This morning, the Gross Domestic Product (GDP) measure was up 3.5% (Click to See Full Story: "U.S. GDP rises 3.5% as stimulus kicks in"). For a country in recession, this is good news because it shows that the economy is growing again. But, before the champagne is uncorked, you have to put some things into perspective.
First, you have to understand that an economy isn't really considered to be out of recession unless there are two consecutive quarters of growth. Two quarters is important because, quite often, an economy might sputter again after having had one good quarter. Some of that has to do with the seasonality of business, the extent of business inventories, and some has to do with what the government is doing.
That brings me to the second issue: Government spending. In this last quarter, the government artificially pushed the economy with two major programs (1) Cash for Clunkers and (2) The First-Time Home Buyers Tax Rebate. As a consequence, there might be as much as 2.5% in that 3.5% number that has been artificially spawned by these two programs. But, what's worse, those two programs may actually hurt the upcoming 4th Quarter GDP because they may have stolen sales that would have naturally occurred in that 4th Quarter. For example, in the Cash for Clunkers program, there was a $3 billion spurt that has since created a substantial slack period for auto sales. Consequently, auto sales in the 4th quarter may actually be lower than they were in the 2nd Quarter; before the "clunkers" program. On the Tax Rebate for first-time home buyers, there was, again, a substantial spurt of sales before mid-September in order to effectively take advantage of that rebate and be able to close on a house before the program was set to expire at the end of October. Even though Congress has just passed legislation to extend the program through April of 2010, the impact on the home sales might have peaked as people scrambled to take advantage of the original program. Again, hurting sales going forward.
Lastly, GDP is a relative number. It is a measurement of business activity from the prior quarter. But, you need to really put that into perspective. Business activity in America is down 50 to 60 percent or more from where it was in 2008. So, to have 3.5% growth still leaves us a very long way from getting back to where we were in 2008. Think of it in terms of being in an elevator that had once made it to the 100th floor. Last quarter it finally stopped going down and made it to the ground floor. This quarter we went back up 3-1/2 floors. But, we still have 96-1/2 floors to go before we get back to where we were in 2008 at the 100th floor.
I personally think that this 3.5% rise in GDP is extremely overstated and my guess is that we might only see a meager 1% growth for the next quarter. Anyone who really takes the time to take a hard look at details of this GDP Report would have seen that business investment was still negative. And, that fact, to me, shows that the economy is still faltering.
On the political side of things, you can expect the Obama Administration to hype this "recovery (?)" to the max; especially with two critical gubernatorial elections pending in Virginia and New Jersey. In fact, this good number on the economy might actually help Corzine to retain his Governor's job in New Jersey; seeing that he was already so close in the polls.
I still think we could possibly see a double-dip recession in 2010 if foreclosures and unemployment continue to rise and if inflation kicks in. Right now, foreclosures are still on the rise and we just had 7 more banks this last week that went belly-up and had to be taken over by the FDIC. Jobs are still being lost and that leads to further reductions in consumer activity. The true home building activity is for apartments -- to house all those people who have been foreclosed on -- and for condos and starter-homes being built for those people who want to take advantage of the first-time home buyer tax credit. But, down the road, we are going to have a glut of condos, apartments, and cheap starter-homes as people start to move back into the homes that were once foreclosed on.
Remember: Everything in economics has a short-term upside and an ultimate and even bigger downside when the government tries to jury rig the economy.
Showing posts with label Cash For Clunkers. Show all posts
Showing posts with label Cash For Clunkers. Show all posts
Thursday, October 29, 2009
Tuesday, September 22, 2009
A Post Mortem On Cash For Clunkers
It has been about a month now since the Cash for Clunkers program (CFC) ended. Cheered as a success by the left, the facts, that are now coming to light, might conclude otherwise.
According to a Cars.com survey of those who bought under the program, about 70% of the buyers were going to buy a car anyway. Therefore, much of the money that the Fed spent could be easily considered a waste of money; assuming that the "real" intent of CFC was to stimulate auto sales.
Other data supports the fact that many of the buyers would have been better off dealing on their own because, under CFC, dealers didn't deal as they would have normally with a trade-in which had value to them and that they could resell. Some buyers actually traded in vehicles that were worth more than the $4500 or $3500 that they got from the government.
As we all know, many dealers are still waiting to get paid by the Fed. This is costing them money in terms of the interest that they have to pay while waiting for the rebates to come through. Also, there were some deals that the Fed rejected because the buyer or the car being traded in didn't meet all the qualifications for the program. In those cases, the dealers are going after the buyers for the rebate amount.
Another surprise for the buyers is the fact that, in some states, the rebate is taxable as a form of income. In other states, the owner could get charged for a sales tax that is equivalent to the $3500 or $4500 they received for their car; even if their cars were worth substantially less than that.
For the dealers, themselves, the foot traffic into the showrooms has fallen back to the pre-Cash For Clunkers levels (Click to See Full Story from the Boston Globe: "Car showrooms quiet after clunkers clamor ends").
