Economic Stimulus…But For Who?

So this “Cash for “Clunkers” has been getting loads of coverage, and yet a few very key details seem to have been left out in all these discussions. First off, let me voice my major concern.  Stimulus packages such as these create superficial demand, which is unsustainable.  This is not a political opinion.  We have seem many types of these packages come out over the last few years and none have worked.  So using this as an example, let’s see what some fundamental problems are.

-With this program most of the money is not going to US car makers.  Rather 4 out of 5 main beneficiaries of this program have been foreign car makers.

-Nothing is being created, rather future demand is simply being brought into the current time frame.  There is a finite amount of new cars that will be sold within the US.  Thus, if people buy a new car now, the people taking advantage of this program will likely not buy another car in the near future.  How can I know this?  Well, the fact they still have a clunker to begin with.  So a car is sold today at the expense of a car being sold in the future.  Will the US auto industry have the same problem down the road?

-On that last note, this package makes people who have paid off cars to buy new cars, likely on credit!  So real assets (albeit not expensive assets) are stripped from the taxpayer and replaced with debt.

-Also, the finite supply of cars that are to be sold over the next several years are being sold at reduced rates.  This depletes the amount of consumers that will be forced to buy cars in the future at normal prices.  The counter argument is that people with clunkers will likely not buy a new car without incentive, but that argument does not hold much water.  Eventually people with clunkers will need a replacement vehicle, and they will need to buy it normal price in the future (whether it is new or used) if this program were not in effect.

-The money tax payers/consumers spend on cars is now no longer available for other purchases.  Nothing really changes, except that the auto industry is basically bailed out…once again.  That money used on the car can now not be used to stimulate other areas of the economy.

I am a trader, so trade the rally, but programs like this make me leary of its continuation.  Ultimately this is a drop in the bucket of everything that has happened, but it shows a major problem in that this program is even in effect.  Long term (not necessarily short-term) I see problems for the market again.  Not because of this program, it is just one example,  but because of what it exemplifies.

~Cory Mitchell, CMT
Chief Market Strategist
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