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Friday, February 06, 2009

Scrap the Government

It's time to trade in our tired, over 9-year-old government for a new model. Do you think Mandy will give us a cash incentive?

Reuters reports today that Mandy's great car scrapping scheme may not work (does anything that Gordo's gang does work?).

The government is studying car scrapping schemes introduced in other European countries to boost demand for new models, but is not certain they would work, a spokesman for Prime Minister Gordon Brown said on Friday.

German dealers have reported an upturn in business after the government announced plans to issue certificates worth 2,500 euros (2,180 pound) for all new car buyers who scrap vehicles that are at least nine years old.

Business Secretary Peter Mandelson said in a speech on Thursday night that he was studying the initiative as he tries to revive Britain's struggling car industry.

"We have said scrapping schemes are an interesting idea," Brown's spokesman said. "But we are not convinced how a scrappage scheme would provide a stimulus for demand."

New car sales in Britain fell by almost a third year-on-year in January to register their worst performance for that month since 1974, according to figures from industry body the Society of Motor Manufacturers and Traders (SMMT).

The SMMT urged the government to adopt car scrapping schemes similar to those in Germany and other European countries.

The government last week pledged to guarantee up to 2.3 billion pounds of car loans to help the car industry to battle a slump in demand that has cost thousands of jobs.

It is also discussing measures with the banks to boost the flow of credit to the finance arms of the car sector.



Karl Denninger reminds us today that we already use creative financing to prematurely obsolete cars:

It didn't take long before people realized that credit could be used to finance consumption too.  That is, your desire to own a car can be realized through the provision of credit.  But this credit doesn't self-liquidate; the car is consumed as you drive it, and when you're done with the car its value is greatly diminished instead of remaining constant or being enhanced.  This sort of credit effectively "pulls forward" demand - that is, it allows one to play "Wimpy" and have a hamburger today for which one will pay next Tuesday.

When this sort of financing becomes embedded in an economy there is a very real risk that it will expand almost without limit, based only on the optimism of the people involved.  This in turn will create distortions in supply that are irrational and cannot be "worked off" with short layoffs and labor cutbacks.

Automobile demand is a good example.  The last few years we've built 14 million cars a year.  But our inherent demand to replace destroyed cars (rusted away, crashed, etc) is only 11 million or so.  The other three million were "pulled forward" with creative financing - for a while.

We employed hundreds of thousands of people building cars that cannot be sold on a permanent basis.  That's a problem.

George Monbiot has joined the controversy.

Posted by Phil at 2:03 PM
Edited on: Friday, February 06, 2009 5:51 PM
Categories: Comment, Environment