Edmunds.com's analysis of September's auto sales clearly shows that the sales going forward will even be lower than before the CFC program. In fact, September sales are expected to tie a 28-year industry low (Click to See Full Story: "September sales rate will tie lowest on record, Edmunds says"). September sales are expected to be almost 12% below June's pre-Cash For Clunkers sales pace. Beyond this record low sales in September, Edmunds.com isn't very positive on industry sales going forward (Click to See Full Story: "Expect decline in car sales after 'cash for clunkers,' Edmunds.com predicts"). This was to be expected. All that CFC did, in most cases, was to steal from future auto sales and compress those sales into a 4 week period. Salesmen are probably closer to losing their jobs than they were before the CFC program.
On the used car front, the CFC program has forced a shortage of used cars and, consequently, higher used car prices are creeping into the market (Click to See Full Story: "Used cars about to get pricier, more scarce, dealers say"). This too was predictable. You can't just destroy 700,000 perfectly viable used cars and not expect the price of all used cars to go higher. Sadly, this effect of the CFC will hit the working poor the hardest.
From an economics standpoint, that $3 billion dollars spent for the CFC program was money that we didn't have. Therefore we will be paying interest on that money for a very long time. Even at a the current low 4.35% interest rate, we taxpayers will continue to pay about $135 million dollars a year for this program; about $174 per car. And, given that we have a national debt that extends as far as the eye can see, we taxpayers will be paying for this program for the rest of our lives; our children's lives; and, their children's lives.
Then, too, a third of that $3 billion was spent on people who were attracted to buying a car and hadn't really planned to. This is about a billion dollars that won't be spent elsewhere; on other things that would better serve a rebound in the economy. Generally speaking, when somebody makes a major purchase, like a car, they tighten their spending for some time after. So, in effect, we might well have hurt many other businesses with the Clunkers program.
Now, if the goal was to save the planet by increasing the mileage on 700,000 cars, think twice. On average, the CFC program might have saved about 5 miles per gallon per car. Assuming an average of 12,000 miles being driven per year and an average of 27 miles per gallon for each new car, the savings adds up to about 88 gallons of gas per-car-per-year. In terms of a barrel of oil, that is about 4.5 barrels of oil per-year-per-car or a total of 3.1 million barrels of oil for all those 700,000 cars. While that may sound like a lot, think about the fact that we import 19 million barrels of oil each day. That 3.1 million barrels a year savings is but one-sixth of a one day's usage of all the oil that America uses in one whole year. In terms of the total world usage of oil, the savings was less than one hour's worth of the world's total annual usage. (Click to See Oil Usage/Import/Export Data)
Lastly, based on an assumption that the price of gasoline holds at $2.50 gallon, that 88 gallons of saved gasoline under CFC would equate to an annual dollar savings of about $220. So, our government spent an average of $4000 per car to save $220/year. It will take approximately 18 operational years for each of the 700,000 cars in order to get a return on that investment. Assuming that the average life of an automobile in America is only 9 years, I don't think we're ever going to get our money back for that program. Of course, everyone seems to forget that we will pay $174 a year in interest expense for every $4,000 that the our government spent on the CFC program. That makes the true savings per year of about $46 dollars. Assuming an average life of 9 years per car, this means that gasoline would have to go above $35/gallon in order to break even during the life span of each purchased CFC car.
I think when all is said and done, the Cash For Clunkers will be a bust. It is just another one of these "sounds good" projects that our government constantly wastes money on. Correction: wastes "our" money on.
Note: The analysis (above) is very simplistic. In business, we would have calculated the return on investment using something like Discounted Cash Flow Analysis (DCF) that took into consideration the time value. If that type of analysis had been done on CFC, the resulting loss of money over 9 years would be greatly higher than above.
According to a Cars.com survey of those who bought under the program, about 70% of the buyers were going to buy a car anyway. Therefore, much of the money that the Fed spent could be easily considered a waste of money; assuming that the "real" intent of CFC was to stimulate auto sales.
Other data supports the fact that many of the buyers would have been better off dealing on their own because, under CFC, dealers didn't deal as they would have normally with a trade-in which had value to them and that they could resell. Some buyers actually traded in vehicles that were worth more than the $4500 or $3500 that they got from the government.
As we all know, many dealers are still waiting to get paid by the Fed. This is costing them money in terms of the interest that they have to pay while waiting for the rebates to come through. Also, there were some deals that the Fed rejected because the buyer or the car being traded in didn't meet all the qualifications for the program. In those cases, the dealers are going after the buyers for the rebate amount.
Another surprise for the buyers is the fact that, in some states, the rebate is taxable as a form of income. In other states, the owner could get charged for a sales tax that is equivalent to the $3500 or $4500 they received for their car; even if their cars were worth substantially less than that.
