The financial lunacy behind the latest government subsidized program is astounding. The cash for clunkers program is expected to add as much as 0.5% to GDP next quarter. While it is likely to contribute positively in the near-term the long-term ramifications aren’t quite as rosy. Bloomberg reports:
“Cash for clunkers came at a very, very good time to jump-start the economy,” Mike DiGiovanni, sales analyst at Detroit-based General Motors Co., said at a teleconference. The so-called Car Allowance Rebate System, which provides credits of as much as $4,500 for the purchase of a new car when an older vehicle to be scrapped is handed over, ran through most of its initial $1 billion of funding within a week.
“If the cash-for-clunkers program is extended by the additional $2 billion that passes the Senate, it could boost third-quarter GDP by 0.5 percentage points,” DiGiovanni said.
Recent ISM and GDP figures have proven that the so called “recovery” is almost entirely due to government stimulus and liquidity injections. We now learn that the latest government waste program is going to further boost the economy in artificial way.
The latest treasury projections are calling for $75B in auctions next week. So let me get this straight – the U.S. government is taking out loans to help U.S. consumers (who are already debt laden and cash poor) take out loans in order to purchase assets that they don’t really need? If that isn’t the most backwards kind of stimulus then I don’t know what is. This short term shot in the arm is exactly the wrong kind of long-term medicine this country and its consumers need. I am all for consumer stimulus (so long as it isn’t in the form of a blank check), but honestly, is a new car and a new loan what every American is looking for in this time of financial difficulty?
My favorite quote from a recent CNN article:
“The PT Cruiser is not my first, second or probably even 10th pick for a car, but it’s rated well and Chrysler matched the $4,500 federal rebate. I never could have afforded this without the rebate programs, nor would I have purchased a brand new car.”
Just brilliant. Go out and buy a car you don’t need, want or can really afford….But hey, it’ll be good for the Q3 GDP figure!
Source: Bloomberg
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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