Kelley Blue Book: Cash for Clunkers Bubble Will Burst

by Robert Farago

Published: August 7th, 2009

kelley blue book cash for clunkers bubble will burst

Here’s one new car shoppers won’t be reading on the home page at Kelley Blue Book. Via press release, the car guide’s boffins wonder what will happen when the federal government stops handing out free money to clunker-driving new car buyers. Unless the Cash for Clunker scheme is extended indefinitely (a possibility) and/or widened to include other types of vehicles (less possible but not improbable), the bubble she gonna burst. And then, bad things. Euphoria, meet reality.

“Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery,” said Alec Gutierrez, senior analyst of vehicle valuation for Kelley Blue Book. “As a result, dealers are going to auction to restock inventory, driving up used-car values. However, the effect of a supply reduction of this magnitude could have an immense impact on these values in the short-term, exacerbating the already-limited supply at auction. If this bubble comes to pass, dealerships will end up with excess inventory of both new and used vehicles and be forced to offer deep discounts to remove surplus inventory, driving values down. Ultimately, there will be the possibility of a severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding.”

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Pch101 on Aug 08, 2009
Not sure why you think my argument is ideological Because it comes straight out of the Mellon liquidation playbook that made the last depression turn into the Great Depression. What you are suggesting is exactly what made things worse in the past. The track record of failure of such policies is quite clear. It just doesn't work, and wishing that it would work doesn't make it so. I’m not even sure how all this spending will be financed. Reagan never worried about it. He ballooned the deficit several fold, and left it to Clinton to pay off the deficit and start reducing the debt. We'll have to do the same thing again, but later, in due time.

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Mpresley on Aug 08, 2009
Pch101 : Reagan never worried about it. He ballooned the deficit several fold, and left it to Clinton to pay off the deficit and start reducing the debt. We’ll have to do the same thing again, but later, in due time. What happened, deficit-wise in 1980s is a bit different from today's situation. I'd be careful about making too many comparisons. Certainly there are similarities, but also major differences in both scale and economic philosophy. Reagan inherited about 100 billion USD of Carter deficit. Obama about a 400 billion USD Bush deficit. The Reagon deficit was under 150 billion in 1989, in spite of increased defense spending (the Cold War was still on, back then), and in spite of the 1982 recession (where tax revenue dropped precipitously). The Obama deficit is now somewhere around 2 Trillion dollars. Do the math. In terms of deficit spending, Obama makes Reagan look like a fiscal shrew. The difference between the two is also marked in terms of fiscal and monetary policy. Reagan never initiated a huge "stimulus" plan. He ushered in tax breaks, and pushed for deregulation. This is not the current administration's plan. As far as I know, Obama is not for deregulation. He is for massive tax increases, and if he cannot convince anyone to buy our debt, then monetary policy has the potential to lead to hyper-inflation. I'm not sure we can hope for any kind of "recovery" in this sort of environment. But I'm no fortune-teller, and time will tell. Your statement about "having to pay it off later" is certainly correct, though.

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Pch101 on Aug 08, 2009
I’d be careful about making too many comparisons. The primary difference is that Reagan inherited an inflationary problem, while Obama inherited a deflationary near-depression. One should not address deflation in the same ways that one would inflation. tax revenue dropped precipitously This is false. Tax receipts increased every year under Reagan. Reagan never initiated a huge “stimulus” plan. Stimulus isn't required when the problem is inflationary. You're confusing one kind of economic problem with another. He is for massive tax increases Tax rates were too low under Bush 43, given the policies, and will be needed to pay off the expense of his bubble economy. Maintaining tax cuts post-recovery would only balloon the deficit that you claim to be concerned about. if he cannot convince anyone to buy our debt, then monetary policy has the potential to lead to hyper-inflation. Current treasury rates are well below historical norms. The country was paying far more to finance its debt under Reagan than it is now. That suggests that at this time, there is no problem selling off US debt. The pricing of treasuries isn't anything close to being hyperinflationary. They could double and still not be anywhere close.

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Cowbert on Aug 10, 2009

+1 Pch101 Also, the concern about the Chinese not buying T-bills is a fallacy. The Chinese are actually concerned about American deflation because American consumption is what is floating their own market at this time. They essentially have no choice /but/ to buy dollars if they want to keep dumping their products on the US. So in essence the system works hand in hand - any stimulus provides for increased (or stabilized) American consumption which stabilizes the foreign economies. The US GDP (of a single country) reflects 2nd largest economy, the first being that of the entire EU at this time; the dollar as the principle reserve currency will be extant for at least another few decades...and the trade deficit will largely exist on paper as well. One sees the same effect with oil producing countries. Any talk otherwise by the foreign parties are at best pitching to get a discount on the treasury rate and at worst "sabre rattling".

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