"Fancy Inflation Hacking Which Sells Cars".

(also posted in economic discussion)

PRESS RELEASE
Citizens for Corporate Accountability
-Price-setting and racketeering cycle by auto corp. finance arms
-Cars prices reported as "falling" in CPI, even though big car cos. inflating through financing

Contact: Dan Spillane DanSLegal at aol.com
Citizens for Corporate Accountability
410 Denny Way #229 Seattle, WA 98122 [phone]

(UPDATE 2)

(SEATTLE) 01/27/04 A complaint has been filed with the US Federal Trade Commission (FTC) regarding a newly uncovered cycle of price-fixing, racketeering, and credit profiteering by major US auto manufacturers. Because of the nature of the price fixing, this cycle affects areas far beyond just cars.

This problem was identified by examining details from official US BLS tables, and comparing long term trends and weightings against independent data and reports.

The scheme involves a gradual and consistent lowering of "reported" auto prices since 2000, by the manufacturing arms of major auto makers such as Ford and General Motors, while at the same time, the manufacturer unfairly increases profits through financing arms of the same("Ford Motor Credit Co.", "General Motors Acceptance Co."). The price fixing trend is clearly recorded in US Bureau of Labor Statistics (BLS)tables, which show a normal trend in prices over many decades for new vehicles-- which was inexplicably reversed in late 2000.

This shift follows a change in 1998, which removes auto finance charges from the US Consumer Price Index CPI. Therefore, the monopolies can inflate profit on financing without restrictions.

In addition, for the most recent BLS CPI assignment, the weighting of the vehicle figures in the CPI has been increased(which increases the effect of negative inflation). This is unexplainable based on normal economic trends, and mathematics--and has the effect of artificially lowering the overal CPI, which is used as the basis for many payments, such as social security and welfare. Moreover, such an artificial lowering of inflation figures has the effect of increasing loan demand for the auto financing arms, so the cycle feeds back on itself.

This finding is significant In conjunction with the new "Hidden Finance Charges" report (01/26/04, Consumer Federation of America)--which provides extensive evidence of credit markups by auto credit companies, which inflate the actual and total cost of vehicles.

Specifically, the artificial lowering of figures reported to the BLS by the monopolies has the effect of an enticement on false terms, as the BLS statistics are systematically used to calculate the CPI--which in turn, serves as a loan basis, and when lowered, is an enticement and provides a "supposed" rate for auto loans. However, as reported by CFA, the supposed rate is indeed not applied when auto deals are closed-- instead, significant markups are hidden in the credit terms of the finance contract. So by lowering the base prices of vehicles at one end of the monopoly, the buyer is enticed, and ends up paying for it at the other end.

These discoveries therefore show a manipulation of prices by the auto companies, with a false enticement. Further, they show a manipulation of the US Consumer Price Index for private gain, as the CPI has a significant weighting for new vehicles (a component which has been reported as negative recently, and has thus caused the overall inflation number to be falsely reported as low).

It follows that the auto companies are liable for this manipulation as it impacts creditors--as well as to any and all consumers who lost benefits indexed against the US CPI, which would otherwise be higher, were it not for the monopolistic actions of these corporations.

This cycle was uncovered as a result of a recent study by Citizens for Corporate Accountability, concerning trends in the US Consumer Price Index CPI, which was reported in a previous news release (see "hole found", below).

1. KICK

2. kick

3. Kick myself

[Castilleja]

4. I'll kick this one as well...

Figures.

[Stephanie]

5. These posts, Dan, make me think there is Enron Accounting in the US Gov't

Is that what's happening? They just skew the stats to show the result that they want?

And what is this about? They are using hidden finance charges to fleece auto customers, but no one knows about it because they are fudging the numbers overall? Is it something like that?

Not economically literate here.

~S

6. It looks to be unprecedented

You are right, based on the report from the consumer group, they are fleecing.

But it goes beyond fleecing.

It is like Enron in a way.

It looks to me that they have created their own credit demand cycle which feeds on itself.

