YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

A Clunker of a Policy


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I keep hearing so much about the “success” of this “Cash for Clunkers” program and I’m getting more frustrated the more I hear about it. So, I decided to Google it (or Bing it) to learn more about this nonsense. I typed in “Cash for Clunkers Nonsense” and came across a well written article that summed up all my thoughts in a nutshell. Rather than reinvent the wheel, I thought I’d share the article. I don’t know anything about the author, other than the fact that I agree with what he says about the program. It was written yesterday by Victor Riesco:

“One way governments can seriously damage an economy is with misdirected policies that seek to “spur GDP growth” or “fix” an economic problem…

Government policies usually mean spending money in unproductive ways or giving credit to businesses on which no private entrepreneur would risk hard-earned cash.

Recently the big news was the success of the “cash for clunkers” car-purchase program. This bill, designed to “help” the economy, gives federal subsidies of up to $4,500 dollars for exchanging your old car for a new one with better gas mileage.

Originally, this program had only $1 billion dollars assigned to it, but thanks to high demand, it ran out of cash in a week (I interject for a moment: If this program is in such high demand, doesn’t that alone send a red flag about the market inefficiency?). The House has approved an extra $2 billion to keep the program running…

What the government is doing is distorting the free market, forcing people to stop saving, which builds capital or pays down debt, and instead to purchase unproductive assets.

The money they are giving away is money that government owes and has to be paid with interest (Again, I interject: Remind me, wasn’t it debt that got us all into this mess? I’ve heard insanity is doing the same thing all over again expecting different results. Gov’t money is not manna from heaven!). The consumer will probably also have taken on more credit to pay for the new car.

Here is a clear example of a misdirected policy that will spur growth, in the short term, through more debt and consumption. However, it will drag the economy in the future as it’s burdened with more interest payments, and the private sector will have less capital to be used in a productive manner that creates real growth.

Also note that more than half of U.S car sales are imports. This program simply makes foreign companies richer at a cost to U.S. taxpayers, and increases the U.S trade deficit.

If a short U.S. government ETF existed, I would go all in on it."


Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | August 04, 2009 | Permalink

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