Rhody Trader

Here’s what worries me.

No one seems to be talking about what kind of impact things like Cash for Clunkers programs can have. They create market distortions. Any time the government comes through and incentivizes something it does that. In this particular case I worry about what can be thought of like an ocean wave.

What I mean is that before a wave comes in the water ahead of it actually drains back into the ocean. Think about the tsunami witnesses who talked about how far back the ocean had receeded prior to the surge coming in. When people can anticipate something like this Cash for Clunkers program they will naturally hold off on their purchases until the incentive is available, if they have a choice to do so. That dries up demand prior to the program just like the ocean receeding.

Then the wave comes through when the incentive kicks in. By all accounts it’s a big wave going on right now given how the government is running out of money already. With a tsunami one can see the ocean receeding to get an idea of how big the incoming wave is going to be (or at least that it’s going to be a doozie). It’s a bit harder to do that with car sales in the full economy, but the size of the wave we’re seeing now does tip us off that there was a lot of car buying that was held in check prior to the program kicking in. Some of that is new demand incentivized by the pay-out, and some is demand that was just holding off on a purchase they were poised to make anyway.

And that brings us to the back-end of the wave. Where are we going to settle out after it passes? If the demand caused by the Cash for Clunkers program was mainly folks who just put off a purchase until they could take advantage of the pay-out, then we could expect the demand level to settle back in to whatever the normal replacement cycle level is in relatively short order.

If, however, a large part of the demand created by Cash for Clunkers is from people who would not otherwise have been in the market for a new car at this point – as I think is probably going to end up being the case – then we could see the repurcussions for a while. It will throw off the replacement cycle in much the same way all the technology upgrading in the run up to Y2K did during the early part of this decade (which I have always said was the biggest reason tech stocks got crushed).

Oh, and where do all these clunkers go? If they aren’t getting scrapped then we’ve actually got a net auto supply increase.

Trackback URI |