How Long Will Cash for Clunkers Money Last?

Cash for clunkers officially kicks off on Monday. Basically, if you have an old car, you can turn it in for a new car, imported or domestic, and receive either a $3,500 or $4,500 voucher, depending on how much of an MPG improvement you’re going for. The government has created this useful resource to explain the legislation, which is referred to as the Car Allowance Rebate System.

The program is funded at $1 billion and will run through Nov. 1 or until the money runs out. Consider that: Until the money runs out. If you do some rough math, you’ll see that the program can handle about 250,000 vehicles. That's in a U.S. market that typically sustains millions of new-car purchases per year. Sure, the new-car market is down. But even though it’s down, Ford (F) and General Motors (GMGMQ) still combined to sell, for example, almost 61,000 of the country’s top two pickup trucks in June 2009. And those numbers represent a more than 30 percent decline over this time last year.

As this NPR report points out, smart money is moving toward the C4C buying opportunity. It isn’t low-income customers driving relics; it’s frugal middle-income people who recognize a good deal. Even with the credit markets stressed, a lot of these buyers are probably seizing what may be a brief chance to save some serious coin on a new ride.

Which raises the question: How brief? There’s probably far more than 250,000 Americans who are currently living with an old car worth less than $3,500-$4,500 who are ready to start visiting dealerships. One can easily see the CARS fund drained in as little as 30 to 60 days, which will put pressure on the Congress to allocate more money. This will get profits flowing in the direction of the struggling auto sector, and as a result should be seen as a good thing. Particularly in the case of GM, which is now majority owned by the taxpayer: Buying a new car from the New General means that you’re taking advantage of your ownership position as a citizen to get a better deal.

But there’s a looming problem, especially if the program is extended. At some point, it will have to be either discontinued or changed in such a way that it drives consumers toward a more narrow slice of products—namely, high MPG, low-emissions vehicles. In its current form, C4C is meant to raise sales in a depressed market. But over time, it may distort that market and set the carmakers up for a big dip in the future. The auto recovery was always going to be bumpy—the trick now will be to keep it from turning into a roller-coaster ride.