Unprecedented--whether intentional or not.

[Stephanie]

8. You see, I don't even know what 'credit demand cycle' is

What is it?

10. Credit demand cycle for dummies

It looks like in the case of cars, they are hiding the costs in a number which isn't in the inflation index, while at the same time lowering the number which IS in the inflation index.

If the inflation numbers are reported as low, more loans are made, demand goes up. The inflation numbers are used to set interest rates nationwide for loans, per the Federal Reserve.

Since GM and Ford OWN the finance companies, they get to profit even if the original price of a car is set low as reported to the BLS, who calculates inflation.

Whatever the case, it is making the overall inflation number lower, even though other things like medical, energy, and food are skyrocketing (and fuel for cars). These increases get hidden or trounced in the overall weighting. So in a way, we are all paying dearly for Fords and GMs profit, much more than we know.

I am not the only one to notice this recently. But I have brought many research items together. See the CNN article on my site, which I have linked in.

And regardless of whether it is intentional or not, it needs to stop ASAP.

[Stephanie]

11. Do you mean they are offering one price and then adding on additional cost

So that the price that is reported doesn't match the actual cost? And they are basing other figures on these preliminary prices?

So if I go to buy a car, it is $9000. But if I want it with AC and power brakes, it is $14,000, so virtually everybody is paying the higher price? Is that how they hide it?

12. Exactly

The finance cost which is added on later was thrown out in 1998, as part of the calculation. But understand that since 1998 or so, the big dealers have started to do much more financing on their own.

You are paying the higher price, esp. if you are black or latino, according to that other report--yes, you are paying more than you think.

But here's the complicated part--if you receive public benefits like welfare or social security, you are giving a little piece of your check to Ford and GM, because of this racket. That's because what they have done here impacts each and every social security check!

So if you are black or latino and one welfare, you are paying many times over, whether you buy a car or not!

THAT is what you need to get your mind around. And why the FTC needs to investigate. Why don't you call them?

[Stephanie]

15. HOW does it impact social security?

Not following you here.

18. Social security payments are calculated based on the CPI

Lower reported CPI-lower monthly payment from the govt to gramma

And she doesn't buy a car--or even drive.

7. Slight correction

minor correction

"It follows that the auto companies are liable for this manipulation as it impacts creditors"

should be

"It follows that the auto companies are liable for this manipulation as it impacts borrowers and other creditors"

9. Kick

13. kick

14. kick

[treepig]

16. i'm clearly missing something here

because wouldn't all the zero percent financing as of late have exactly the opposite effect as postulated?

17. Not exactly

Zero percent financing is offered as an alternative to cash backs, and only on some models, and for specific periods. And of course, zero percent financing is available only through the monopolies. You cannot go to a third party.

So you can't say "look at this cheap car" and then go to the bank, and get zero percent. When you go to the bank, they will quote you some non-zero rate, and of course, you will not get cashback, or at least, I haven't heard of that, and can't see why you would.

If you buy a non-incentive model, or you choose cash back, that is where the markup is.

Apparently, many people are taking the cash in this economy. So as the economy gets worse, more people take cash backs, and the margin improves for the lenders, or at least, the monopolies are taking steps to do that, according to the CFA report. If you get 1000 back up front, then its just a matter of doing the right calculation to recover more than that if you are a lender.

I also believe that people are taking on LARGER debts (buying larger vehicles) in reponse to low interest rates. Fuel economy hit a multi-decade low (see report on my website).

So, consider if the average price of a vehicle is higher than ever (it is), and if people are borrowing ever more (they are), then a few basis points up goes a long long way. Get out your calculator.

It would be interesting to see growth statistics in cashbacks for vehicles.

I have similar statistics for home refi cashbacks linked into my website (a very analogous situation, they average 25k or so!)


