Category Archives: Money

Savers and Interest Rates

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My father lived through the Great Depression and was forever nervous about whether he had saved enough to pay his bills after he quit working. He always saved all he could and put his savings into safe Certificates of Deposit (CDs). He had to move to assisted living and then began to fret that the interest he was earning wasn’t enough to keep him from beginning to use up the principal. I can’t imagine how upset he would be with the miniscule rate of return available to savers for the past few years. There must be millions of older Americans trying to figure out how to stretch their retirement savings to pay their bills while they earn less in interest than the rate of inflation.

The financial crisis resulted in the government intervening by “increasing the monetary supply” and reducing the interest on loans to near or at zero. It has struck me as beyond baffling that the result was a boom in the stock market while elderly savers suffered. I know I wasn’t the only investor who decided to take the additional risk of buying stocks with dividends that were higher than anything to be found in CDs. While politicians were railing against people who have money (the “investor class”), they supported policies that enriched those same “evil Capitalists” to the detriment of elderly savers.

I wonder when the millions of elderly savers who are voters will rebel against the economic policies that have punished them. I acknowledge that the current stock market has begun to look risky for the “investor class” that has been willing to take risks for higher returns. My father would probably say something such as “Learn from this and stick with CDs.”

The Federal Reserve has actually introduced negative interest rates into their recent discussions of the economy. Perhaps the “saver’s revolt” will happen when the message is that you will receive less than what you put in your CD when it matures?

The Rich Pay All the Taxes

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Jane Wells reported last December on CNBC that the Congressional Budget Office had issued a report analyzing the amount of taxes paid by the “five tiers of wage earners” for 2010.The report doesn’t seem to indicate that the rich are getting away without paying their fair share, although those who advocate there is income inequality will find ammunition for their argument if they read deeper into the report. The report presents the statistics on payment of taxes by the different income groups in a variety of graphs and written discussions. (The report is overly long and not written to keep your attention, but it contains thought-provoking information.) Table 3 on page 13 shows the lowest wage-earning quintile pays 0.4% of all federal taxes, the second quintile pays 3.8%, the third 9.1%, the fourth 17.6% and the top quintile pays 68.8%.

The report includes the interesting kicker that the top three quintiles pay all the taxes!  Page 11 of the report says, “Much of the progressivity of the federal tax system derives from the individual income tax. In 2010, the lowest quintile’s average rate for the individual income tax was -9.2 percent and the second income quintile’s rate was -2.3%…(A group can have a negative income tax rate if its refundable tax credits exceed the income tax otherwise owed.)…For example, although the lowest quintile’s average rate for individual income tax was about -9 percent, more than one-quarter of the households in that quintile had an average rate below -15 percent, more than one-quarter had a rate of zero or higher, and nearly half had an average rate between -15 percent and zero.” Continue reading →

Fooled by Randomness

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bookcvr_fooled by randomnessThis book written by Nassim Nicholas Taleb was recommended by a reader who has given many worthwhile suggestions. That track record kept me reading a book I found to be frustratingly difficult. I do not recommend this book to anyone who wants to have a fun and easy read. The book was written by a very smart person who has contempt for people who don’t understand his wisdom. The kindest description is that he has supreme self-confidence, although “arrogant” works also. I was frustrated with the frequent passages that said something was to be explained in more detail in a future chapter. I was also frustrated by his lengthy references to ancient philosophers and poets. Taleb wants the reader to be impressed by his scholarly intellect.  I write this understanding that the author describes those who write reviews that are not fawningly positive as “idiots.” Continue reading →

Liar’s Poker

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bookcvr_liars_pokerI read this book by Michael Lewis several years ago at the recommendation of our son who had worked as an intern at Merrill Lynch. He knew I was working hard to understand the stock market, or at least to understand it well enough to not make too many bad investment decisions. Lewis writes that the stock market is well enough regulated that it is almost fair to investors. The same was not true of the bond market. Lewis somehow bluffed his way into a Salomon Brothers training program despite his degree in art appreciation and became a bond trader making incredible amounts of money. They paid him very well indeed to pretend he knew what he was doing. “Never before had so many unskilled twenty-four-year-olds made so much money in so little time…” He says he set “…out to write this book only because I thought it would be better to tell the story than to go on living the story.” I particularly liked the statement at the end of the Preface that his parents “…are, of course, directly responsible for any errors, sins, or omissions herein.” Continue reading →

Panic! The Story of Modern Financial Insanity

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panicThis book was loaned to me by a friend, and it provides useful information and warnings to people interested in or involved in stock market investing It was edited by Michael Lewis, as described on the front flap, is about “…the crash of 1987, the Russian default…the Asian currency crisis of 1999, the Internet bubble, and the ongoing subprime mortgage disaster.” The book is composed of more than fifty articles that were written by numerous authors, and several are by Lewis himself. The approach had both positives and negatives. The chapters are usually short and to the point, but there is obviously no consistency of style. Also, the articles often have redundancies.

