C.M.O. 3.3.2009

Credit Market Overview
March 3, 2009

Although this Nation’s financial brainiacs have created enough toxic assets to virtually sink the world’s economy, the U.S.A. has long stood as a symbol of capitalism in one of its purest forms. In a perverse sort of way, manufacturing AAA securities from sub-prime mortgages and selling them to unsuspecting buyers stands as a perfect example.

The current crisis is turning many things upside down at the moment so it should come as no wonder that there are lessons to be learned from two unexpected sources, namely the Germans on marketing and the Chinese on economic policy. Who’d a thunk a stodgy Western European nation could beat Madison Avenue at its own game and a Communist country could take the U.S.A. to school on stimulating the economy.

Germany has instituted a “scrap” bonus for people who trade in an old car to buy a new one. The E2,500 ($3,200) payment is made by the government to people who scrap a car that is at least nine years old and buy a new car that meets the latest emissions standards. Does it work? So far 134,000 people have applied for the bonus and that number is rising by upwards of 7,000 people a day.

“It’s a real sales boom” says Ceyhun Tan a Volkswagen dealer in Berlin whose February sales were two-three times what they were a year ago. Sabine Mumm, a librarian from the north of Germany said “All the available cars were gone, especially the small cars. It was really hard even to get the dealers attention.”

The program is so successful that France, Italy, Spain and even Slovakia are adopting the theory both with cars and other big ticket items. If there is a hitch in all of this for Detroit is that German auto manufacturers actually make cars people want to buy.

From the north of Germany we travel to Beijing where they are preparing for the parliament’s annual meeting which is heralded at China’s “political event of the year”. Eyes are on the world’s third largest economy as the country is one of the few left that is experiencing positive, albeit lower, growth. “China has the resources to reinvigorate and reorient its economy.” Cornell University professor, Eswar Prasad, recently stated. He went on to say “This could have a broader payoff for China in the international arena by providing support for global demand.”

Wen Jiabao, China’s premier said motivating buyers in China was different than in other parts of the world because “Consumption is not based on slogans, but on whether consumers really have money in their pockets.” The government is also encouraging workers that have lost their jobs to start their own businesses by offering tax incentives and training opportunities. In addition to only spending what they have the Chinese save around 25% of what they earn.

What’s interesting here is that a country founded on the principals of Karl Marx has only slated 8% of its 850BN Yuan($124BN) stimulus package for things like health care (1%) and public housing (7%).

So while they might like it in their fried rice the Chinese seem to have no room for pork in their stimulus.

Enjoy the week.

Jim Delaney