Has The Federal Government Directly Financed The Purchase Of 2.25 Million Cars In The Past Year?
An interesting observation emerges when one analyzes the various holders of non-revolving consumer credit. While the traditionally largest players in non-revolving consumer credit provisioning, commercial banks and finance companies, have been actively curtailing their lending of auto loans (the primary form of non-revolving credit, which also includes student loans, as well as boat and trailer loans) with their combined holdings declining by 5% year over year (from $989 billion to $940 billion), another actor has jumped in to take their place at the margin. It should not surprise anyone, that with a 68% increase in non-revolving credit holdings over the past 12 months, this entity is none other than the Federal Government.
While in the domain of revolving, or credit card, credit, the government is still a non-existent entity in direct lending (not so indirectly if one accounts for major governmental holdings in bailout recipient banks such as GMAC, Citi and BofA, and all of them if one adds the TLGP and the various other Fed's alphabet soup backstop programs), in non-revolving credit, the Federal Government has long been an actor. And while the drop in revolving credit over the past year has been dramatic, in non-revolving credit the situation has been much less dire. The reason: the massive pickup in government lending, as the Feds have become a lender of first and last resort not only to banks but to the troubled U.S. consumer. Where in November 2008, the Government accounted for $110 billion of released credit, last month this number was a whopping $184 billion. The chart below shows the massive surge in government borrowings to offset all other traditional sources of credit.
We attempt to normalize for the government's sudden and dramatic lending spree. If one applies the same YoY level of change to the government lending amount as is the average for all other sources of credit, the resultant non-revolving credit amount in November 2009 would have been $1.520 trillion: a $75 billion cumulative lower total than the actual NSA amount of $1.595 trillion.
This renormalization allows us to do some thought experiments with this primary marginal lender. Assuming that out of this $75 billion, 60% has gone for auto loans, an extremely conservative assumption, we get that the Federal Government has financed $44 billion in auto loans in the past year that otherwise would not have found a source of funding. In addition applying an 80% LTV to these loans, implies that these loans purchased a total of $56 billion in cars that would likely not have been purchased otherwise. Lastly, assuming a $25,000 average price per car, leads to the observation that the government's largess permitted the acquisition of 2.25 million cars which otherwise would not have been bought.
2.25 million is a large number when one considers that the most recent SAAR came out at 11 million and change. Not only has the government goosed up auto sales with direct subsidies in the form of Cash For Clunkers, but has additionally provided a majority of the marginal financing that would not have been there otherwise for incremental car purchases in 2009.
The conclusion is that as long as the government is the marginal actor in all aspects of the economy, expect nothing bad to happen. However, stimuli, zero cost financings, AIG bailouts, record Wall Street profits, and other boons courtesy of Uncle Sam and US taxpayers will only continue for so long before the current administration is booted out as voters realize they have been had and all the current stability is at the expense of tens of trillions of new debt on the back end. When said booting occurs, watch as the floor falls out of the economy, and as the PPT becomes just a little troubled with containing the stock market together.