Pop Goes the Car Bubble

Almost every negative thing happening in the car business – in particular, ludicrous technical complexity for the sake of electronic gimmickry and also to cope with diminishing returns federal “safety” and emissions mandates – could be gotten under control by the simple expedient of cutting off the monopoly money/debt-financing that makes it all possible.

The seven-year loan.

“Free” money (zero or very low interest).

Give-away leases.

The car industry is riding a bubble that’s proportionately as large as the housing bubble of a decade ago. And it is going to pop. For the same reason that a wave has to crest and wash ashore, once set in motion.

Signs of trouble abound. They build them – but no one comes. Not without inducements that amount to giveaways.

For several years now the car manufacturers have been resorting to truly desperate measures to prop up new car “sales” – in air quotes because it’s a dubious proposition to describe as a “sale” a transaction that involves exchanging the item for  a sum insufficient to cover the cost of its manufacture, plus a profit sufficient to make the exercise worthwhile.

Time to buy old US gold coins

Yet that is exactly what is going on.

As new car prices rise, the cash back offers, dodgy leases and other “incentives” necessary to move them off the lot also rise in frequency and inanity. Examples include the leasing of electric cars for less than the cost of a monthly cell phone contract (Fiat made just such an offer; see here) and “below invoice” transactions that rely on the manufacturer (e.g., Ford) paying a dealer to “sell” a car (e.g., manufacturer to dealer incentives) for the sake of getting rid of it, getting it off the books.

Or rather, onto someone else’s books.

This financial flimflam works for awhile because – just like the housing flimflam – a shell game is being played.

The dealer finances the acquisition of a new car, which he buys from the manufacturer; he then puts the car on his lot for sale. He pays interest each month on his loan, just like an ordinary person who has bought a car on debt (the honest name for a loan). Each month that comes and goes with the car still on his lot is another month of carrying costs for him.

Selling the car – that is, transferring the debt load – becomes a matter of increasing urgency.

In order to entice a buyer – that is, the next-tier-debtor – he resorts to every measure available, including “special offers” and (here we go again) extremely dodgy financing. His goal is not so much to sell the car to someone who can afford it but to offload the debt.

Onto a bank or other lender.

Eventually, the taxpayer – when the bank collapses and the government bails it out.

Once the papers are signed and the car is driven away, it is no longer the dealer’s problem. He no longer has to worry about it. If the “buyer” fails to make the payments, it is now the lender’s problem.

And that problem is written off, in its turn, when it becomes necessary to do so. The bank makes up the loss via interest and fees on other debt. Or by re-selling the repo’d vehicle  at exorbitant interest to another debtor.

Rinse, repeat.

The dealer, meanwhile, has made a “sale” – and it is so recorded and reported, adding another log to the swaying Jenga tower.

Sound familiar?

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