I recommend scanning the reviews on Amazon. Many reviewers warn that the book is edited by Michael Lewis, and is not a “Liar’s Poker,” “Money Ball” or “Blind Side.” I will say in Mr. Lewis’s defense that the front cover clearly says at the top “Edited by…” (although in relatively small print). Another point in his defense is that he mentions in acknowledgments that proceeds from the book will go to Katrina victims (and the first person he thanks is himself).

I found the most interesting sections to be about the Internet bubble and the real estate collapse. Perhaps the most interesting theme in the book is that crises often find their beginnings when smart people begin running complicated but legal versions of Ponzi schemes. The nice thing about Ponzi schemes is that early investors can make lots of money if they get out in time. The bad thing is that those getting out late can easily result in losing everything. Overvaluation results from sellers looked for “the greater fool” to buy what they had bought for too high a price. They hope someone else would give them an even higher price before the price collapses. Another theme is that we think of the people who are involved in mind-numbingly complicated financial schemes and “instruments” as geniuses. The author often reminds us those revered experts often don’t understand any better than others. One statement worth remembering is, “The longer the bull market goes on, the more believers there are.” Continue reading →

The End of Money

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Reviewed by Kathy London

end-of-moneyThis book was written by David Wolman, who would like to dispense with physical money. As he puts it in his book “Physical currency is a bulky, germ-smeared, carbon-intensive, expensive medium of exchange. Let’s dump it” in favor of electronic money.

Money has always puzzled me. How can something so important be so abstract? As Wolman tells us, you may not have a god in your life, but you have faith: Faith in the dollar’s value, faith in each other and in our shared government. We are believers. I guess I have mostly dumped cash already. There is no wad of dollars in my mattress. My money mostly exists in accounts I access on the Internet. A lifetime of labor, distilled into 1s and 0s in some server out there. Talk about faith!

Interwoven with interviews and his personal experiment of living without cash for one year, Wolman offers a lot of fascinating information: the history of money, how issuing currency profits governments and establishes their power, how a shortage of currency helped fuel the American colonies’ revolution, why the U.S. keeps minting pennies and nickels at a cost above face value, how many countries have given up their own currency and use U.S. dollars, and why some people think the end of cash would be the beginning of the Apocalypse. Reading about counterfeiting is, alone, worth picking up the book. (North Korea runs on counterfeit U.S. dollars? That’s infuriating.)

The concept of money is world-changing because it allows for commerce beyond barter. Money lets people store and move value, not just within a village, but across the world. Gold makes excellent physical money. Gold is durable, safe to handle, easy to test for authenticity, and won’t decay or catch fire. And it shines – people love bling. But, until recent industrial uses, it’s been worthless in the sense you can’t eat it or heat with it. Gold has only the value we agree to give it. Bizarrely, a small group of men sitting around a table in the U.S. in 1944 decided an ounce of gold would be worth $35. Today gold trades in a free market and worth over $1600 and ounce. But gold is not perfect money. It can fuel inflation and deflation, and won’t stop revolutions and depressions. Wolman thinks gold is just an older and more comfortable abstraction.

Wolman explains the problems with cash. Cash must be printed, guarded, and lugged around. Cash can be stolen or lost or destroyed. Cash is contaminated with germs and traces of cocaine. Cash enables tax-cheats. If you are poor, all these costs and risks hit you the hardest. Without the ability to convert cash into electronic money, you are excluded from banking and denied a safe and reliable way to save.

Cash offers anonymity in transactions and therefore liberty. But because of this, cash is the choice of criminals worldwide. About 60% of the US currency in circulation is $100 bills. How many are in your wallet?

Wolman thinks technology can now cure the problems of cash. Person-to-person transfers via smart phones counter credit card fees. People accumulate more debt when using credit cards than cash, but if you pay with your smart phone, apps could flash vivid images to make the transaction more “real”. Reading how such transactions will work is a view into a future that is standing on our toes.

This was an interesting book and may help readers see the current move away from cash as a good trend. You can’t fight it anyway. Electronic money is taking over the world already, so the only battle left for Wolman is to convince governments to stop issuing cash. As long as that doesn’t bring on the Apocalypse.