S., and it would save energy by increasing U.S. government auto fleet efficiency," Wang said. "It would be like catching three fish with one cast and I think the new Obama administration would look very favorably on the energy efficiency aspect, both private and public sector dimensions."

Shares of GM fell 30 cents to $2.79, while Ford declined 16 cents $1.52 in Wednesday morning trading.

First, the United States Congress should pass and the president of the United States should sign a rescue package for General Motors, Ford and Chrysler, post-haste.

If this was the "Roaring '90s" or even the "Fabulous '50s," an operational cessation by General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler, would hurt the U.S. economy. As investors know, however, we are not in the 1990s or the 1950s, but in a teetering economy, and an auto sector cessation would be devastating, driving the U.S. economy into a deeper and longer recession.

Second, the notion that only companies that "perform" in the free market should continue and that others, the underperformers, should fail, as an absolute rule, simply has not been the history of the United States economy. Moreover, dozens of companies receive billions of dollars in subsidies from the U.S. government, which is you, the taxpayer.

Need a few examples? Let's do what the late, great New York Governor Al Smith would do: Let's look at the record.