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“Cash For Clunkers” is Really Economics For Dummies

August 5th, 2009 Comments off

In confronting a  crisis of epic proportions, one can do the heavy work of crafting a well conceived, comprehensive strategy. But why bother, when short-term gimmicky is politically more feasible. Thus we have this absurd counter-cyclical gimmick, the so-called “cash for clunkers” boondoggle, being offered by the Washington establishment as their “answer” to the  massive problems confronting the automobile industry, not only in America but globally as well.

Throughout the world, a vast car manufacturing infrastructure has been constructed at great expense and high leverage, designed for global demand of almost one hundred million cars per year. However, the Global Economic Crisis has unleashed massive demand destruction in many key categories of consumer durables. In the case of autos, worldwide demand is currently just above fifty million units per annum, rendering it almost impossible for most automobile manufacturers to generate a profit, whether they are located in Detroit, Tokyo or Stuttgart. The challenge is massive, global and complex. Yet, the geniuses in Washington have come up with a solution that is small, local and simplistic beyond all measure.

The concept of the “cash for clunkers” program is very simple and superficially enticing, as are most gimmicks. Trade in the old jalopy that was on the verge of being junked anyways, since it had no trade-in value on the open market. The federal government will fund  a $4,500 credit that will go towards the purchase of a shiny new automobile, thus stimulating the economy. As to be expected, the response from those with dilapidated vehicles on the verge of being dropped off at the local scrap yard has been  substantial, in the process depleting the original one billion dollar appropriation for the program. Also not a surprise, the politicians rushed to provide another  $2 billion for the program, to the delight of car dealerships across the land.

While on the surface  the program may be seen as an economic stimulus initiative at work, no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression. And most notably, the supposedly strong response to the program actually betrays its supercilious essence. For one thing, four of the the five most popular cars being purchased under “cash for clunkers” are foreign brands, meaning the impact on the domestic auto industry is minor at best.

Beyond the fact that  domestic car manufacturers are only partially benefiting from the program, it must  also be remembered that every dollar of credit being distributed under the program’s auspices is from U.S. taxpayers, at a time of massive, multi-trillion dollar deficits. Using borrowed money to subsidize the purchase of foreign made automobiles, along with domestic models, does not make much economic sense. However, there is another aspect to this program that has thus far escaped scrutiny.

A major driver of the Global Economic Crisis was the stampede of consumers who were enticed into buying new homes they could not afford, due to the Federal Reserve lowering interest rates beyond prudent levels. This created a real estate bubble, and we all know the consequences of that. Now, with “cash for clunkers,” it just may be possible that many of the consumers taking advantage of the credit largesse from Washington are those with incomes that were inadequate for  a new car purchase, but have been persuaded by their own government to take the plunge on a new automobile loan, courtesy of this deficit-financed program. What happens if many of these new car owners end up defaulting on their auto loans, as the recession deepens?  This is by no means a small possibility, given the current dynamics of the nation’s most severe economic contraction since the 1930s. In effect, the American taxpayer may be financing a new wave of consumer loan defaults down the line, further exacerbating what some are now calling the Great Recession.

“Cash for Clunkers” is really a showroom lemon, masquerading as brilliant economic policy. The politicians may think it is ingenious; my own view is that it is symptomatic of the intellectual bankruptcy that has come to dominate Washington’s response to the nation’s descent into financial and economic doom.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

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Is The U.S. Auto Industry Doomed?

March 31st, 2009 Comments off
Detroit has become an urban wilderness. Only a few miles from the downtown core of the Motor City can be found once vibrant neighborhoods that are now devoid of human life. Only abandoned homes remain, extinguished of their occupants by a tidal wave of foreclosures. Recently, the local and even national media have reported on a phenomenon unique in metropolitan America; animals that had not inhabited Detroit for decades, including industrious beavers, were now reclaiming their previous habitat, as more and more areas of urban Detroit have been transformed into pastoral land. No better metaphor can exist to point out what has happened to the heart of America’s once mighty automobile industry.
As the Global Economic Crisis destroys worldwide consumer demand for automobiles, two of America’s three remaining domestic carmakers, General Motors and Chrysler, look to President Barack Obama for salvation. They, however, are not alone. The financial and banking system are first in line, while states and cities starved of tax revenues are also clamoring for help from the Obama administration. No doubt President Obama has many burdens weighing on him as he seeks to provide leadership for a national and global economy in tatters. Obama did not cause the decline of the U.S. automobile industry, and no doubt he is trying to do his best in formulating policy regarding Detroit and well as the many other ailing sectors of the U.S. economy. However, the recent decisions regarding G.M. and Chrysler that Barack Obama has made will not, in my view, do much to reverse the dismal fate that seems irreversible for the once proud car builders of Detroit.
The perspective from the White House appears to be that the two domestic auto manufacturers are in dire straits because they have not formulated a business plan that is viable in current market conditions. They have therefore, in effect, been sent an ultimatum. Chrysler is being told to merge with the Italian automaker, Fiat, while G.M. was compelled to fire its CEO, and must “restructure” radically within two months, or face bankruptcy. Washington will only provide funding for the duration of the ultimatum, with further support only available if the expectations of the Obama administration are met in full.
With respect to Chrysler, the attempt at a shotgun marriage with Fiat is just another failed automotive merger in the making. The record of foreign carmakers buying large or controlling interests in American auto companies has been universally disastrous. One need only look to Chrysler’s relatively recent merger with Mercedes-Benz, at which time the joint company was known as Daimler-Chrysler. Prior to that catastrophic union, which Mercedes-Benz management will forever regret, there was the purchase of American Motors by Renault, the French auto giant. The end result of that merger was the extinction of AMC, with its remnants bought by Chrysler. It should also be pointed out that Fiat abandoned the American car market decades ago, so it is totally unfamiliar with the dynamics of the U.S. auto marketplace.