For the dealers, themselves, the foot traffic into the showrooms has fallen back to the pre-Cash For Clunkers levels (Click to See Full Story from the Boston Globe: "Car showrooms quiet after clunkers clamor ends").
Edmunds.com's analysis of September's auto sales clearly shows that the sales going forward will even be lower than before the CFC program. In fact, September sales are expected to tie a 28-year industry low (Click to See Full Story: "September sales rate will tie lowest on record, Edmunds says"). September sales are expected to be almost 12% below June's pre-Cash For Clunkers sales pace. Beyond this record low sales in September, Edmunds.com isn't very positive on industry sales going forward (Click to See Full Story: "Expect decline in car sales after 'cash for clunkers,' Edmunds.com predicts"). This was to be expected. All that CFC did, in most cases, was to steal from future auto sales and compress those sales into a 4 week period. Salesmen are probably closer to losing their jobs than they were before the CFC program.
On the used car front, the CFC program has forced a shortage of used cars and, consequently, higher used car prices are creeping into the market (Click to See Full Story: "Used cars about to get pricier, more scarce, dealers say"). This too was predictable. You can't just destroy 700,000 perfectly viable used cars and not expect the price of all used cars to go higher. Sadly, this effect of the CFC will hit the working poor the hardest.
From an economics standpoint, that $3 billion dollars spent for the CFC program was money that we didn't have. Therefore we will be paying interest on that money for a very long time. Even at a the current low 4.35% interest rate, we taxpayers will continue to pay about $135 million dollars a year for this program; about $174 per car. And, given that we have a national debt that extends as far as the eye can see, we taxpayers will be paying for this program for the rest of our lives; our children's lives; and, their children's lives.
Then, too, a third of that $3 billion was spent on people who were attracted to buying a car and hadn't really planned to. This is about a billion dollars that won't be spent elsewhere; on other things that would better serve a rebound in the economy. Generally speaking, when somebody makes a major purchase, like a car, they tighten their spending for some time after. So, in effect, we might well have hurt many other businesses with the Clunkers program.
Now, if the goal was to save the planet by increasing the mileage on 700,000 cars, think twice. On average, the CFC program might have saved about 5 miles per gallon per car. Assuming an average of 12,000 miles being driven per year and an average of 27 miles per gallon for each new car, the savings adds up to about 88 gallons of gas per-car-per-year. In terms of a barrel of oil, that is about 4.5 barrels of oil per-year-per-car or a total of 3.1 million barrels of oil for all those 700,000 cars. While that may sound like a lot, think about the fact that we import 19 million barrels of oil each day. That 3.1 million barrels a year savings is but one-sixth of a one day's usage of all the oil that America uses in one whole year. In terms of the total world usage of oil, the savings was less than one hour's worth of the world's total annual usage. (Click to See Oil Usage/Import/Export Data)
Lastly, based on an assumption that the price of gasoline holds at $2.50 gallon, that 88 gallons of saved gasoline under CFC would equate to an annual dollar savings of about $220. So, our government spent an average of $4000 per car to save $220/year. It will take approximately 18 operational years for each of the 700,000 cars in order to get a return on that investment. Assuming that the average life of an automobile in America is only 9 years, I don't think we're ever going to get our money back for that program. Of course, everyone seems to forget that we will pay $174 a year in interest expense for every $4,000 that the our government spent on the CFC program. That makes the true savings per year of about $46 dollars. Assuming an average life of 9 years per car, this means that gasoline would have to go above $35/gallon in order to break even during the life span of each purchased CFC car.
I think when all is said and done, the Cash For Clunkers will be a bust. It is just another one of these "sounds good" projects that our government constantly wastes money on. Correction: wastes "our" money on.
Note: The analysis (above) is very simplistic. In business, we would have calculated the return on investment using something like Discounted Cash Flow Analysis (DCF) that took into consideration the time value. If that type of analysis had been done on CFC, the resulting loss of money over 9 years would be greatly higher than above.
Thursday, August 13, 2009
The Consumer is MIA!
This morning, the latest month's Retail Sales Report came out and, after 2 months of meager but positive growth, the consumer is once again missing in action. The economists who had been surveyed before the report, had looked into their dusty crystal balls and had predicted the future to be a growth in sales of seven-tenths of one percent. In actuality, the overall sales came in with a "loss" of one-tenth of one percent. Worse than that, if you yank auto sales out of the number and their artificial boost due to the "Cash for Clunkers" program, the actual sales in all other areas were down by six-tenths of a percent; down almost as much as they were supposed to be up (Click to See Full Story: "Bleak sales are another reality check for economy"). I really think all those economists should have their crystal balls checked before they make another one of their not-even-close projections.
The ominous thing about this report is that unless the consumer enters back into the picture and starts buying things, our economy will never recover. The economy is 70 percent consumer driven. Obviously, the tax cut that Obama gave to 95 percent of Americans -- the one that gave everybody who got it about $13 a week --- isn't working. As I've said before, that silly tax cut won't even buy a daily donut and a cup of coffee; let alone, even mildly attempt to restart this economy.