Dan

[treepig]

19. sure, you can choose "cash back"

and then go to the bank and get financing (or pay cash/with-a-check for the car if you wish - although then of course you'd be in the "terrorist" database for making a large cash/check transaction).

and doesn't your statement "So, consider if the average price of a vehicle is higher than ever" conflict with your deflationary theory?

actually, the cnn article you link to on your website claims that new and used (apparently lumped together) vehicle prices have fallen by 3.6 % over the past year, and they constitute 8.2% of the inflation index (consequently, the CPI is 0.3% lower than it otherwise would be).

anyhow, also according to your cnn article, housing appears to be putting a much larger damper on inflation, perhaps the real scandal is here?

"So what's keeping the reading on inflation low? Asilis thinks one big piece of the picture is housing. In computing the CPI, the Bureau of Labor Statistics assigns a 22.2 percent weighting -- the most of any item -- to something called "owners' equivalent rent of primary residence." Basically, it's an estimate of what homeowners might pay in rent if they rented their homes instead of owning them.

To calculate this, the BLS looks at actual rents, compares them to owned residences and then uses that to calculate housing costs.

The problem? The low-interest rate environment has meant that many people who might otherwise rent now own -- in fact, home ownership rates are at record highs. As a result, rents have come under pressure, and "owners' equivalent rent" has grown at just 2.1 percent over the past year -- less than the overall CPI and far lower than the costs for education, health care and so on"

20. Here's a good article which illustrates the effect

Auto incentives ring up business

Banks, credit unions losing customers to finance divisions of automakers

(As an aside, what's interesting is this article suggests finance arms aren't making money, which appears to be the opposite according to the CFA report).

I'll just bet there are far more people going with a cashback higher interest rate plan with the auto finance firms. The reason I think that is based on the large refi cash outs noted in the Fed report.

http://www.charleston.net/stories/062803/bus_28loans.shtml

21. Here is one sure way to win

You could claim to finance, get the cash back, and then pay off the vehicle with your own cash (or re-finance).

I wonder if they affix a penalty to that in the contracts?

[treepig]

23. just to be clear

it seems from your posts that you are under the impression that a person only gets the "cash back" if he or she finances through the manufacturer.

do you have evidence?

even your article indicates otherwise (i.e., you can take the rebate, and then go finance the purchase independently):

Dallas-area credit unions depend on auto loans as their primary product, and have been particularly aggressive with the "Take the Rebate and Run" campaign.

Here's the scenario they pitch:

Take a $22,000 car loan with a $2,000 trade-in. The monthly payment on a 48-month loan with zero percent is $416.67. But it's only $395.16 on a loan with a 4 percent APR from a local credit union when a $2,500 rebate is factored in as part of the down payment.

24. Their are apparently at least two kinds of rebates

Vehicle, and finance

It's possible that the mix has shifted. I don't have statistics on that.

[treepig]

26. and what about the international trends?

the u.s. has an inflation rate in line with other industrialized countries (doesn't support your hypothesis)

but it has been falling faster the past 2 or 3 years (perhaps supports your hypothesis, although it was way higher in 2000 to start with)

28. That is a nice graph which shows it exactly

I think since 2000 you are seeing "car effect"--and some of the "house effect"

Now find a graph 1983 on vs. pre 1983 to see if you can see more of a "house effect"

I think for the most part these cycles have only kicked in with super low interest rates interacting with the house and car components of the CPI.

But maybe pre and post 1983 comparisons will also show something.

22. I agree house inflation is a problem

Its not only that housing/equiv rent has an unanticipated black hole effect, but that the black hole effect has grown. Go look back at the portion of weighting for houses and cars in the CPI--it has gone up recently. Many people have speculated about a housing bubble. This could be a real symptom of a bubble (bubbles grow in size right before they pop).

In reading the Fed report I have on my website, they seemed somewhat surprised to see house prices going up even in a recession.Apparently that has never happened.

NOTE: used cars were removed from the so-called "core" CPI a few years ago.

[treepig]

25. did the scam begin under clinton?

it appears that the inflation rate is right on the ten-year trend:

30. Next, do that graph pre and post 1983

i would like to see if you can see the "house effect"...

