What happens in bubbles?
Essentially, people think they are wealthier than they really are, and that returns from long-term investments will be better than they're actually going to be.
This is because in the real world, no more scarce resources are brought into existence by the creation of fiduciary media from out of thin air. Yet, for a while, people think this 'new' money is worth the same as the 'old' money, and that it will get the same quantity of scarce resources.
The trick to democratic government is fooling enough of the people for enough of the time, that this 'government magic' of creating money out of thin air actually works.
But the longer this trick is worked, the worse is the explosion of the bubble at the end of the line. Which is where we are now.
In the last ten years people have bought better, faster, and more luxurious cars than they actually needed or could really afford, often based upon rising house prices against which they borrowed or because of increased wages, both caused by government money printing.
Car makers have found cheaper money than they should have found, so very long-term investments (such as building car manufacturing plants) have made sense, with long-term returns appearing to provide net positive present values.
So far, so good. Then reality bit. The credit crunch made banks price money properly both to car manufacturers and retail car consumers. This made investment in car plants suddenly a bad idea. People also realised they really didn't need that brand new luxury car and could make do with a second hand standard car instead.
The market thus returned us to a state of sanity. What should have happened is that a few car manufacturers, particularly of expensive luxury brands, should have folded, thus releasing their resources to better uses.
But no, governments can't have that. There are too many votes at stake. So they embarked upon quantitative counterfeiting to get interest rates lower again, both for manufacturers and consumers. Yes, this stacks up yet more problems for the future, but that's the future's problem.
Unfortunately, despite these massive injections of new 'stimulus' money, there have only been pathetically paltry returns, the so-called green-shoots. (Imagine loading a garden with 25 tons of horse manure, planting the finest grass seeds, drenching the garden in high quality sunlight and filtered water, and only finding a few small patches of grass coming up, most of them wilting and dying almost instantaneously. Here are your green shoots.)
So, not to be put off, governments have been taking money from successful small British companies via corporation tax, thereby weakening those companies who possibly had a chance of making it into the future, and using this money to prop up failing car companies, like Ford (a foreign-owned company), to help sell more cars.
Result. Instead of wasted resources being moved to more productive uses, even more new cars are being produced and sold than would have been the case in the free market, less investment is going into the taxed companies who are being raked for this subsidy money, and Mr and Mrs Joe Voter are able to replace their 10-year old Ford 'Ka', which had another five years of useful economic life, with a brand new one which has better air-conditioning.
So when Mr Voter is unemployed next year, due to this government stupidity and wreckage of the jobs-generating free market, he'll be nice and cool when he drives to the dole office.
If he can afford the petrol.
No doubt these subsidies will expand as the economic collapse twists and turns into yet more phases, until we're all living in shanty towns surrounded by Veyrons and Rolls Royces. What politician has ever been able to turn off a subsidy stream once it has been turned on? Oh no, the pain would be too unbearable.
Thanks Lord Mandelson. You are an economic guru.