More evidence of the disaster that was Cash-for-Clunkers
An interesting article today in Seeking Alpha reported that the Cash for Clunkers program successfully contributed to a further decline in the American savings rate. I quote below from the article. Read the entire article here.
Purchases of Autos, in response to the “Cash for Clunkers” program, accounted for most of the August increase in purchases of durable goods, and more than accounted for the July increase.
If incomes are flat or rising slowly and spending jumps, it means that people are either drawing down on savings or going into debt. As far as these statistics are concerned, it doesn’t matter which.
The Cash for Clunkers program “succeeded” in getting the savings rate to come back down. In the short term, that is a good thing and has helped breath some new life into the economy. It was certainly good for Ford (F), CarMax (KMX) and Auto Nation (AN).
In the long term, however, this is a disaster. In August, personal savings (DPI minus PCE) was 324.1 billion or a rate of just 3.0%, down from $436.0 billion or 4.0% in July.
Our low savings rate and excessive dependence on consumer spending to power the economy is one of the key reasons the economy is in the mess it is in….
….A declining savings rate helps boost the economy, but a very low savings rate is unsustainable and eats away at the very core of its structure. It is sort of like eating your seed corn — you enjoy it while you are feasting, but the next year you have a much smaller harvest. This country has been progressively eating more and more of its seed corn over the past 30 years or so.
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