Are Economists Rational?????
July 08, 2009
– Comments (6)
Scott Grannis is a well known Economist with a very respectable Economics Blog:
http://scottgrannis.blogspot.com/
I strongly recommend his blog for those who like Economic issues.
Scott wrote a blog yesterday titled: Used Car Prices Soar
In his blog he states:
I think the rise in prices also has something to do with the return of money velocity. Consumers retrenched violently in the fourth quarter of last year, hoarding cash and repaying debt in the face of tremendous uncertainty. Money velocity collapsed. Now that confidence is returning, money is getting spent again. The economy is recovering some of the ground it lost.
My response was as follows:
Scott,
Not a chance.
My buddy is in the industry and I have attended used car auctions. And yes, used car prices are WAY UP at the auction. Even big SUVs. But not for the reasons you state.
It is very difficult right now to get new car financing. The margins for used cars are soooooo high that they are self-financed in many cases.
If the car must be taken back, there is enough margin built into the sale to make the deal still work.
The primary reason used cars are selling is because it is very difficult to get new car financing. Plain and simple, and sort of a strange byproduct of the times.
His response to me was....
alstry: Your argument boils down to this: used cars are very cheap relative to new cars. That explains the surge in demand for used cars. We are reversing the slump of late last year which left used car prices way too cheap relative to new car prices. As I'm arguing, the world is returning to normal.
Actually that was NOT my arugment to Mr. Grannis. In fact, my argument was exactly opposite, that used cars are expensive and are selling because buyers can get financing for them due to the very high margins built into the car, despite being over priced......not much different than when anyone with a pulse could get financing on over valued houses during the bubble years. Heck, in some cases, used cars are selling for higher prices than new cars soley because they can be financed at such high prices.
Based on the fact that the President and Congress is relying on a bunch of Economists to solve this financial mess, you think it may be a big reason why the mess is getting worse!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
It is seems that Economists have very little understanding of leverage and its important implications on the Economy.......little wonder why our nations economic health is rapidly entering the critical stage.
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