Welcome to Financial Spiderplant!

“I would freeze interest rates for five years. These adjustable rate mortgages, if they keep going up, millions of Americans will be homeless.” -Hillary Clinton

Whoa whoa whoa…what?

People that bought homes and chose an adjustable rate mortgage entered into an agreement. The short term benefit for the buyers was that they would be faced with a lower monthly payment. The long term loss was that the buyers would eventually be paying more money.

Banks chose to accept lower payments (short term loss) for higher payments in the future.

A welcher is someone who ’swindles you by not repaying a debt or wager.’

I remember listing to my high school economics teacher, Robert Leake mentioning adjustable rate mortgages when I was 16 years old. He talked about the fact that he was in a 30 year fixed rate mortgage and that he would be paying the same amount every month until he either sold the home, or owned it outright. He also mentioned that he and his wife were making an extra monthly payment each year which would reduce the overall interest that would be paid by him. He was choosing conservative behavior which reduced his risk.

We were then presented by the situation of his brother (or maybe it was his brother-in-law) who had chosen to enter into an adjustable rate mortgage. The way his brother justified this form of mortgage was “well, I’m tied to paying the same rate as a fixed rate mortgage for 5 years. If during that five year period, interest rates fall, my monthly payments will be EVEN LOWER!” His brother thought that he was winning out, working the system, and ’saving a bundle.’

“But what if interest rates go up?”

The argument for an adjustable rate mortgage was shot down with a single question. The answer is that his brother’s payments would go up instead of down. That same money that he thought he would be saving and using to pay for an extra family vacation would instead be extra money from his budget. The extra payments would have to come from somewhere; maybe his family just wouldn’t be taking any vacations for a while.

I understood from a quick 5 minute lecture that adjustable rate mortgages are gambling. You might end up paying more 5 years from now and you might end up paying less.

Fixed mortgage = Predictable outcome
Adjustable rate mortgage = gambling

Guess what?! The mega millions lottery is set to pay out its 5th highest jackpot. $270 million dollars! I sure could use an extra $270 million and I also got paid today…If I take my entire paycheck and buy lottery tickets, just think of how much better my chances will be than if I only bought one ticket or worse…if I didn’t buy any tickets!

But what if I don’t win? Then I won’t have any money to pay rent, buy food, or anything else…

Any rational person would call me an idiot for using my entire paycheck to buy lottery tickets. The lottery is gambling. You should only gamble with money you can afford to lose.

Buying a home is an important decision. It is also one of the biggest decisions of your life. If you make big important decisions without talking to more than one person, doing any research whatsoever, and presume that somehow everything will just magically turn out all right…you would be making a mistake.

Foreclosures increase the supply of homes on the market. Excess supply causes prices to drop. One of the arguments for why ARMs should be locked is to prevent more foreclosures which would cause a decline in home values. Declining home prices can be a bad thing but the value of stocks, houses, gold, and other investments fluxuates over time. That is how wealth can be created and also how wealth can be lost. When did the United States start fighting the free market?

Why should people that are already ‘homeowners’ be allowed to continue to build home equity when they can’t afford the terms of the mortgage agreement? People that can’t afford to buy a home are one of two things: homeless or renters. People that are facing issues with making their mortgage payments still have income. They were able to make rent payments prior to becoming a homeowner and they were able to make mortgage payments before the payments increased. People that are facing foreclosure can become renters without moving from their homes.

That’s right! The best solution is to have the people that can no longer make mortgage payments sell their homes. If the home cannot be sold, simple solution: You no longer own the house and you are now a renter. Your previous mortgage payment will now be a rent payment. You will not build equity because: you are a welcher! You over extended yourself and made a wager you couldn’t afford. You gambled and you lost. Sorry. Better luck next time, hopefully you will learn from your mistake, and pass on that knowledge to others so they don’t make the same bonehead maneuver that you did.

