Saturday, November 8, 2008

US auto sales crash

Sometimes, lower rates are simply not enough. The US central bank have already begun to find this out; the Bank of England and its monetary policy committee are about to learn the same lesson.

Ever since the Fed began cutting rates, auto sales in the US have tanked. Supposedly, auto sales are sensitive to interest rate changes. Despite all the head-line grabbing fed press releases announcing historically unprecedented rate reductions, US monthly auto sales are down 36 percent relative to August 2007, when the crunch first reared its ugly head. The US auto industry is now edging towards bankruptcy and a likely government bailout.

The chart above is telling us a hard and bitter truth. Monetary policy isn't working. Central banks may cut, but the real economy simply doesn't respond.

That is going to hit some policy makers and commentators very hard, particularly those who have invested naive faith in the power of monetary policy. That simplistic idea, that central banks could regulate the economy by adjusting the rate at which it lends to commercial banks, has proved to be a very unreliable intellectual construct.

The relationship between policy rates and the wider economy has collapsed under the weight of deeper contradictions in the economy. Both the US and UK economies are deeply disfunctional. When banks teeter on the edge of insolvency, asset prices are crashing, and households struggle to service their debts, interest rates are very unlikely to produce a surge in optimism and output.

Ed, my good friend over at the Credit Writedowns blog, always emphasizes the political rather than the economic imperative to cut rates. Only this week, he argued that the Bank of England had wanted to cut rates for some time and the MPC were looking for an any old excuse to issue a crowd pleasing press release.

He could be onto something there.


  1. political diktat...
    we make the bank independent...
    we make the banks do as we say...

    sheeps clothing inna wash innit?

  2. This is a scary but very predictable part of the recession effects. Just imagine huge cut backs at big car production plants in the UK. The local economies of towns near production plants will suffer with huge knock-on effects on house prices. Simply because there are normally large housing estates near these plants that house the workers. If these people are out of work for a long period then this is going to impact on housing prices through forced sales or people moving away from the areas. My immediate thoughts are with towns like Swindon and the large Honda plant.

  3. could it be political interference such as CPI instead of RPI and off balance sheet borrowing that has caused this decoupling effect.I'm no economist but it seems to me that all the old "levers" which could be pulled to affect the economy have had there connections altered and the people with the most to gain are politicians.

  4. also even though the FED has slashed rates that banks can borrow at..the banks have not passed on the lower interest rates to teh real economy. They need to get consumer rates lower as an incentive.

  5. I live near Swindon, and there is the BMW plant for Mini panel production located here too, which is also closing for 4 weeks over Xmas. It could be a grim old time around here for the forseeable future.

  6. London estate agentNovember 8, 2008 at 5:59 AM

    Any similar charts for the UK?

  7. rate cut not working - does not compute, does not compute....

  8. Public sentiment has changed from spending to saving. That simple fact explains it all, but I doubt the clowns in government or the BoE will ever grasp it because it conflicts with their received truth, and also renders then impotent.