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    Cash for Clunkers

    Now as an owner of large stakes in car manufacturers, the US found a novel way of moving stock – providing a cash back incentive to owners of older vehicles to trade these in for new models. At face value the plan worked incredibly well with annualised sales of new vehicles moving up from around 10,5million to an annualised 14,5 million in August.

    The plan, which ended on the 24th August, paid up to $4500 per trade in and was initially limited to funding of $1 billion, but then quickly expanded to a total of $3 billion.

    New car sales were boosted from a low of around an annual 10,5 million to an annualized 14,1 million in August. However for the full year, Moody’s is forecasting an annual 11,5 million, which although up on 2008 is still far below the nearly 17 million in new vehicle sales in the US earlier in the decade.

    But the incentive saw sales in August itself spike up 26% from sales in July – also because new purchases would have been held back in July.

    Dealers apparently submitted claims of 690 114 nearly depleting the $3 billion in appropriated funds for this initiative.

    Wells Fargo, along with others, estimates that the rebates will have the effect of borrowing sales from the future. New sales will definitely tumble in the coming months, but many of the trade-ins would have been on outright owned vehicles, now replaced with new vehicles and a payment book, resulting in lower discretionary spending in the months ahead.

    Essentially the deal transfers capital from taxpayers to the car buyers, who possibly would have at some stage had to trade in their vehicles anyway.

    The big questions then – “is there a net gain to the economy” or is this merely a short sharp shot in the arm to a particular sector under pressure, which just happens to also be where the government has a direct interest. The US government owns 61% of General Motors and 10% in Chrysler.

    The chart below reflects the annualized sales stepping up dramatically.


    Source: Wells Fargo and US Department of Commerce

    History reflects that high government involvement in private enterprise does not work well and so only time will tell whether this artificial boosting and distorting of the private market by the government will prove beneficial.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments
    021 9144 966

    Permalink2009-09-03, 17:26:22, by ian Email , Leave a comment
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