This blog post originally appeared on RealMoney Silver on Aug. 4 at 8:50 a.m. EDT.
From my perch, there is far too much hyperbole surrounding the cash-for-clunkers program. Not only is the size of the program small ($2 billion-plus) relative to the scale of a $10 trillion domestic economy and a $750 billion-plus fiscal stimulation program but, similar to the euphoria and outsized market response surrounding the
(which followed the unwarranted depression in March 2009), the Car Allowance Rebate System (CARS) program is not an economic sine qua non.
CARS will provide a modest boost to third-quarter 2009 GDP and will contribute to a lower-than-anticipated CPI. According to
, "With auto production comprising around 1.1% of GDP, the boost (from the CARS program) from 9.6 million over the first half of the year to 11.2 million would add 0.6 percentage points to annualized GDP growth in Q3 if this level of sales is maintained through the rest of the quarter and production rises in line."
CARS is a popular program that appeals to consumers and to our government officials who are elected by those consumers. It will no doubt serve to further buoy consumer-confidence levels. I fully recognize that the CARS program provides a psychological positive, which, however fleeting, is important in these times, as it can become psychologically self-reinforcing to the consumer. After the initial positive effect on production (and confidence), however, CARS (unlike other programs) will likely neither be enduring nor supportive of a self-sustaining economic expansion.
Most consumers who are participating in the program are taking on additional financing, the timing of which might be suspect as most consumer balance sheets have yet to be repaired. Moreover, the ultimate termination of the program could heighten fears of an economic double-dip as CARS program 2009 buyers borrow from 2010 automobile sales.
Depending on the duration of the program, CARS could also potentially have the unintended consequence of wreaking havoc on the pricing of used cars, and I am looking into re-shorting an old favorite,
In summary, the positive reaction to the CARS program seems hyperbolic (by the markets and in the media). And perhaps I, too, in giving this column the heading I have, am given to hyperbole, but while CARS will raise both consumer confidence and insure a boost to third-quarter 2009 GDP growth, it is small in scale relative to the size of our economy and could give way to concerns of weaker economic activity when the program is terminated.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Know what you own: Other automobile-related stocks include Ford (F) - Get Report, Toyota (TM) - Get Report, Honda (HMC) - Get Report, AutoZone (AZO) - Get Report, O'Reilly Automotive (ORLY) - Get Report and Advance Auto Parts (AAP) - Get Report.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.