General Motors is a much larger carmaker, with a global presence and vast overhead. Its very size defines the essence of the problem being faced not only by G.M. but also by other global car builders, including Toyota, Nissan and Ford. Currently the world has the manufacturing capacity to assemble more than 90 million automobiles a year. However, the Global Economic Crisis has created a vortex of demand destruction in the car business, reducing global demand to around 50 million units. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity. With worldwide sales reduced to 50 million cars, no major car company can make money.

The only solution for preserving General Motors is to provide sufficient demand for its manufacturing capacity. This demand need not be restricted to cars; during World War II Detroit became the arsenal of democracy, as its assembly lines retooled to build the weaponry that helped defeat Nazi Germany and Imperial Japan. However, in 2009, political leadership appears to lack the imagination to see the potential of harnessing the productive capacity of the auto manufacturers in other directions that can facilitate global economic development and recovery. What we are left with are ultimatums that provide only two possibilities: bankruptcy now, or becoming “leaner” with the future possibility of insolvency still hanging like a sword of Damocles.

I do not think the Obama plan for preserving a domestic U.S. auto industry, as presently conceived, will work. At most, it may preserve fragments and echoes of what was once the mightiest industrial productive capacity on the planet. Unlike the Great Depression of the 1930s, in which industrial giants such as G.M. and Chrysler did survive and eventually prosper, the Global Economic Crisis is devouring what were once seen as the pinnacles of economic and industrial might. If G.M. and Chrysler are in fact doomed, along with much of what remains of America’s industrial capacity, this will be largely due to a policy decision that establishes the financial sector as the center of gravity for the U.S. economy, reflecting the vastly more significant taxpayer dollars that have been allocated to that sector, with far fewer strings than are being attached to the paltry aid given to Detroit.

How is it possible for the U.S. to rebuild its economy if the industrial sector, epitomized by companies such as General Motors and Chrysler, is largely sacrificed on the altar of Goldman Sachs, AIG, Bank of America and their ilk?

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

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Global Economic Crisis Ravaging World’s Auto Companies

December 14th, 2008 Comments off

America’s car industry is on the verge of extinction amidst the global economic crisis. The Senate tuned down a bill offering Detroit automakers a $14 billion dollar bridge loan. Now it is up to the Bush administration to grant the 3 domestic auto manufactures the money from its TARP fund for the temporary rescue of the Detroit automakers; TARP was originally set up by Congress to save the financial industry from the global economic crisis.

The downturn in the auto business is not only an American phenomenon. The global economic crisis has ravaged auto producers throughout the world. Among the major European car producers come warnings of a bleak and barren 2009. The indications are growing that the deepening crisis in the automobile sector is global, going beyond the American auto industry’s desperate life and death struggle.

Recently, the CEOs of Renault-Nissan and Fiat stated that the automobile markets would undergo sustained declines in 2009. This parallels the catastrophic sales declines that have pushed the American “Big Three,” Ford, GM and Chrysler, to beg for bailouts from the government. The global economic crisis is destroying demand for cars in virtually every market.

The world’s number one car company, Toyota Motor Corp, will be reporting a loss of about 100 billion-yen ($1.11 billion at current exchange) for October-March. This is according to Japanese media. If even Toyota is losing money and cutting automobile production, how many weaker car companies will become extinct during the global economic crisis? For the auto business, as with many other enterprises, the worst is yet to come as the global economic crisis picks up the pace of its destructive impact on the world economy and global financial system.

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