Cash for Clunkers -and- Bernanke “Saving the World”

More economic wisdom from Chris Gaffney and Chuck Butler…

Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm a government led recovery is underway here in the US.  In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the cash for clunker program.  But Chuck sent me a note over the weekend which questions the ‘success’ of this program.  Is it really what the US economy needed?  Here are Chuck’s thoughts from San Francisco:
 

“I was sitting here thinking about something that had flashed across the TV screen here in my room, and that is the “Cash for Clunkers” program… I blasted this program two weeks ago, and now that it’s finally done with and $3 Billion was spent to artificially boost auto sales, I will put my final thought on this… Of course I already talked about the obvious things wrong with this program. But here’s my final thought, and that is… I believe the program is going to end up hurting the most vulnerable consumers in the U.S. Middle Class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.

So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… “I’m from the government, and I’m here to help”…

The reason I’m all over this program today like a cheap suit, is that this weekend, I heard that Big Ben Bernanke made a claim at the Jackson Hole boondoggle, that “we saved the world”… Oh, Come on Big Ben, isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for re-appointment in January, and you would love to have that thought of you “saving the world” on the minds of the administration?

So… In the end, we’ll see if “he saved the world”…”

I’m with Chuck on this one.  It seems the US government is intent on getting consumers to go back to their borrow and spend habits.  This is what created the bubbles, and the administration seems intent on creating another bubble economy.  US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice).  The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies.  Use this downturn to correct some of the bad habits which we had gotten into.  Yes, it will be painful, but breaking an addiction is always hard and painful.  US consumers need to break our addiction to easy credit and massive debt.  This recession/depression has given consumers a much needed wake up call, hopefully the administration won’t be able to push consumers back into their old habits.

I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy.  One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic V shaped recovery.  I let her know that I think the economist was one letter off, and that instead we will see the recovery shaped more like a W.  The green shoots and recovery we are seeing right now will die out as government stimulus slows.  High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn.  Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.

Nouriel Roubini wrote a commentary in today’s Financial Times which agrees with my thoughts.  Roubini said the chance of a double dip recession is increasing because of risks related to ending global monetary and fiscal stimulus.  He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009.  While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double dip with another leg down.  “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote.  “Policy makers are damned if they do and damned if they don’t.”

Vandal Economics (Cash for Clunkers)

By Bill Bonner

“In keeping with the requirement that old engines be destroyed, mechanics across the country poured sodium silicate into crankcases and revved engines, causing mass car death,” says an article in Harper’s Weekly.

“‘It just don’t make sense,’ said a used-car-parts salesman in Dayton, Ohio. In Glenview, Illinois, mechanics watched a blue 1994 Chevy Lumina van wheeze and choke for five minutes before stopping. ‘That’s a good American GM product,’ said service manager Mark Rolla, ‘that won’t die.’”

Let’s open up the hood and take a better look. Does ‘Cash for Clunkers’ really work, we ask? In answer, we guffaw. Then, we invite dead economists to guffaw with us.

Richard von Strigl, among others, pointed out in 1923 that there is a big gap between real economics and the vulgar economics that drives policy decisions. On the one hand, serious observers study what happens in a pure, natural economy and draw their truths from its crystal streams. On the other, the meddlers distort the economic world so much that the observations of the old economists hardly matter. Downstream from the meddlers’ camp the water is not even fit to drink.

In theory as well as in fact, the planners never know what they are doing:

“The…knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” began Friedrich Hayek in 1945, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

A “good” is a good only insofar as it is good to the person who wants it. The public servant – as able and self-less as he may be – has to guess. History and theory tell us what happens; he usually guesses wrong. Only the individual knows what he wants and how to get it. He compares one good against others – using prices to guide him to where he gets the most good for his money. But when the government steps in with its subsidies, it effectively pisses in the stream of price information. Now, the consumer, with no clean signal to guide him, makes mistakes. He may be lured to buy a new car. The central planners may be pleased. They see the effect they desired – more auto sales. But what don’t they see? We invite Frederic Bastiat for an opinion (1850):

“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.”

