More on supply shock

Re the post below, Alex sez:

This domino effect idea is kind of hard for me to buy. It reminds me of the Y2K bug or something.

Basically, the disaster rests on the idea that if a bunch of consumers (car manufacturers) of some product (car parts) cease to exist, then the manufacturers of those products (car part manufacturers, natch) go out of business.

Uh, what? I thought that when demand goes down, even drastically, supply goes down to match, not to 0. Sure, they'll have a hard time for a while. But to me, the natural thing to happen would be the following: all suffer for a little while, until one fails, then another, then another. As these part manufacturers fail, business gets better and better for the rest, until we reach equilibrium, and the supply meets the demand. It's not like they'll all fail exactly simultaneously.

Why would this not happen? Admittedly, this is still very bad.

Apparently, it's a bit more complicated than that. I've found a better explanation of the supply shock phenomenon here--definitely worth a read.

The problem isn't so much that globally people won't be able to manufacture cars--it's that nobody will be able to manufacture cars in America for the next year or so. And this will cause all car manufacturers in America to shutter their plants--even the ones who were performing well, like Toyota, Honda, etc. Moreover, the problem is greatly exacerbated by the fact that we are in the midst of a once-in-a-century credit crisis: normally when companies encounter short term revenue shortfalls they simply borrow money to cover operating costs, but these days they can't get a loan, and so a short term revenue shortfall can spell doom for a company. Given a long enough horizon things will even out again, but most of the car manufacturing will have moved overseas by then.

In the end, the potential number of jobs lost is staggering: it could be as much as 200,000 just from the car companies alone, plus like 600,000 more from all the companies that support them. To put that in perspective: suppose that tomorrow, Adobe, Google, and Oracle all went out of business. Imagine how that would affect the economy of the Bay Area, and even California as a whole. You know how many people those three companies employ? About 90,000. So if all this really happens, it's going to be, like, Armageddon in the Rust Belt. And when you think about all that economic devastation, and the timing of it--coming as it does in the midst of a credit crisis and on the brink of recession, if not depression--a $20b loan seems like a small price to pay to keep the auto companies alive until things get stable again.