We are now nearly 7 months past the enactment of the Stimulus Package and we are still getting horrible numbers. From meager tax cuts to part time infrastructure work, the "Stimulus" is just a flop!
In addition to that bad news, the foreclosure rate just keeps rising. Foreclosures were up by 7 percent in just one month from June to July. On top of that, the number of foreclosure filings, as compared to last year's July number, went up a whopping 32 percent (Click to See Full Story: "Foreclosures rise 7 percent in July from June"). Again, where's that Obama program -- his 31 percent solution -- that was supposed to help stop all these foreclosures? (Click to See My Blog Entry: "The 31 Percent Solution?")
Nothing that this Administration has done or promised to do has come true. That's why Obama and the Democrats "should not be trusted" with any more of our money for things like Health Care Reform and Cap and Trade. First things first! Get this economy rolling again!
The ominous thing about this report is that unless the consumer enters back into the picture and starts buying things, our economy will never recover. The economy is 70 percent consumer driven. Obviously, the tax cut that Obama gave to 95 percent of Americans -- the one that gave everybody who got it about $13 a week --- isn't working. As I've said before, that silly tax cut won't even buy a daily donut and a cup of coffee; let alone, even mildly attempt to restart this economy.
We are now nearly 7 months past the enactment of the Stimulus Package and we are still getting horrible numbers. From meager tax cuts to part time infrastructure work, the "Stimulus" is just a flop!
In addition to that bad news, the foreclosure rate just keeps rising. Foreclosures were up by 7 percent in just one month from June to July. On top of that, the number of foreclosure filings, as compared to last year's July number, went up a whopping 32 percent (Click to See Full Story: "Foreclosures rise 7 percent in July from June"). Again, where's that Obama program -- his 31 percent solution -- that was supposed to help stop all these foreclosures? (Click to See My Blog Entry: "The 31 Percent Solution?")
Nothing that this Administration has done or promised to do has come true. That's why Obama and the Democrats "should not be trusted" with any more of our money for things like Health Care Reform and Cap and Trade. First things first! Get this economy rolling again!
Friday, August 7, 2009
Cash for Clunkers: A Numbers Game
If you listen to the Obama Administration, the Cash for Clunkers program is producing better than expected mileage savings. However, when Edmunds.com, an independent group, actually surveyed the auto dealerships to find out what cars were be sold and in what volumes, Edmund's survey produce a list that was out of sync with what Obama's people are reporting. In fact, there were more lower-mileage trucks and SUV's populating Edmund's top-10 lists than all those gas-miserly mini-cars that "supposedly" appear on the government's list (Click to See Full Story).
The government list is as follows:
The Edmund's list has an SUV on top with some other less fuel-efficient trucks/SUVs like the Ford F-150, Jeep Patriot, and the Chevy Silverado that don't even appear on the government list:
From the Stimulus Package to the lies about their health care intentions, Obama and his people are increasing becoming untrustworthy on almost everything that they either say or do. It just seems like everything is being manipulated for the best possible political impact; and, the hell with the truth! If they can't even tell the truth about a $3 billion dollar program, what makes you think they are telling the truth about a trillion dollar one?
The government list is as follows:
- Ford Focus
- Honda Civic
- Toyota Corolla
- Toyota Prius
- Ford Escape
- Toyota Camry
- Dodge Caliber
- Hyundai Elantra
- Honda Fit
- Chevy Cobalt
The Edmund's list has an SUV on top with some other less fuel-efficient trucks/SUVs like the Ford F-150, Jeep Patriot, and the Chevy Silverado that don't even appear on the government list:
- Ford Escape
- Ford Focus
- Jeep Patriot
- Dodge Caliber
- Ford F-150
- Honda Civic
- Chevrolet Silverado
- Chevrolet Cobalt
- Toyota Corrolla
- Ford Fusion
From the Stimulus Package to the lies about their health care intentions, Obama and his people are increasing becoming untrustworthy on almost everything that they either say or do. It just seems like everything is being manipulated for the best possible political impact; and, the hell with the truth! If they can't even tell the truth about a $3 billion dollar program, what makes you think they are telling the truth about a trillion dollar one?
Wednesday, August 5, 2009
Cash For Clunkers: A Green Flunker
Our science community has been busily putting pen to paper and has been able to calculate the "green" impact of the soon-to-be $3 billion Cash for Clunkers program. In general, it is believed that the program will save about "one hour's worth" of all the CO2 output of this entire country over one year's time; or, about 700,000 tons of CO2 (Click to See Full Story).
