According to Manheim Consulting, used vehicle prices jumped 16.4% in the first half of 2009 on a seasonally adjusted basis. Once more we are reminded that a weak economy and rising unemployment do not necessarily create deflationary conditions.
The Manheim folks attribute the surge in used car prices to the dearth of new car sales: "The cause of higher wholesale prices does stem from a negative - namely, the significant reduction in potential supply available to the auction industry." 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.
The fact that prices have not collapsed tells us once again that this recession was not the result of a shortage of money (see my many posts re: no shortage of money). It was a lack of confidence more than anything; fear that banks would collapse, fear of counterparty risk. That problem is now being resolved. The Fed responded to the huge increase in money demand, thereby avoiding a depression/deflation such as we had in the 1930s.
One problem we are left with, however, is a massive and wasteful increase in government spending, which promises an equally massive increase in tax burdens. This is the main factor that is now holding back the animal spirits that could otherwise be giving us a V-shaped recovery.
The other problem we have is highlighted by the rebound in used car prices: if that rebound is analogous to the rebound in money velocity, then the Fed is going to have to take dramatic steps very soon to pull back all the money it has dumped into the banking system. Otherwise we are going to find ourselves with way too much money and that will give us rising inflation.
HT: Mark Perry.