But who listens to Bastiat or Hayek? Ten countries have taken up ‘Cash for Clunkers’ programs. In Britain, the government puts up 2000 pounds to grease the deal…with a total of 300 million earmarked for the program. In America, the ‘Cash for Clunkers’ program was extended last week, giving buyers a bonus of $3,500 or $4,500 when they turn in an old vehicle. In France, buyers get 1,000 euros toward the purchase of a new car. Everywhere, the program is hailed as a success. It is widely thought not only to boost auto sales, but to help revive the economy, reduce pollution, cut oil imports and even lower highway deaths. We haven’t heard that buying a new car contributes to weight loss, but we haven’t seen the TV news. Even ‘free market capitalists’ such as Larry Kudlow say they like it:

“The Cash-for-Clunkers rebate program is working. …And the price tag of the program is a mere $2 billion compared with the trillions of dollars Washington has been wasting. So, for once in our lives, Washington spending is giving us a good bang for the buck.”

Bastiat knew better. He described a scene where a boy had broken a shop window. The store’s owner was annoyed, until a foolish economist pointed out that the broken window was a blessing in disguise. It gave work to the glaziers and glassmakers. The glaziers then could buy other things…and thus did the whole economy enjoy a bounty from this single act of vandalism.

But wait, Bastiat wanted to know, if you could improve the lot of mankind by breaking windows, why not smash every window in Paris? And if you could improve the lot of mankind circa 2009 by crushing cars, why crush them all? And knock down London and New York too. Think of the boom that would accompany the rebuilding!

Obviously, it doesn’t work that way. Replacing broken windows, or crushed cars, takes resources away from some other uses. This unseen effect is actually greater than the seen effect – the improved market for new cars. Lured by phony price information, buyers send phony signals to the rest of the economy. The automakers produce more cars than they need. Steel, which might have gone to refrigerators is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders.

Savings, that might have been invested in new industries, go to prop up an old one. Kudlow allows himself a peek at the unseen consequences: “…yes, it’s quite possible that government rebates today will steal car sales from next year. But let’s cross that bridge next year…” Then, he even wonders, briefly, at the obvious foolishness of it…almost as though he were a serious thinker: ‘Well, why not just spend another $100 billion and give consumers checks for everything?’ Or, ‘Why not spend another trillion?’ Well, I don’t want to go there…”

No one wants to go there. The old economists shake their heads: ‘It’s a fraud,’ they say. The rest of them don’t give a damn.

The Economy: Glimmers of Hope in The Darkness

By Al Walsh

Although this pervasive recession/depression continues to hang over us, and I believe the worst is yet to come, there are small positive signs.  Following is a recap of recent observations; many of which I’ve previously shared:

• Commercial credit is showing signs of loosening up – although the “jury is still out” as to who will qualify.
• Durable goods orders are up – indicating some positive stirrings in industry.
• Housing sales are marginally up – although I expect more “dark days” ahead as people use up their unemployment benefits and more mortgage resets occur.  I’ve heard talk of Washington extending unemployment benefits further, which may help matters if they go through with it.
• Businesses have begun receiving federal funds for energy development.  So far, most of the money has gone to big business.  Not much help to entrepreneurs, but good for jobs and business in general.  Smaller companies may receive some indirect benefits via subcontracts from the major recipients.
• The “cash for clunkers” program is popular, spurring auto sales.
• The stock market’s shown signs of life, although I expect dangerous volatility ahead.
• Imports are marginally up, indicating some “fresh breath” in consumer spending.  This will help the shipping lines and common carriers.
• Headhunters I talk to tell me that they’re starting to see some increased hiring action. Nothing to get excited about yet; but a start.
• Consumer saving is on the rise.  The saving rate has been dangerously low for way too long.  The funds deposited with banks should help marginally ease the credit freeze by providing a base for new lending.  Let us hope the banks don’t just sit on it, like they did with the bailout money.
• The rate of IPOs (Initial Public Offerings) is slightly up, providing a positive sign that investment capital is starting to “come out of the woodwork”.
• Industry in general reduced inventories drastically; a mixed-blessing but one that provided cash flow for survival and which will provide a platform for ramped-up production as we come out of the recession/depression and demand increases.
• Consumers are going through the painful process of deleveraging from the high credit positions they’ve been in for years.  Of course many without jobs are increasing those positions for survival, but in general the nation is going through a forced shedding of some credit burden; which is a good thing.
• Other nations are starting to see signs of recovery, including the UK and China.

None of these factors are of great significance themselves, but together they offer some rays of hope.