Everyone loves cheap motoring, but don’t get sucked in by 0% interest over 5 years unless you’re sure you can afford it in the long run.
Where are you going to be in 5 years? Will you be working? How many kids will you have, and how much disposable income? What are your incomings and outgoings going to be like? It’s pretty hard to predict the future, so is signing up to pay out £200 per month for the next 5 years a good deal for you, or a good deal for the manufacturer?
In case you hadn’t noticed, the global economy is in a right old mess. It all started when currencies were decoupled from gold, and became paper (monopoly) money, with about as much intrinsic value as a roll of andrex. With house prices and the cost of living going through the roof, it’s hard to imagine that once upon a time, our pound sterling (as well as the dollar) money was linked to the precious metal gold, which does have intrinsic value, but since money was decoupled from a commodity it has become progressively more worthless, especially under the control of central bankers as they have been flooding it into the economy in ever greater amounts.
Giving an individual the power to create money is a dangerous thing. In the first instance allowing commercial banks to set the amount of money in the economy by their lending behaviour doesn’t seem the most appropriate means of monetary policy imaginable. In the second, the biggest danger is that individuals in central banks falsely believe that they have the power to harness the economy by means of economic stimulus (money printing). Money printing doesn’t create demand, people do. This hasn’t stopped central bankers from trying to get the economy going by throwing a lot of money about the place, and allowing a few choice individuals nearest to the soup kitchen, to get very rich in the process.
Free markets, if allowed to function freely will allocate capital in the most efficient manner. But the free market effect has not been allowed to function for quite some time, especially since the subprime fiasco of 2008/09. Rather than letting the heavily indebted system and all of its crookedness collapse in on itself, it was preserved in all of its decrepitude, and allowed to prevail and fester in ever unhealthy ways. Capitalism had failed to claim any heads.
So here we are at the end of 2015 after 6 years of unprecedented ‘recovery’ (read: central bank stimulus programmes). They were well meaning, but ultimately flawed in their thinking. Central bank stimulus programmes (QE) and bank lending into assets like property were meant to create a “wealth effect” (where people extract money from their homes as though they were cash machines, and spend it on cars, kitchens, loft extensions, holidays etc) to fill the demographic consumer spending hole left by retiring baby boomers. This is not real demand however, and while people may be able to get their goodies now, they will still be required to pay for them later.
As the demographics of the world has been changing towards ageing populations, central bankers have all followed the same path, albeit at different times. Japan’s economy has led the West as its baby boom retirement occurred earlier than the West. The miracle of economic growth in China, which was making the global demand look much better than it really was, was also based upon printed money ($10 trn or so). As a consequence, most of the economic growth since 2009 has been in China, and has been a fake recovery. People somehow got hold of the idea that China was suddenly middle class, but they clearly didn’t look too deeply at the figures. When you look at the underlying incomes of the average Chinese person, their incomes are still very low (in 2014 the average disposable income was just $3,294)
So the world is looking to the great miracle of China to provide the demand to purchase the over-supply ramped up for the baby boomers, who are all now retiring. But China has turned off the money pumps, and the economic boom has been revealed to be the same as the economic “recoveries” of the UK and the USA; a blatant lie based upon central bank ‘stimulus’ programmes. Demand is dropping off rapidly and in a global market, manufacturers are looking for someone to buy their products.
What does this mean to you and I, and what does all of this have to do with interest free motorcycles?
A good question. The answer is that manufacturers have run their sales models based upon the “field of dreams” model i.e. if you build it, they will come . There was always enough demand in the marketplace, and companies have been expanding their model ranges to capture more and more of that market share. But this supply led model is changing as the customer base dries up. We are instead heading into a demand led model, as I mentioned in my note about the future of motorcycling, where companies will be serving customers in more specific ways, with products which they want to purchase.
We also need to talk a bit about money and debt. Don’t worry, it will be mostly painless, and will make a lot of things clear about our current economic situation:
money = debt
Commercial banks make loans to individuals and businesses, and when they do they literally conjure that money into existence. It is ‘born’ as a negative entry on their balance sheet. They don’t take money belonging to someone else and give it to you when they make a loan. Banks can create as much of this ‘debt money’ as they want, and give it to whoever they see as being fit to pay it back with interest. If you wondered why house prices are so high, it is because of this glut of ‘money’, and the relative shortage of houses to spend it on. It’s supply and demand Jim, but not as we know it.
97% of all of the money sloshing around the economy is this kind of money; it is debt. When people borrow heavily (are in debt) then there is more money in the economy. When they pay their debts off to the bank, that money disappears. If you want plenty of money in the economy, under the current system you need lots of people in debt.
The western boom-bust cycle of economics is predicated on the expansion and contraction of credit. Banks make their money by creating credit (debt) and lending it to people to pay back with interest. These interest payments are an income stream to the bank.
In good times, usually following a regression to the normal, the supply of credit expands to meet demand, and as it does so, people feel good about money, they spend it freely, are generous, so more people borrow more money, banks lend freely to customers, and the expanding credit supply (money) means that people have money to make their repayments (the banks’ income stream).
