Artificial Demand as Designed by the Government

Any Monday after a vacation hurts, but today was rough! Back to the regular routine after doing practically nothing for a week reminds one just how much energy it takes to work day in and day out.

Artificial Demand as Designed by the Government
I will concentrate on a singular idea this evening as several strands of thought seem to snake back to the same source.

Cash for Blank Coming Soon
In the comments section from the last post, loyal reader Watchtower observes that my prior post that forcasted a "Cash for BLANK" program to be unveiled:

I believe you called this one with your "cash for 'blank'" analysis : )

"Latest in Stimulus: 'Cash for Refrigerators'
Beginning late this fall, the program authorizes rebates of $50 to $200 for purchases of high-efficiency household appliances."

I'm waiting for the 'cash for canned goods' program, or maybe the 'cash for toilet paper' program, or how about 'cash for cash's sake' program?
Who would have ever thought that you could actually borrow yourself rich by buying disposable products, genius, pure genius.

I maintain my expectation that by November we will see an entire arsenal of "Cash for BLANK" plans put into practice.

Cash for Clunkers Ends a Huge Success
At midnight Monday August 24, 2009 the Cash for Clunkers program ends. The program, which allowed up to $4500 to be credited towards a purchase of a new car (with many caveats), is by all accounts a great success. This program has really bothered me from the beginning, and I would expect another run of it as car sales collapse once again.

I can think of two things that bear watching regarding the results of this program:
-As I had written before, I think banks that jumped to make these new car loans were doing so under the idea that because the government was behind the program, and will not want to look bad should things go south, the loans themselves are perhaps "protected". What I mean is should a high percentage of these car loans default, the banks can always say "Hey, YOU wanted us to make these loans! YOU now will have to cover them". A "Cash for Repossession" program does not sound very good.
-There is going to be fraud. There has to be. As the paperwork finally gets processed and checked, I would be shocked if over 15% of these sales were not fraudulent or gamed. Considering the good press the program has had, and the expansion of others like it, we may never really get the hard details reported.

Congratulations to all the new car buyers that made this deal. Just think, that $4500 will almost cover the instant depreciation of your new car the second you drive off the lot. Quite a deal indeed.

Frenzied Market for Cheap Houses
The home sales numbers released last week were widely celebrated as a sure sign of a turnaround in housing. Digging into the number revealed some very suspect details, but that would have taken effort to figure out. Barry Ritholtz of The Big Picture does all the work for the mainstream media in this post, and I would encourage you to check it out. Barry vibes:

In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

Ouch!

I came across this Bubble Meter post that has some comments by Diana Olick of CNBC, and this table by the NAR:

As I am from Eastern Massachusetts, I have never seen a home priced under $200,000 since I started looking at homes. Under $100,000? You cannot even get a shed around here for $100k!

Still, the 38% increase in sales at the low end is pretty impressive. Is this a good sign? Is this a real turnaround? Sadly, the answer is no. It seems the government once again is in the artificial demand game once again.

The First Time Home Buyer Tax Credit is a program that allows up to $8000 to be used as a down payment towards a home purchase. Calculated Risk has some observations on the program, but one in particular jumped out at me:

Anecdote: I've spoken with two younger guys (30 ish) who told me they had no down payment, but edit: were looking to buy a house NOW. They are using the tax credit and FHA to buy. I think that conversation is happening in many places.

Now you already know that Economic Disconnect is a free market type. You know I would rather eat glass than tell people what to do with their lives. You are aware that I would prefer everyone make their bed, then have to lie in it. Of course the government sees things different, and they would try and support poor choices using tax dollars. For once, I am going to actually offer some advice and try and tell people what to do.

If you are looking to buy your first home (or your first buy in 3 years, as per the program details) and you cannot save up even $8000 for a downpayment (on a regular home of say $250,000, $8000 is only about a 3% down payment) then allow this to sink in:

Stay out of the housing market. You have no discipline. You have no ability to budget. You do not make enough money, or you spend too much. That $8000 up front you think is so great now attaches you to a huge mortgage that you will have trouble paying, as you cannot even save up $8000 to begin with. There are huge costs associated with owning a home (taxes, upkeep, major repairs) that you will not be able to afford. If $8000 is enough for you to put your credit at risk (should you default on the loan) than you are a gambler that will hurt the markets over the long term. If you think that a 3% discount on a purchase that would cost you 10-20% less before this is all done is a good deal may I suggest you stick to scratch tickets as your investment vehicle. Normally I could care less what you do with your finances, but as Fannie/Freddie/FHA are making all these loans I am going to have to pay for this at some point.

End rant.

Demand rises and falls. It has done so since time began across every asset type ever known. When the only people that want to buy a home are the sort that jump at a 3% tax credit discount thinking they are getting a "Sweet Deal" (thanks Casey Serin, I will never forget you!) there is a problem. Keynesian thinkers try to argue to support demand in and of itself, as if it exists in a vacuum, as if there are not real factors behind demand changes. Sadly, the US government over the past two years has enacted policy in support of such cloistered thinking.

Calculated Risk thinks the Tax Credit program will be extended (it expires in November) and I agree fully. I would expect this to become a permanent fixture of policy, and it will be expanded to include all buyers of homes. The Clunker Cash will morph into any new car purchase cash. TV's, refrigerators, computers, furniture, you name it, will soon have a demand enhancing program behind it.

Of course all of this has a cost. While we can argue whether the US can indeed spend money to support artificial demand across all these consumer areas, I think a key point is being missed.

The US dollar, and hence belief that the US to repay its debt is built on pure fantasy. While this has been accepted for a long time, the US has up to now behaved as if they at least understand they need to keep up the appearance of fiscal discipline. When the worlds biggest economy resorts to hand outs to stimulate demand from their "villagers" then the storyline begins to get laughable. While foreign creditors like to play pretend, they tend to not like being made a fool of.

Have a good night.