Great Depression Online Archive Issue:

Ridding the World of Clunkers

Great Depression Online
Long Beach, CA
August 11, 2009

Inside This Issue You Will Discover…

*** Quite the Head Scratcher
*** It was a Massacre
*** Ridding the World of Clunkers
*** And More

Then those Things ran about
With big bumps, jumps and kicks
And with hops and big thumps
And all kinds of bad tricks.
And I said,
“I do NOT like the way that they play!
If Mother could see this,
Oh, what would she say!”

-- Dr. Seuss, The Cat in the Hat

Quite the Head Scratcher

The recession is over.  Economists say so.  Wall Street does too.  Just consult any newspaper across the land and you’ll find countless proclamations of the good news.

“History will be written that the recession ended in the summer of 2009,” said Princeton University economics professor and former vice chairman of the Federal Reserve, Alan Blinder last Friday.

Blinder, if you didn’t know, is the brainchild behind the Cash for Clunkers program…of which we’ll have more on below.  But for now we’ll bask in the radiant knowledge that the recession is over. 

~~~~~~Make Them Pay~~~~~~

Over 500 years ago, Marco Polo made his fortune just like this.  Recently Joe Kennedy used this business to make his fortune as well.  It’s one of the world’s oldest professions (no, not that one).  Discover the ultimate buy low sell high business you can start on a shoestring budget.  Make Them Pay.

~~~~~~~~~~~~~~~~~~~~~~~~~

Like this tidbit from Jeffrey Frankel, a man on the National Bureau of Economic Research’s business-cycle dating committee – the group responsible for ‘officially’ dating the start and end of recessions…

“I haven’t felt that there have been any previous months for saying this will turn out to be the bottom, but this one [July] is definitely a candidate.”

The big news, the news these men were commenting on, was the Labor Department’s announcement that only 247,000 jobs disappeared in July and that the unemployment rate dropped to 9.4 percent from 9.5 percent.  Quite frankly, we found this to be quite the head scratcher.  We couldn’t comprehend how the unemployment rate could drop while nearly a quarter million jobs vanished.

With numbers, however, anything is possible.  And with a little digging we unearthed the fact that the drop in unemployment was largely due to people running out of benefits and falling out of the program.

It was a Massacre

Still, Wall Street didn’t seem to care that the unemployment numbers were phony.  Instead, traders bought stocks last Friday with ardor…boosting the S&P500 2.3 percent for the day.

“U.S. stocks rose for a fourth week,” reported Bloomberg over the weekend, “pushing the Standard & Poor’s 500 Index above 1,000 for the first time since November, as better-than-estimated employment, manufacturing and home sales data boosted confidence that the worst slump since the Great Depression is ending.

“The S&P 500 has jumped 49 percent from a 12-year low on March 9, the steepest surge over the same number of days since the Great Depression, as three quarters of its companies posted second-quarter earnings that beat estimates and the economy improved.”

The Bloomberg story failed to mention what happened after the epic stock market rally that followed the initial crash of October 1929.  For your edification we’ll fill you in.

In short, it was a massacre.  Here are the particulars…

From September 3, 1929 to November 13, 1929, the DOW lost 47.9 percent.  Then, as rarely noted, it rallied 48.1 percent through April 17, 1930.  Good optimism, good money, and good people poured back into the market to recover their losses.  Soon after, though, the market crashed 89.2 percent from its initial peak along with the hopes, dreams, and aspirations of a generation.

“History does not repeat itself, but it does rhyme,” said Mark Twain.

Whether the unemployment rate has peaked or not or whether the economy has ‘officially’ bottomed out or not, we suspect there will be more pain to come for stock market investors…perhaps a lot more pain.

In the meantime, the brain trust is hard at it – making a mess of things everyway which way they can… 

Ridding the World of Clunkers

Back on July 27, 2008, Princeton University economics professor and former vice chairman of the Federal Reserve, Alan Blinder, proposed what he called the Cash for Clunkers program.  In fact, he outlined the scheme in a New York Times editorial titled “A Modest Proposal: Eco-Friendly Stimulus.”

At the time we thought it was a moronic idea rooted in pure Keynesian bosh.  You know what we’re talking about.  The idea that when people run out of money to spend, the government should give them more so they can keep spending.

Regrettably, however, the government took Blinder’s Cash for Clunkers proposal seriously.  And in hindsight, why wouldn’t they?

For here is a fraud so preposterous, practically everyone can line up behind it and cheer.  Social engineers, environmentalists, government hacks, economists, the automotive industry, and even the little guy…from all their varying perspectives and reasons, ridding the world of clunkers makes it a better place.

But ridding the world of clunkers is not without consequences.  The price tag’s now up to $3 billion.  While this may seem like peanuts compared to this year’s $2 trillion projected deficit, the costs are actually much higher.

All clunkers, conceivably, are already paid in full.  Their car payments have long since been fulfilled.  They’re owned free and clear of debt.  And many of them still drive just fine.  In other words, they have a positive net asset value.

The Cash for Clunkers program, as we understand it, gives somewhere between $3,500 and $4,500 in government cash to consumers to trade in their old car and buy a more fuel efficient vehicle like a Toyota Prius.  Doing a quick search we see that a new 2010 Toyota Prius starts at about $22,000. 

Now it is possible that some buyers, after accepting $4,500 for their old clunker, pay the difference out of pocket with cash.  But for most, we imagine, the $4,500 covers just the down payment…the rest requires financing.  So while the GDP may get a temporary boost in July and August due to increased automobile sales, the GDP over the next five years will be dragged down by the debt burden of Cash for Clunkers car loans.

What’s more, the American taxpayer will have to pay the interest on the $3 billion for Cash for Clunkers…which will be added on top of the $2 trillion 2009 deficit…which will be heaped upon the $12 trillion national debt – not to mention the government’s $56.4 trillion in current obligations.

Here’s why this is such a grave concern…

On January 18, 2007, long before the economy’s current sputters and grunts, Federal Reserve Chairman Ben S. Bernanke testified before the U.S. Senate Committee on the Budget, on the long-term fiscal challenges facing the United States.

“The outcomes that appear most likely, in the absence of policy changes, involve rising budget deficits and increases in the amount of federal debt outstanding to unprecedented levels.

“A vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits.

“Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by sharp spending cuts or tax increases, or both.

“High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time.”

Cash for Clunkers, you see, doesn’t help the economy; rather it ultimately hurts it.

But people love it.  And they cheer for more.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Stocks these days appear poised for a fantastic crash.  Corporate executives and insiders are exiting in droves.  While the little guy is buying back in just at the peak…like he always does.  If you’re tempted to buy stocks right now, we strongly recommend you first read this.  There are some remarkable opportunities out there to build massive wealth without having to buy a single stock.  It’s called the “Off-Wall Street” Cash Recovery Plan.

 

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