As the credit expands, the interest payable on the debt becomes more significant, at some point, the credit being issued is less and less useful at adding to the economy due to the burden of compound interest, as more of it goes back to the banks in the form of interest payments. Have a look at what happened in Greece; they borrowed more money from the IMF, the majority of which went straight back to their creditors.
As individuals default on their debts, banks risk insolvency (being on the hook for all of the money they conjured out of thin air), and a shortage mentality sets in across the board. With less money sloshing around the economy, more and more people default on their payments, people start to hoard money and the velocity of money drops off. As debts are cleared or paid off, the money supply shrinks, further exacerbating the issue. This is debt deflation, the contraction of the credit bubble, the ‘Bust’ of Boom and Bust economics.
Under debt deflation the amount of debt in the economy starts to reduce, either due to debt default (foreclosure), or because people want to pay down their debts to acceptable levels. As credit (debt) expands, it is good for people who are part of the economy, as they are more likely to get some of that money (debt) which is sloshing around the economy. There is plenty of it, and more is being created all the time. But as the debt starts to contract under debt deflation, the same amount of assets in the economy, are now being chased by less (debt) money, which means that the value of that (debt) money goes up/prices go down. If the value of money goes up, the value of debt also goes up, which means that your debt repayments will increase in real terms. You should hold debt in an environment of expanding debt, but hold cash in a deflationary environment.
Who Will Buy these Wonderful Motorcycles?
Manufacturers want to sell you stuff, and if you can’t afford it in cash, they will try to make it easy for you to buy it on credit. As we have seen, most of the money supply is debt, so if nobody took out any loans, there would be no money. Buying houses is the average UK resident’s leveraged speculative investment of choice. The value of those houses tends to go up as long as banks keep lending money into the housing market (as we have seen happening with QE and Stock Markets in the UK, USA and China), so people don’t mind paying back more in interest payments when they buy houses. You can pay the bank and increase someone else’s asset wealth (renting) or you can pay the bank and increase your own (mortgage), but in either case the bank gets its money from you, the person who needs a roof over your head.
When it comes to cars and bikes, however the value of the asset plummets immediately after sale, and so people are less interested in paying over and above for the priviledge. When money is plentiful, such as at the beginning of a credit cycle, people are getting more of the expanding money supply, people are generous and spending freely and the flow of cash in the economy is good. What matters to an economy based upon debt money is the velocity of that money, not how much of it there is in the economy. In these instances, people have enough disposable cash to pay healthy interest payments.
So, where are we now?
At the end of 2015 we are currently sitting at the end of the great Fiat Money experiment, started in the 70’s when the US dollar (and therefore all other currencies, as the US dollar is the world reserve currency) left the gold standard.
First will come deflation, which will bankrupt those heavily indebted industries, then central banks will print money like crazy and try their best to cause inflation to inflate away the debts.
So what happens to all of the motorcycles being manufactured? Who will buy them?
What we are seeing in the form of the 0% interest offers on the table for new motorcycles is the motorcycle industry’s last gasp attempt to scoop up subprime customers. They may not be able to afford these loans, so the company issuing them probably shouldn’t be making them, but when the loan backer is an automotive giant like Honda, and it is their means to sell their wares, it makes sense to at least try.
Once the individuals with ready cash have spent their money, manufacturers go looking for the harder sells, enticing them with ever more affordable deals. So we see 2, 3 and 4 year interest free deals, and when the sales dry up, the manufacturers reach out for more customers with even more appealing deals, now up to 5 years interest free!
We mustn’t forget that auto manufacturing is the world’s largest manufacturing industry, so there is a lot of cash in selling road going machines. Perhaps it’s not so big with motorcycles, but the market is still a global one, and reliant on expanding markets. As the baby boomers are retiring, and spending less money as they save for their lengthy retirements, who are the new customers? The young don’t seem particularly interested in cars, much less motorcycles, so it will be interesting to see how they fare over the next decade.
If you use a motorcycle to get to work every day, it might make sense to lease it over 5 years, but if you are buying a toy that you could live without, is signing up for the next 5 years such a sensible choice?
Locked into a Credit Agreement
The danger with buying on credit is how it affects the marketplace. Similar to negative equity, when you have a credit agreement you are locked into, you cannot buy another machine for the duration of the credit agreement. The auto industry will eventually run out of people to sell cars and motorcycles to, and when they do, they will be looking for some new means to sell their wares.
If inflation became the monetary environment, then 0% interest over 5 years would make sense, but under a deflationary environment (negative inflation), it doesn’t. You are better off using what spare cash you have to buy yourself a decent condition second hand bike, or holding the cash in the short term and putting off your purchase until prices fall and the value of your cash rises.
At some point in the future, central banks may try to stimulate inflation, but this could take many years, for the short term, deflation is what we are dealing with, so be aware of this when taking out any loan for an extended period, or make sure that you have no penalties to ending the loan agreement PCP early.