I disagree with government attempts to control the free market. Yes, I feel bad for people that got duped into buying a bigger home they could afford, people that were led on by mortgage lenders (even though they were foolish enough not to do their own research), and people that are being removed from homes that are now without tenants. But what about people that currently aren’t homeowners?

There are millions of Americans that did not purchase a home either because they did not have the available capital at the time. They did not purchase while millions of other Americans (likewise not able to afford a home) overextended themselves into situations that would benefit them in the short term as homeowners but destroy their long term future. Under a free market, individuals choose their own actions. They make their own risk/reward calculations, they do their own research, and they are responsible for both the consequences and the fruits of their investments.

Current market circumstances have led towards declines in home values as the supply of homes for sale increases. This allows new individuals to use their capital savings to purchase a home at market value rather than the artificial value that would be sustained by increased regulation to help out the ARM gamblers. Increased regulation can create circumstances that reward homeowners that can afford their homes and home owners that cannot afford their homes. If you cannot afford it, you should not own it.

The desire to help out struggling individuals is an admirable one but that desire should not cause you to create circumstances that generate large rewards for those who are struggling while also creating barriers to market entry that prevent others from receiving those same rewards. When the inefficient Russian steel industry was failing due to price competition with other more efficient companies, the government started to help out. The inefficient procedures continued, the steel industry continued to fail, and the government wasted billions of dollars. It is possible to fight a free market system that allows for the purchase of goods and services under a fair price as determined by market demand? More importantly, it is in the long term interest of our country? I believe that it is possible to fight the system and that we should do all that we can to create a system that fosters success but I think that attempts to reverse the direction of the real estate market will be a slippery slope towards a weaker United States.

I’m not sure what the best course of action is. I don’t know what effects all of the government programs to ‘help’ will have. I think that the most important thing is to continue to search for an answer but to remember that sometimes you can’t help everybody. What is in the interest of the few ARM holders at risk might not be in the interest of our economy as a whole. These overextended welchers may believe that they ‘deserve’ the help of the government, the assistance of banks, and the American dream of home ownership but that’s the thing about dreams, they must be created and manifested; an individual rarely ‘deserves’ to have their dreams handed to them and sometimes dreams don’t come true. It sucks, but that’s why the market rewards those who make careful

The primary purpose of this article was to question what is going on and whether or not we are even using the correct premise in the approach towards the solution of our problems. I would love any comments that anyone has regarding the whole situation regarding ARM mortgage holders, foreclosures, or any other subject of interest. My e-mail is david113@gmail.com.

Download your free copy of Suze Orman’s book, Women and Money: Owning the Power to Control Your Destiny from Oprah’s website free today and today only.

Suze has some great tips and approaches towards handling your finances.

If you are looking for a few new ideas on how to cut your spending or some new approaches towards handling your finances, check her book out.

Also, check out the massive list of Suze Orman articles on Opra’s website here.

Some of the articles in the list that I have found interesting:
How to Buy Life Insurance
Should You Ever Lend to a Friend?
Learn how to handle your investments during a market decline
What to do with your money decade by decade
How to Play Rollover with Your 401(k)
Don’t Stop Thinking About Tomorrow

I made the ‘mistake’ of keeping a subscription to an audible books site I don’t use anymore. I noticed the charge on my Amex and went to cancel the service and as a ploy to keep me as a customer, the site offered me a free book download. I decided to keep the service since I’d already paid the 2008 fee of $10 and chose Jim Cramer’s Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer). While I haven’t always been a huge fan of Cramer but I love his energy and the passion that he shows in his work. This book is one that I highly recommend if only for the advise given in the first few chapters of the book alone. (Although the whole book is great! The first chapter is available for viewing here thanks to eReader.com!)

A few of the subjects covered in the book:

Focus on the ‘boring’ focus on capital preservation rather than on growth of assets is A LOT more important than a focus on gains. (Although accounts that contain riskier and higher returning investments (AKA: Fun accounts) are highly encouraged!) Of course you want to grow your net worth but that last thing you want is for your accounts to get wiped out!