To put this into perspective, there are 8,760 hours in every non-leap-year year. Our population grows by about 2 percent per year, and, therefore, it is safe to assume that our carbon output grows by the equivalent of 175 hours each year. In comparison to the mere hour of carbon savings from the Cash For Clunkers Program, our population growth will completely offset that savings in just 2 days. Further, think about how futile the Cash For Clunkers program is in terms of the sheer population growth in both China and India. Combined they have 8 times our population and are growing twice as fast as we are in terms of their per capita carbon output. Therefore, when looking at the mammoth and overall task of saving our planet from CO2, the carbon savings of the Cash For Clunkers is nothing "less" than infinitesimal.
The only thing that "Clunkers" did is continue to bury us in debt and create another government welfare program for a bunch of car buyers who were probably going to replace their cars anyway.
To put this into perspective, there are 8,760 hours in every non-leap-year year. Our population grows by about 2 percent per year, and, therefore, it is safe to assume that our carbon output grows by the equivalent of 175 hours each year. In comparison to the mere hour of carbon savings from the Cash For Clunkers Program, our population growth will completely offset that savings in just 2 days. Further, think about how futile the Cash For Clunkers program is in terms of the sheer population growth in both China and India. Combined they have 8 times our population and are growing twice as fast as we are in terms of their per capita carbon output. Therefore, when looking at the mammoth and overall task of saving our planet from CO2, the carbon savings of the Cash For Clunkers is nothing "less" than infinitesimal.
The only thing that "Clunkers" did is continue to bury us in debt and create another government welfare program for a bunch of car buyers who were probably going to replace their cars anyway.
Tuesday, August 4, 2009
The 31 Percent Solution: Even Worse Than I Thought
Back in February, Obama announced a plan that he thought would save 9 million homeowners who were either at or near foreclosure.
At the time, I wrote a blog titled "The 31 Percent Solution?" (click to view) where I had said, at best, only about "eleven percent" or 1 to 1-1/2 million of his targeted homeowners would actually get a benefit from this plan. We'll, as usual with Obama, it appears that both he and I were being overly optimistic. With a report that was just released today, Obama's plan was only able to help "nine percent" of those who were supposed be helped by this wildly optimistic project (Click to See Full Story). While I was only off by a couple of percentage points, Obama was off by a whopping 1100 percent! Not even close!
This is just another example of how this Administration and the Democrats are totally unable to deliver on what they say will happen. Just look at the Stimulus Plan and, most recently, the "Cash For Clunkers" program. Now, we are supposed to believe that their Health Care Reform Bill will do everything as promised, too? Just give me a break! I don't even want to here the words "It's Working" from this guy about this, his latest flop!
At the time, I wrote a blog titled "The 31 Percent Solution?" (click to view) where I had said, at best, only about "eleven percent" or 1 to 1-1/2 million of his targeted homeowners would actually get a benefit from this plan. We'll, as usual with Obama, it appears that both he and I were being overly optimistic. With a report that was just released today, Obama's plan was only able to help "nine percent" of those who were supposed be helped by this wildly optimistic project (Click to See Full Story). While I was only off by a couple of percentage points, Obama was off by a whopping 1100 percent! Not even close!
This is just another example of how this Administration and the Democrats are totally unable to deliver on what they say will happen. Just look at the Stimulus Plan and, most recently, the "Cash For Clunkers" program. Now, we are supposed to believe that their Health Care Reform Bill will do everything as promised, too? Just give me a break! I don't even want to here the words "It's Working" from this guy about this, his latest flop!
Sunday, August 2, 2009
The "Crash" For Clunkers Program That Is Yet To Come
Once the "Cash for Clunkers" program is all over, the auto companies and the auto dealers may find the next few months of sales down to a virtual snail's pace; even slower than it was before the program. That's because the "cash for clunkers" program may have actually "forced" many of the recent car buyers to buy now; instead of in the months to come. In effect, stealing sales from the future.
I'm not completely sure but, the program may actually cause future layoffs in the auto industry if sales fall off significantly over the next few months. You can't artificially mess with the economy this way without any unintended circumstances. What our "wise" Congress may have actually done is create higher unemployment in the future by doing something that they erroneously thought would actually create jobs. But, let's be real about the "clunkers" program. It really wasn't intended to save jobs. It was fully intended as a "green" program to reduce carbon dioxide. But, like all their plans for the "greening" America, such as the Cap And Trade bill, employment will ultimately suffer. Only time will tell if I'm right.
I'm not completely sure but, the program may actually cause future layoffs in the auto industry if sales fall off significantly over the next few months. You can't artificially mess with the economy this way without any unintended circumstances. What our "wise" Congress may have actually done is create higher unemployment in the future by doing something that they erroneously thought would actually create jobs. But, let's be real about the "clunkers" program. It really wasn't intended to save jobs. It was fully intended as a "green" program to reduce carbon dioxide. But, like all their plans for the "greening" America, such as the Cap And Trade bill, employment will ultimately suffer. Only time will tell if I'm right.
