The Car Bubble … and Cash for Clunkers II?

A guy who smokes meth can pull a week of 15 hour days. But come next week… .

That’s how artificial “incentives” work on the economy. On the macro level, it is the Boom – and Bust – business cycle, whose unnatural peaks and valleys are caused by manipulation of money and credit, which causes excessive and unwarranted “investment” that – inevitably – leads to a downturn (or even a crash) when the artificially induced supply is disproportionate to demand. The housing bubble of the early 2000s is an obvious example of this.

Cash for Clunkers (same era) is another – and its unfortunate effects are just now beginning to become obvious. Against the State: An ... Llewellyn H. Rockwell Jr. Best Price: $9.94 Buy New $9.95 (as of 10:40 EDT - Details)

As with housing in the early 2000s, the federal government decided it would be a good idea to “stimulate” new car sales by enacting a program that paid people to throw away perfectly good used cars. The idea being that they would then buy new cars to replace the ones thrown away.

Many (but not all, bear with) did so. This created a boom in new cars sales. Not only because there were fewer good used cars available, but also because the ones that remained had gone up considerably in price due to (wait for it) limited supply. This artificial scarcity, in turn, became the artificial incentive to buy a new car.

Actually, to take out a loan on a new car.

The remaining used cars  that survived Cash for Clunkers were still less expensive than a new car. But they were now expensive enough that few people could afford to plunk down cash for one. That meant financing – and the interest rates on a loan for a used car tend to be much higher while interest rates on a new car loan were (and still are) much lower.

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Another artificial incentive to “stimulate” the sale of the new over the used.

But even with low-interest financing, the cost of a new car is higher than ever. So high, in fact, that most people have to take out a six or even seven-year loan – the new normal – in order to make the monthly payments manageable.

The cost of new cars is high – the average new car sold for more than $30k last year – because of two factors, and they are in a very real  way additional artificial “incentives” that have distorted the car market to the point of absurdity. Clinton Cash: The Unto... Peter Schweizer Best Price: $1.29 Buy New $4.35 (as of 09:10 EDT - Details)

One, the government keeps piling on mandates – safety and emissions – which add parts or require new designs, none of which comes free and often comes very expensive. The VW Diesel Debacle is a case in point. We know now that the cost per car to make the “cheating” diesels meet Uncle’s mandates amounts to several thousand dollars per car – an amount so high that the cars are not worth “fixing” and so will be thrown away instead. And because the cost to make Uncle-compliant diesel is so high, VW has decided to make them no longer (see here).

Two, buyers want gadgets.

Even “economy” cars now come with or offer LCD touchscreens and power pretty much everything.

Which is fine – except people can’t really afford this. Or the mandated-by-Uncle equipment. Debt is necessary to make it all feasible… temporarily.

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