Clunker Program: Real Economic Demand or a Wish List

Discussion of Hypothet #1, Continued

In the hypothet, Mr. Smith wanted a new car.  Perhaps he was tired of driving the Jeep.  Perhaps some of his neighbors had shiny cars with all the bells and whistles.  But does Mr. Smith's desire for a new car really equate to true economic demand?

It has been noted by supporters of the Clunker Program that "people who wouldn't otherwise have been able to afford new cars have been able to buy new cars.  Isn't that great?"  No, actually, it really isn't great at all.  What the government is doing here is indulging peoples desires.

Again I ask, is the "purchase" of a million or so new cars, supported almost exclusively by the borrowing of the U.S. government and individual "purchasers" true economic demand?  It is not because there is no current or past economic production to stand behind the desire of the individual "purchasers", only debt.  It is only simulated demand.

Quote of the Day: August 12, 2009

"Bubblenomics is not the way to a strong/sustainable economy, but it is an effective tool for shifting wealth from one class to another."  - Mike Whitney 

http://www.counterpunch.org/whitney08102009.html

"Clunkers": Reinflating the Auto Bubble

Discussion of Hypothet #1

The Obama Administration hopes to stimulate demand through the "Clunkers" program.  However, the program does not stimulate demand; it merely simulates demand.  The government-created "demand" of the Clunkers program is not real because it is entirely supported by borrowing.

The billions of dollars that the Obama Administration is pumping into the program come entirely from the issuance of United States Treasury debt.  The government deficit is running at an annual rate of 1.8 TRILLION dollars.  That is one thousand eight hundred billions.  Of those one thousand eight hundred, approximately three are being pumped into the Clunker program.

It appears that dealers are structuring their sales programs in a way that allows them to market the Clunkers program as a no-money-down offer.  As such, the purchasers are really bringing minimal or no money to the closing table.  As such, the purchasers are merely borrowing money.

The only sober conclusion is that the Clunkers purchases are supported entirely by borrowing, borrowing which can not be sustained.  The federal government is already facing problems in credit markets.  Interest rates on federal debt is rising in order to attract investors.  Foreign powers who invest in U.S. Treasury debt (most notably China) have expressed their concern over the rate of federal borrowing.  The federal government can not continue to borrow at this rate.  

At some point, this feel good program will have to end, and with it the simulated demand for motor vehicles.  Then what happens to demand for automobiles?

NEXT:  REAL ECONOMIC DEMAND VERSUS SUBJECTIVE DESIRE

Cash for Clunkers: A new car versus your family's health

Bubblenomics hypothet number 1:  Cash for Clunkers

Imagine if you will a family man (Mr. Smith) who drives a Jeep Cherokee.  The Cherokee is a simple, serviceable vehicle.  It doesn't cost much to maintain.  It does the job day in and day out, rain or shine, through snow and ice.  Mr. Smith does not owe a dime on his Jeep Cherokee.  

One fine day, Mr. Smith reads about the government's Cash for Clunkers program on the internet.  He discovers that despite the fact that the Jeep performs very well for his family, the new program would consider it a "clunker".  He goes to a local dealership and makes a deal for a new Honda Pilot.

The Pilot is new and spiffy and his liberal neighbors will respect him for driving a more fuel efficient vehicle.  He gets $4500 from the federal government for his Jeep, which the goes to be crushed.  (Think of it as a form of motor vehicle euthanasia.)  The dealership also gives him a credit.

But of course the Honda Pilot costs more than the government and dealer credits, so low and behold, what do we have now?  Car payments, that's what.  Each month Mr. Smith will now have to shell out a $350 car payment.

Suddenly, Mr. Smith is laid off.  As a result of the layoff, he is forced to pay for his own health insurance through COBRA or find new insurance.  Mr. Smith could find a perfectly respectable PPO or HMO for $350 a month.  One problem:  Mr. Smith's health insurance premium is sitting in his garage.

Oh boy, wouldn't he like to see the old Jeep Cherokee again!

What exactly is "bubblenomics"?

You may not have heard the term "bubblenomics" before.  Don't be ashamed or embarrassed.  "Bubblenomics" is an avant-garde term.  Bubblenomics is a term that describes an economic system in which demand is artificially stimulated by fraud, artifice or government fiat.

If you have been paying attention in recent years, you have seen housing bubbles, automobile bubbles, real estate bubbles, entertainment bubbles, education bubbles and most famously, the internet bubble.

Bubblenomics is in that section of the Venn Diagram (see above) where economics, politics and hopefully, a sense of humor, intersect.

Bubbles, by their very nature, can not be sustained.  They inevitably pop or disintegrate when their outer surface can no longer resist the gas pressure in side.  Unfortunately, economic bubbles are unsustainable too.  Bubblenomics 101 will examine current political and economic developments with the sense of humor that is required in times such as these.