Friday, July 31, 2009
I Was Wrong On Cash For Clunkers
I have to apologize. I thought that the Cash For Clunkers program would fail because I wrongly believed that people wouldn't just run out, in the middle of a recession, and take on new debt and new monthly payments, new higher insurance rates, and new vehicle taxes by trading in their inexpensive and old, yet running, vehicles for a new one that might get them 4 miles-per-gallon over their old clunker's mileage. I guess I was just dead wrong. I guess I was wrong in thinking that people would have learned their "debt" lessons of the past year-and-a-half and kept their money for the important things in life like paying off their mortgages or their credit card bills. But, I guess I was stupid. The Congress was right and they knew that people just couldn't help themselves when the government decides to almost dump money out of helicopters over their heads. Recession? What recession? Lose my job? You've got to be kidding me?
But, the program was so wildly successful that the 250,000 clunkers are now off the road in just 4 days; using up a billion dollars in taxpayer money. Of course, the intelligentsia of our Democratic Congress thought this program would really take up to 4 months to eat up a billion dollars. Boy, were they wrong! I guess, based on experience, they thought this program would be as slow as the Stimulus Package that they had passed, earlier this year.
When you think about, you've really got to wonder what all these clunker-traders are really smoking.
First off, I would hope that the car that they are trading in has a resale value that is "less" than $3,500 or, really, they are getting screwed. Of course, this is if the new car that they are buying is 4 miles per gallon better than the old one that they are clunking. A resale value of $4500 would have to apply if there is a 10 mile-per-gallon differential. The $3500 or $4500 is all they are going to get on their trade-in because, under the conditions of the Cash For Clunkers program, the dealers are legally obligated to destroy all the trade-ins; once the sale is done. They will not be able to resell them and get any profit from the car that is being traded in. Of course, the "clunkier" the car that you are trading in, the better off you are in making the deal. After all, if your piece of s**t is only worth $1000 dollars on a normal trade, you just got a $2500 or $3500 gift from Uncle Sam; depending on the mileage differential. If your car was worth $3500 or more in value as a trade, you literally got screwed by our Congress.
Secondly, I would hope that these "new car" owners are prepared for the future shock of all the new costs that are associated with their new, government-subsidized car. That $3500 or $4500 clunker that they just traded in was probably paid for. My guess is that the new car will put these owners in hock for monthly payments that are in excess of $250 a month for the next 5 years. And, then there's all the taxes and the higher insurance rates. Didn't we get into this recession because people took on too much debt?
As a result of how successful this program has been, our Congress is now in the process of allocating another $2 billion to extend the program. In effect, and assuming they get Senate approval for another $2 billion extension, there will be a total of 750,000 old and perfectly running cars that will be destroyed and taken off the road as a result of this program. The impact of that fact won't be known for awhile. But, our Congress has unwittingly created a reduced inventory shortage of nearly a million used cars in America. Given the law of supply and demand, this newly reduced supply means that the average used car will be more costly in the future. This is inflationary and the people most hurt by this will be the poor who can't hardly afford to buy a new, fuel efficient car. But, thank God, we saved the planet by shearing off 4 miles-per-gallon on almost 1 out of every 240 cars on the road. Never mind the fact that first-time new car sales in both China and India ate up the CO2 savings of this country's Cash for Clunkers program in, probably, just a few hours of one day.
As I said before in this blog, the Cash For Clunkers is bogus program. Much of what is being done will just be a benefit to those who were already going to buy a new car. What's worse, it may have pushed people into irresponsibly buying a new car that they really cannot afford. Further, the amount of CO2 savings is minimal' at best. And, lastly, the poor of America will ultimately pay for this program in higher used car pricing in the future. Only people, like the Democrats in Congress, who don't understand business, would do something so stupid and, then, repeat their own stupidity with another $2 billion program.
But, the program was so wildly successful that the 250,000 clunkers are now off the road in just 4 days; using up a billion dollars in taxpayer money. Of course, the intelligentsia of our Democratic Congress thought this program would really take up to 4 months to eat up a billion dollars. Boy, were they wrong! I guess, based on experience, they thought this program would be as slow as the Stimulus Package that they had passed, earlier this year.
When you think about, you've really got to wonder what all these clunker-traders are really smoking.
First off, I would hope that the car that they are trading in has a resale value that is "less" than $3,500 or, really, they are getting screwed. Of course, this is if the new car that they are buying is 4 miles per gallon better than the old one that they are clunking. A resale value of $4500 would have to apply if there is a 10 mile-per-gallon differential. The $3500 or $4500 is all they are going to get on their trade-in because, under the conditions of the Cash For Clunkers program, the dealers are legally obligated to destroy all the trade-ins; once the sale is done. They will not be able to resell them and get any profit from the car that is being traded in. Of course, the "clunkier" the car that you are trading in, the better off you are in making the deal. After all, if your piece of s**t is only worth $1000 dollars on a normal trade, you just got a $2500 or $3500 gift from Uncle Sam; depending on the mileage differential. If your car was worth $3500 or more in value as a trade, you literally got screwed by our Congress.