I should point out, if their are circular cycles in the index we are not aware of, it makes the numbers on the graph less meaningful.

Also, lets say the weightings don't correspond to actual consumer budgets (which I found in my first study).

But that aside...

[treepig]

31. lots of information is available at

if you're interested in year by year data, check out

http://inflationdata.com/Inflation/ (couldn't find it graphed, by they claim to have data back to 1913), plus other interesting stuff:

32. Do I believe "inflation adjusted price of gas"?

I am not convinced the weightings are proper in the CPI.

That aside....

Nice graph

34. The gas graph needs adjustment...

Price per gallon doesn't give the proper reference point.

Avg fuel mileage just hit a 20 year low.

So there is some other net cost line drifting up--gas cost per mile, which, juding from the graph, is therefore higher than anytime 1985!

[treepig]

35. the gas graph is perfectly fine

if you wish to graph the cost of gasoline per mile, that's perfectly fine, too - it's just an entirely different graph, for an entirely different purpose.

for example, hypothetically speaking of course, if i wished to purchase gasoline simply to make molotov cocktails (and rode my bicycle down to the filling station to pick it up) my only concern (pricewise) would be how much the gasoline was costing me in "real" dollars.

36. But that's the BUSHY (shrubby) part!

Since somehow the vehicles are weighted more heavily in the CPI--negatively--along with houses, it helps hide things like rises in fuel prices.

An SUV uses 35-40 percent more fuel than a car. So the real cost is let's say, 1.3 times that line on the graph compared to the 1980s.

Total cost = unit cost * volume
volume = 1.3 times what it was

The nice part about it is with all the SUVs out there, fuel demand goes on for many years, regardless of whether shrub is still in the oval office!

Not to mention carbon dioxide and global warming...maybe shrub wants to grow himself in this new climate?

37. KICK that bushy shrubby part

ddddddddddddddddddddddddddd

[DevilsAdvocate2]

27. How do they figure?

Including the cost of financing in the price of a car is bogus economics. The price is the price, period. Some people pay cash, while others get zero percent loans. In either scenario the cost of the car is simply price paid + tax. Sure, some people pay finance charges on their loans because they don't have good enough credit to qualify for a zero percent loan. Should lenders be required to take on higher risk at no additional charge? There's a reason people end up with bad credit: they don't pay their bills! It is a statistical reality that lower credit scores = higher risk of default. It is not biased against race or gender. Blacks and latinos with adequate credit scores receive the same "zero percent for 60 months" as anyone else with equal credit scores. It's easy enough to ensure that you don't get overcharged for credit: call several lending institutions and find out what rate you qualify for. Then, if the company doing your financing tries to stick you with a higher rate tell them "No, thanks. I can get a better rate at XYZ Bank."

29. There apparently is a "captive effect" AND a kickback to dealer

The dealer gets a kickback IF they go with the GMAC/FORD, according to the CFA report. Does this mean the dealer throws in one or two extras on the deal--YOU BETCHA. Hence, monopolistic.

It would also seem the whole thing inflates VOLUMES of sales, and VOLUME (size/cost.fuel cost) of vehicle. And that is what my complaint to the FTC includes.

Are they profiting by enhancing the loan volume, etc. by dropping their price reported to BLS, which in turn makes up the CPI, on which loan demand is keyed?

That is ample grounds for the FTC to investigate. In addition, the credit jacking with the kickbacks--granted, where they trap consumers.

So really, there are at least two questions, which are relatively independent.

33. MOST of the makers profit IS financing

For perspective, consider that GMAC generated $2.8 billion in net income in 2003. Meanwhile, GM's North American unit earned $1.2 billion. The entire automotive business, factoring in losses from foreign operations, earned just an adjusted $370 million.

See

http://www.fool.com/News/mft/2004/mft04012011.htm

--CLEARLY much more is going on alongside "zero percent"

This, more than anything else, shows me exactly the effect my FTC complaint entails. They are setting low price points at one end of the monopoly (even to being barely profitable) to jack up loan demand.

And screwing with the CPI, like I said.