Saving money is about opening new avenues to wealth, it is provide you with future options, to take an active approach towards building your own wealth. Saving is all about activity, not about being total passive. Your goal should be to have your money work for you but your money won’t work for nothing, you need to do some legwork!

You MUST create a budget to reflect annual, monthly, and even daily expenses. Rent, food, entertainment, saving, retirement contributions, transportation…INCLUDE EVERYTHING! This budget must reflect all historical events in your life. You MUST have health insurance so that you don’t get wiped out by one event of illness.

You cannot have credit card debt. Get rid of it. Period. With the exception of organized crime, credit cards are the worst lenders out there! Very few people can earn a better return in the market than the annual interest rate charged by credit card companies. If you have an unpaid credit card balance, it should be a top priority just under health insurance. Cramer advocates balance transfers as a tool for keeping your interest rates low and avoiding high interest debt. Just do your research and make sure you do another transfer before the teaser rate expires.

Avoid debt not used to secure assets! (Like education and a home) There is a difference between ‘I deserve it’ and ‘I can afford it.’

If you are getting life insurance, get term life insurance.

A quick way to save on having children: Child Tax Credit - A $1 tax credit for your child is equal to $1 reduction in your tax liability regardless of tax bracket. If your household income is less than $110,000, you can take up to a $1,000 tax credit per child every year, if you earn more than $110,000, you lose this benefit on a sliding scale.

Income shifting - If you transfer income producing assets to a child, s/he will still pay lower taxes as long as they are in a lower tax bracket. This doesn’t work as well with children under 18 because of the kiddie tax.

Open a brokerage account for your child. Buy them shares in companies they are familiar with, McDonalds, Disney, Wal-Mart etc. Teach them about compounding interesting, company ownership, and income growth. The lessons they learn will be invaluable.

Don’t ever get into an ARM. You don’t want to mess it up with unsure payment amounts. Lock in your mortgage rate and payments for the next 30 years. If you later have a chance for another great deal on a much lower mortgage that is still at a fixed rate, you can always refinance.

The list goes on and an extremely large amount of valuable information is presented.

Further into the book, Cramer provides specific tips for investing as well as stocks that he believe will continue to do well in the future. I highly recommend his book and if possible, get the audio version, it is hard to get as much from Cramer’s text as it is from his words.

Credit is a powerful thing. It can help you buy a house far beyond your immediate purchasing ability, it can keep you from getting employed, and it can influence whether or not you are charged 10% or 29% on a credit card. It is fully possible to avoid building your credit, you don’t ‘NEED’ it but it can certainly help you out.

You should always avoid going into debt unless you are using the debt to secure assets but it is also possible to use short term debt to your advantage.

There are all sorts of random perks that cards will offer up to get you to join. Whether it is GM offering you X% cash back towards a new car, Delta airline miles, Hyatt free hotel stays, or any myriad of the points programs out there. Credit card companies realize that without providing these services, the competition can clean up with free iPods or free hats. (thanks Emigrant Direct!) The downside is that credit card companies will often offer these great perks to attract customers but will hide the higher APRs they charge in the fine print. Don’t fall for their gimmicks!

Credit card perks are a little extra ‘thank you’ for using the cards, these perks should not be used as an excuse to take on additional debt or to apply for every credit card offer you receive. If you’re going to buy $200 in groceries and you have at least $200 in your checking account, you can swipe your debit card and have the $200 deducted or swipe your credit card, get the perk, and pay $200 to your credit card company. The cost of the perk is only the time it takes you to pay your bill at the end of the month.