Secondly, I would hope that these "new car" owners are prepared for the future shock of all the new costs that are associated with their new, government-subsidized car. That $3500 or $4500 clunker that they just traded in was probably paid for. My guess is that the new car will put these owners in hock for monthly payments that are in excess of $250 a month for the next 5 years. And, then there's all the taxes and the higher insurance rates. Didn't we get into this recession because people took on too much debt?
As a result of how successful this program has been, our Congress is now in the process of allocating another $2 billion to extend the program. In effect, and assuming they get Senate approval for another $2 billion extension, there will be a total of 750,000 old and perfectly running cars that will be destroyed and taken off the road as a result of this program. The impact of that fact won't be known for awhile. But, our Congress has unwittingly created a reduced inventory shortage of nearly a million used cars in America. Given the law of supply and demand, this newly reduced supply means that the average used car will be more costly in the future. This is inflationary and the people most hurt by this will be the poor who can't hardly afford to buy a new, fuel efficient car. But, thank God, we saved the planet by shearing off 4 miles-per-gallon on almost 1 out of every 240 cars on the road. Never mind the fact that first-time new car sales in both China and India ate up the CO2 savings of this country's Cash for Clunkers program in, probably, just a few hours of one day.
As I said before in this blog, the Cash For Clunkers is bogus program. Much of what is being done will just be a benefit to those who were already going to buy a new car. What's worse, it may have pushed people into irresponsibly buying a new car that they really cannot afford. Further, the amount of CO2 savings is minimal' at best. And, lastly, the poor of America will ultimately pay for this program in higher used car pricing in the future. Only people, like the Democrats in Congress, who don't understand business, would do something so stupid and, then, repeat their own stupidity with another $2 billion program.
Sunday, June 14, 2009
Why "Cash For Clunkers" Won't Work
Our Congress is on the verge of passing a $1 billion plan to give people as much as $4500 to buy a new, higher mileage automobile (See Full Story).
Under this proposed law, if you buy a new car that is 4 mpg more efficient than your old one, the government will hand you a voucher for $3500. For a 10 mpg differential, the voucher will amount to $4,500.
While this may sound good politically, it is, in practical application, doomed to fail.
First, the true clunkers on the road are all well over 9 years old. The people driving these cars, even with a voucher from the Feds, are not going to go out and buy a new car. They just don't have the money. That's why they're driving a clunker in the first place.
Besides having to commit to high monthly payments against something that they currently have no monthly payments on, they will wind up paying more in annual fees and insurance payments. In most states the vehicle registration fees are age and value based. In Nevada (as an example), a 10-year old car costs about $40 a year to register. A new car will cost nearly $500. Additionally, a new car would probably add another $400 to $600 a year in higher insurance costs. Combined, you could be looking at a new expense of $850 to over $1000 a year that is over-and-above any monthly expenses for a new car loan.
The average mileage on a new car is about 27 miles per gallon and that car is destined to drive about 12,000 miles a year; once off the lot. That means that this new car will probably need about 450 gallons a year to operate. At the current rate of $2.60 per gallon, the annual fuel expense would be about $1170 dollars. A 4 mpg increase in a mileage rate is only a 14 percent reduction in annual fuel expenses. The resulting savings for buying that new car would be a little over $13 a month for the buyer. Not much of an incentive to spend $10,000 or more (even after the voucher) to save such a small amount of expense in gasoline.
In essence, this program is only going to benefit the middle class that have enough money during this recession to commit to buying a new car. It will appeal to those people who had already planned to buy a new car and who plan to move from high mileage SUV's to a lower mileage sedan or hybrid. This would attract people whose life style has changed for some reason; like recent empty nester's or retirees who no longer need that Chevy Suburban to haul kids around. But, the high mileage car that they leave behind them will still remain in the marketplace as a used car. And, given that the average car is 9 years old, that used car will remain on the road for a very long time.
The people in Congress don't seem to understand that minuscule savings in gas mileage won't warrant the high cost of buying a new car; even with vouchers. That's why Prius sales are down almost 50% from just last year. The actual savings in gasoline expenses just don't compute when compared to the increased cost of any new hybrid. Only the ideological "greens" are willing to forgo the true cost of buying a hybrid so they can impress their friends at the latest dinner party and tell everybody how they, personally, are saving the planet.
Lastly, the biggest problems with the "Cash For Clunkers" spending bill is that it will drive consumers to buy Toyota's and Honda's. That's because, the Japanese vehicles have higher mileage capabilities than most U.S. models of the same class or type. In fact, most Japanese hybrids are at least 4 mpg more efficient than any equivalent U.S. branded hybrid. Standard fueled cars are even more efficient. That means that many new car buyers just see this as a "government give-a-way" for something that they planned to do anyway.
