Saturday, August 8, 2009

Cash for Clunkers is a Lemon - The Daily Reckoning Weekend Edition

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The Weekend Edition - August 8-9, 2009

  • The financial world's newest bamboozle...
  • The Mogambo Guru with an urgent update...
  • James Kunstler is here to rain on your parade...
  • Why the FDIC is trouble, according to Bud Conrad...
  • It's not safe to get back in the water, says Bill Jenkins...
  • Bill Bonner on reaching into the future to pay for today...and more!

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    The Daily Reckoning's Highlight of the Week:
    Cash for Clunkers is a Lemon
    Baltimore, Maryland

    We couldn't pass up this opportunity to talk about the newest bamboozle on the market: 'Cash for Clunkers'. We realize everyone is talking about it - but for good reason!

    First of all, this plan, which is barely two weeks old, is already bankrupt. The Obama administration had to go back to the Senate asking for more cash this week, saying if they didn't get more money, the program would be shut down by Friday. The Senate voted 60 to 37 to give the program another $2 billion.

    The Obama administration says this will keep Cash for Clunkers going until Labor Day...which is about one month from now. Does anyone think that this is quite a bit of money to dump into a brand-new program to keep it running for just - one more month?

    And as Bill has been pointing out, this is just another example of the government promoting the idea that the future doesn't matter - just spend for today. He wrote in Friday's essay: "Instead of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn't expect 2010 to ever arrive..."

    The Wall Street Journal backs us up here: "The subsidy won't add to net national wealth, since it merely transfers money to one taxpayer's pocket from someone else's, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years."

    But who's worried about national wealth? Certainly not the US government, who, in the face of an estimated $1.8-trillion budget deficit this year, passed what is basically another auto the tune of $3 billion.

    Keep reading for Bill's view on why Cash for Clunkers, and the other 'stimulus programs' won't lead the United States to a recovery...

    People believe that there is a recovery...and that it is the result of stimulus efforts by the feds. The results from the second quarter show the economy still contracting...but at a slower pace, just - 1% annually, rather than the - 6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.

    "It if weren't for stimulus spending, the contraction [in the 2nd quarter] would have been closer to 4%," says the editorial in the International Herald Tribune. "The stimulus is helping...and more stimulus would help even more."

    Oh? Would it? Let's look at stimulus-in-action:

    'Cash for Clunkers' is a hare-brained scheme...but that doesn't make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to the get the money, people have to buy one.

    According to the press reports, the program has been a great success wherever it has been put in place - in France and Germany, as well as in the United States.

    If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

    [We all know none of those suggestions will ever really happen...but there is a way you can get your slice of the stimulus pie. A completely legal 'loophole' (that's been missed by millions of Americans) could be the key to your financial survival during this major downturn. Read all about it here.]

    What's so special about autos, in other words? And why is it a good thing for people to buy cars?

    Oh c'mon, dear reader...don't pretend you don't know. The auto industry is huge...with many lobbyists and many organized groups interested in its wellbeing. It is an old and well-established industry with plenty of political clout.

    Tomorrow's industries, by contrast, have no organized labor... no pet political action committees. So who gets the money?
    The above is just an excerpt from Bill's standout essay from this week. You can read it in its entirety on The Daily Reckoning site - it's an essay you don't want to miss. Get it here.

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    ALSO THIS WEEK in The Daily Reckoning: The message of our contributors and our DR regulars was loud and clear this week: everything is not 'hunky dory', as James Kunstler puts it in Tuesday's essay. A recovery is not nigh - 'we have not seen the end of this yet' Bill Jenkins tells us in Thursday's offering. See all of this week's essays, below...

    Urgent Update: The Gold Window is Still Closed
    by The Mogambo Guru
    Tampa Bay, Florida

    "...lots of dollars were being created by the Federal Reserve and multiplied by technology increasing the velocity of money through the banking system, resulting in a lot of inflation and a lot of dollars piling up overseas."

    Hunky Dory
    by James Howard Kunstler Saratoga Springs, New York

    "A broad consensus has formed in the news media and among government mouthpieces and even some 'bearish' investors on the street that 'the worst is behind us' in this tortured economy. This view is completely crazy."

    The FDIC Is in Trouble
    by Bud Conrad
    Los Altos, California

    "...using any reasonable accounting method, the FDIC is already bankrupt and will require hundreds of billions of dollars in government bailouts just to keep the doors open."

    Illogical Optimism
    by Bill Jenkins
    Pylesville, Maryland

    "When these chickens do come home to roost, we will see another gut- wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet."

    A Stitch in Time
    by Bill Bonner
    Ouzilly, France

    "The automobile bought in 2006...the house bought in 2005...the vacation taken in 1999 - the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back - ever."


    We've got an exciting week ahead of us. On Monday, Dan Amoss, over at Stategic Short Report, could uncover the biggest financial lie of the last 64 years - and the aftermath is going to rock an unsuspecting Western economy.

    Basically, Dan has discovered a bank that is doing everything in its power to hide from its shareholders that they can't pay their massive $1.512 billion dividend scheduled for 2009. News of this 192-year old bank going belly-up is not only going to kill their share price, but will hit the financial markets hard.

    This isn't the first time Dan's been ahead of the curve...he called Lehman's collapse 5 months early, showing readers how to play the bankruptcy for a $200,000+ profit...

    When this bank is forced to put their cards on the table (and they will be), the share price will undoubtedly crash...making a unique opportunity for you. Dan's conservative estimate is that you'll make 50-75% by the end of the year by betting against the stock...but word around the office is that he really thinks this is a money-tripling opportunity.

    Watch this space for more info.

    Enjoy the rest of your weekend,

    Kate Incontrera
    The Daily Reckoning

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