Want to bet what we'll be talking about a year from now?
Let's narrow it down to a specific subset - after the 9/11 attacks the US went into cocoon mode for a while, we were in a much milder recession back then so things were already a bit tough but that made it tougher. The auto companies decided it was time to pull demand forward... and 0% interest rates on cars were born... along with massive rebates - $4, $5, $6K many times. This pulled demand forward - success! Until you train the consumer that is what the deal is. Then they see 3.9% financing with $2000 rebates as awful. And they wait for you to blink. So you have to continue the deals, and continue the deals. Harpooning your bottom line. Eventually the consumer is so strained even these low interest rate, huge rebates don't work. So you have to turn car loans into mini mortgages [Feb 13, 2008: Car Loans Being Stretched to 7 Years] [September 2007: Is a 10 Year Car Mortgage Far Off?] It's all the same drug; just stronger variations.
I just have to change a few words above, and change the industry, and change a few numbers and we're talking about almost the entire US consumption economy. Housing, furniture, electronics, clothes. It's all the same. When you can't squeeze any more blood... create the new paradigm. The drug needs to keep getting stronger until the drug nearly kills the patient. And that's what you just saw in the U.S. Because healthy, cleansing downturns are no longer politically convenient.
So we have the car for clunker program coming in the U.S. - essentially an outright bribe from the US government to buy new cars. I'm sorry, an environmental initiative to help Mother Earth. I look forward to the details on this one - are we really going to give people $4500 for the 1988 Pontiac Fiero? Does the car need to run to qualify? Does it need to have an engine inside? Or can I just roll in the frame? But we're going to keep pulling money from the money tree and handing it out - Bush / Obama / whomever. Keep pulling demand that is not there naturally forward - never letting equilibrium to happen - as the market has been trying to get us to, through this painful but very necessary adjustment period.
So we'll see how many more years of rebates and handouts we'll be going through. I sincerely believed when the Bush stimulus came out (remember we were NOT in a recession as per the pundits at the time nor were we headed for one) that a bigger one would come when the new President came in, whomever it was. I said around $500B; they surpassed that. I said when that stimulus came through we'd have another one (I guess its stimulus 3.0, not 2.0 technically)... I am sticking to that. If you believe everything will be just dandy in the US economy in 6-9 months you won't agree with me as there is no need. We'll see what happens.
But going back to cars we wrote about the raging success of the German deal back in March [Mar 3, 2009: German Auto Sales Boom to 10 Year High Due to Government Scrap Bonus]
Auto sales in Germany last month boomed to their highest level in 10 years, spurred by the German goverment's bonus to people who scrap older cars and buy new ones, an industry group said Tuesday. Germany's 2,500 euro incentive is part of a wider 50 billion euro economic stimulus plan.
Germany's goverment discounts for new-car buyers is Europe's most generous — 2,500 euros, or $3,134 at Tuesday's exchange rate. A buyer has to trade in a car at least 9 years old and agree to let it be scrapped.
Judging from what I am seeing so far we are going to make the German handout look like peanuts... I see $3500-$4500 and the new car only has to have 4 mpg more than the old, with the old at a maximum 18 mpg? So I guess even if your car is 1 year old you can trade it in as long as you add a whopping 4 mpg ... sound smart. And the cost is only $4 billion... that is only 1/8th of the typical Citigroup bailout.
- The House on Tuesday waded deeper into the rescue of the troubled auto industry when it passed a $4 billion plan to subsidize new cars sales for consumers who scrap old ones.
But going back to the point of this long winded post (aren't they all?) what happens after the stimulus? Oh, then the worries I suppose begin because you pulled up a ton of demand... sort of like what we did to the 2008-2010 vintage of home buyer, who rushed into the 2005-2007 market. I only ask this as a rhetorical in the US because the answer is easy... after the stimulus you... do a new stimulus. But I guess in other countries the climate is not quite so suitable to growing money trees, so they actually have to face the reality of what happens after green shoots sprout from nothing other than government transfer payments. Thankfully as a blessed people we never have to worry about such issues.
- As a cash-for-clunkers program is considered by Congress, European carmakers say they are worried about the impact of weaning themselves off similar incentives when they expire this year.
- The payments have proved to be a huge success among consumers across Europe since they were introduced in late 2008. In Germany, they have helped increase sales by about 40 percent from a year ago. But for car companies, living without them will not be easy, said Carlos Ghosn, the chief executive of Renault and Nissan. “The incentives have given us some breathing room and obviously we are worried about what happens when they end,” Mr. Ghosn said in an interview in Brussels. “We are worried because we know it will have a negative impact. Hopefully, the economy will have improved enough by then so that the impact will not be too dramatic.”
- Halting the incentives is proving much more complicated than introducing them. (much like halting the use of drugs is much harder than starting) Germany has already extended the deadline of its program once, and French automakers want them to continue beyond their scheduled elimination at the end of 2009.
- When it was introduced in January, Berlin envisioned spending 1.5 billion euros to get 600,000 clunkers off the road. But as demand mounted in March and April, politicians raised the budget to 5 billion euros for two million cars and extended the deadline through the end of 2009.
- The demand for new cars, however, is not expected to improve by then (end of 2009), leaving automakers wondering how they can tempt consumers to buy cars. (I propose magic shows at your dealerships? fun for the whole family - nah, more money trees from government works)
- “It effectively transfers the downside risk from 2009 to 2010,” said David Arnold of Credit Suisse in London. “They will not be able to simply end market incentivization — it has to be done gradually.”
Just put it on my bill with the rest of it, half a million and counting.