Furthermore, the reason the U.S. car sales have slipped over the years is because resale values are lower and repairs higher. If you just look at any Cadillac, two years off the showroom floor, there are constant and reoccurring problems with things like the electrical system. That's why resale values are lower and why their Japaneses counterparts are more desirable. The quality and finish of a car on the showroom floor is one thing. However, the repair history is something completely different. U.S. namesakes can't compete with the Japanese after 2 or 3 years of operation. Just look at consumer reports or other rating agencies.
I just think that this "Cash for Clunker" program will be a cash cow for those who intended to buy a new car anyway. The true winners might be the Japanese and South Korean manufacturers who excel at high mileage vehicles. It might sway some to buy a hybrid because the $4500 voucher can ease the pain of having to foot $6000 or more for the price of a hybrid over the equivalent conventionally powered car. But, the bottom line will be that there will be just as many "clunkers" on the road after the program is over. If you really wanted to get those clunkers off the road, the program could be wider spread and more effective by giving any American a voucher if "they trade up" by 5 years on a "newer" and, not necessarily, new car.
Under this proposed law, if you buy a new car that is 4 mpg more efficient than your old one, the government will hand you a voucher for $3500. For a 10 mpg differential, the voucher will amount to $4,500.
While this may sound good politically, it is, in practical application, doomed to fail.
First, the true clunkers on the road are all well over 9 years old. The people driving these cars, even with a voucher from the Feds, are not going to go out and buy a new car. They just don't have the money. That's why they're driving a clunker in the first place.
Besides having to commit to high monthly payments against something that they currently have no monthly payments on, they will wind up paying more in annual fees and insurance payments. In most states the vehicle registration fees are age and value based. In Nevada (as an example), a 10-year old car costs about $40 a year to register. A new car will cost nearly $500. Additionally, a new car would probably add another $400 to $600 a year in higher insurance costs. Combined, you could be looking at a new expense of $850 to over $1000 a year that is over-and-above any monthly expenses for a new car loan.
The average mileage on a new car is about 27 miles per gallon and that car is destined to drive about 12,000 miles a year; once off the lot. That means that this new car will probably need about 450 gallons a year to operate. At the current rate of $2.60 per gallon, the annual fuel expense would be about $1170 dollars. A 4 mpg increase in a mileage rate is only a 14 percent reduction in annual fuel expenses. The resulting savings for buying that new car would be a little over $13 a month for the buyer. Not much of an incentive to spend $10,000 or more (even after the voucher) to save such a small amount of expense in gasoline.
In essence, this program is only going to benefit the middle class that have enough money during this recession to commit to buying a new car. It will appeal to those people who had already planned to buy a new car and who plan to move from high mileage SUV's to a lower mileage sedan or hybrid. This would attract people whose life style has changed for some reason; like recent empty nester's or retirees who no longer need that Chevy Suburban to haul kids around. But, the high mileage car that they leave behind them will still remain in the marketplace as a used car. And, given that the average car is 9 years old, that used car will remain on the road for a very long time.
The people in Congress don't seem to understand that minuscule savings in gas mileage won't warrant the high cost of buying a new car; even with vouchers. That's why Prius sales are down almost 50% from just last year. The actual savings in gasoline expenses just don't compute when compared to the increased cost of any new hybrid. Only the ideological "greens" are willing to forgo the true cost of buying a hybrid so they can impress their friends at the latest dinner party and tell everybody how they, personally, are saving the planet.
Lastly, the biggest problems with the "Cash For Clunkers" spending bill is that it will drive consumers to buy Toyota's and Honda's. That's because, the Japanese vehicles have higher mileage capabilities than most U.S. models of the same class or type. In fact, most Japanese hybrids are at least 4 mpg more efficient than any equivalent U.S. branded hybrid. Standard fueled cars are even more efficient. That means that many new car buyers just see this as a "government give-a-way" for something that they planned to do anyway.
Furthermore, the reason the U.S. car sales have slipped over the years is because resale values are lower and repairs higher. If you just look at any Cadillac, two years off the showroom floor, there are constant and reoccurring problems with things like the electrical system. That's why resale values are lower and why their Japaneses counterparts are more desirable. The quality and finish of a car on the showroom floor is one thing. However, the repair history is something completely different. U.S. namesakes can't compete with the Japanese after 2 or 3 years of operation. Just look at consumer reports or other rating agencies.
I just think that this "Cash for Clunker" program will be a cash cow for those who intended to buy a new car anyway. The true winners might be the Japanese and South Korean manufacturers who excel at high mileage vehicles. It might sway some to buy a hybrid because the $4500 voucher can ease the pain of having to foot $6000 or more for the price of a hybrid over the equivalent conventionally powered car. But, the bottom line will be that there will be just as many "clunkers" on the road after the program is over. If you really wanted to get those clunkers off the road, the program could be wider spread and more effective by giving any American a voucher if "they trade up" by 5 years on a "newer" and, not necessarily, new car.
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