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“Buy One, Get One Free” - That was the offer last week in the United Kingdom. But the two-for-one sale wasn’t for bags of potato chips or loaves of bread at the supermarket - it was for cars.

U.K. newspaper The Guardian reports car dealers across the country were doing the unthinkable to unload excess inventory. They were selling Dodge Avengers at 2-for-1. The gas-guzzling Avenger, made by Chrysler, has been one of the worst-selling cars in the country where gas will run you $5 a gallon (even with oil at $50 a barrel).

Dealers were so hard up to unload the “Yank Tanks” they were literally giving them away. That’s how bad demand has gotten in the U.K. and it could be a sign of what’s to come for the United States.

American car dealers are already starting to offer extreme deals as the 2009 models roll in, which is normally the best time of the year to be selling cars.

The NY Times reports in Automakers Office Big Incentives to Spur Sales desperate offers are already being made to help move new cars off the lot. A dealership in Minneapolis is offering $15,000 off a GMC Yukon. Other reported discounts include $14,000 off a Ford F-150 pickup, $12,000 off a Jeep, and $2,500 off a Ford Focus.

With those kinds of discounts, they might as well be 2-for-1. In some cases, the discount is half the list price. Worst of all, the discounting will only continue for the next few months as 2008 models have to be moved out to make room for 2009s. It could get even worse if the auto industry gets its $25 billion bailout.

Inventory Piles Up

Take a look at General Motors (NYSE:GM). GM is in the worst shape of all the U.S. automakers and it’s only going to get worse.

Earlier this week we saw how truly weak the retail market really is. Of course, most investors have been expecting the worst consumer shopping seasons in decades, but GM hasn’t been able to get prepared in time.

At the end of October, GM North America reported it has 799,000 vehicles in stock – consisting of both cars and light trucks. That’s about five months worth of inventory (when measured against the 166,000 sold in October), which is 15% below last year’s inventory, but it’s only getting worse.

At current sales rates, inventory will start to grow. GM expects to produce an additional 567,000 (875,000 total for Q4 minus 318,000 October production) over the next two months. If the October sales rate holds up, despite rising unemployment and falling consumer disposable incomes, GM’s total inventory will increase to 1,234,000 vehicles.

Considering the growing lot of unsold cars and trucks, it’s no wonder the Associated Press warns, “[GM is] practically running on empty already, and analysts and others warn that it might be out of business by the time Obama is sworn in on January 20th.”

Ballooning inventories are the biggest problem the automakers are facing. Insufficient demand and oversupply will always show up in inventories. And, frankly, a $25 billion bailout will exacerbate the problem and will only delay the inevitable; one of the major U.S. automakers is doomed to go out of business before this recession is over.

Coming and Going

If GM is allowed to go under, the consequences will be harsh. More than 3 million jobs associated with the automaker would be lost. The federal government would also lose an additional $150 billion in annual tax revenues associated with GM. That will certainly make the $25 billion price tag (although probably only $15 billion will go to GM) much more palatable.

On the plus side, when a major automaker moves out of a factory, there will certainly be someone willing to move in. The solar industry has already started to set up shop in the Rust Belt. For example:

First Solar (NASDAQ:FSLR) has been one of the first to start tapping into the rust belt. The $22 billion solar panel manufacturer recently announced the expansion plans for its Ohio factory.

Flaberg is slated to build a new solar panel-making facility in Pittsburgh, Pennsylvania.

Energy Conversion Devices (NASDAQ:ENER) operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also laid out a plan to almost double production and double capacity in one of them

Replacing all of the auto factory buildings with solar panel manufacturing isn’t going to happen overnight. Also, all the blue collar jobs will not be replaced by green collar jobs in the foreseeable future either.

One of these major employers going under would certainly spell another disastrous day for the markets and a bailout probably isn’t going to be well-received either. It’s a lose/lose situation over the short-term.

Letting one of the Big Three automakers go bankrupt will be the equivalent of ripping the Band-Aid off. And it will hurt. But it would probably help the foundation of a recovery start to form much quicker.

Until this story plays out, I’d still recommend using a very conservative investing strategy. To try and find something positive here, the sooner a direction is chosen, one of the many uncertainties hanging over the markets would be out of the way.

Source: The Biggest Problem Detroit's Big Three Face