I received a rebate of $98.09 for using my USAA credit card last year. (If you are eligible for USAA, I highly recommend it. To be eligible, you must have served in the military or be related to another individual who already has a USAA account) It provides 1% cash back on all purchases I make. I use the card for most purchases over $100 whether it is for groceries or ticket master and for most purchases that are ~$20. Since my USAA card is linked to my USAA checking/saving account, it is pretty simple to log into my account and pay off the charges as they pop up. It might not be worth the effort of other individuals but I’ll take a ‘free’ $100 any day.

I also use my American Express card to auto pay my Verizon phone bill and my USAA car insurance every month. Since I pay off the balance in full every month, all I use the card for are the points. While the rewards don’t amount to much, they were able to provide me with a $50 Barnes and Noble card during 2007. $50 worth of ‘free’ books every year was more than worth the 5 minutes it took to set up the auto pay program and the few minutes it takes every month to pay the bill in full.

As previously stated, I don’t advocate using a credit card if you can’t pay the bill off in full every month. I do advocate using your credit card, getting the best perks out there, and paying the bill off every month. The little things really do add up over time and you should be headed in the direction of accumulation and building rather than towards attrition and hole digging.

My AAA Card, my medical insurance card, my driver’s license, and EVERY SINGLE credit/debit card were returned to me! Thanks Leroy! While my money is lost, the wallet is not.

Leroy called me and made sure that I got my wallet back and I’m greatly…grateful!

To whomever lightened my wallet of the several 20’s in it, HAPPY NEW YEAR!

I was notified of a conference call David Bach was hosting to get 2008 started off on the right foot and signed up. The call featured questions from all of those dialing in and my understanding is that this is going to be a monthly event. Sign up for one of the conference calls at here. Below are the questions that were asked along with points from David’s answers and also some information I added that might be helpful.

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“If having to choose between a ROTH IRA contribution or funding my retirement account which should I choose seeing as how I can always withdraw ROTH contributions with no tax consequence should an emergency arise?”

An emergency fund should generally consist of anywhere from 6-12 months of expenses in a readily accessible money market fund. David recommends having a one year minimum and perhaps as much as 2 years of expenses depending on your security needs. (David’s Four Steps to an Emergency Fund, and Peace of Mind article on yahoo) Strictly speaking, an emergency fund is for emergencies and a retirement account is for retirement. While retirement accounts can be accessed should an emergency arise but you shouldn’t have this intention when contributing to your account.

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A quick side note that was brought up referred to the ROTH 401K which is becoming increasingly available in employee retirement plans. David suggested taking your current 401K percentage contribution and evenly splitting it between the traditional 401K and the ROTH 401K. (I wrote an article on ROTH 401Ks here.)

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“My spouse and I end up changing work locations nearly every 3 years, should we still consider buying a house given the fact that we move so often?”

David Bach was able to relate to their situation by citing his own experience as a writer and those of radio/TV reporters. Given the often changes in job location, it absolutely depends on your situation. You could purchase a home every time you move and continue to rent out the home in order to build equity and passive income. You might also appreciate the ability to fluidly move from location to location without dealing with home closing costs and real estate agents on a regular basis. If you don’t know how long you are staying in a given location, DO NOT BUY! But as you grow accustomed to the neighborhood, you might want to think about buying if you like the location and could see yourself in the area for a while.

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“What should I do if I have unsteady income and am often subject to large cash influxes followed by times where my income is greatly lessened?”

DON’T treat large incoming checks as a windfall of cash. You need to budget carefully in order to survive those periods of draught. As a writer, David Bach is quite familiar with the unpredictable schedule/amount of royalty checks etc. He recommended the following: move 10% immediately into a retirement account, 10% into an emergency account, and 40% into a taxed account since you will end up paying taxes on this money. The remainder is yours to budget out! It sounds like a great concept to be able to magically handle your finances but without a system in place, the odds are greatly against you. One of the biggest factors that can destroy a self employed person’s life is not correctly accounting for the future taxes you will pay. Cover your retirement, cover your emergencies, cover your health care, and cover your taxes.

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“Do you have a method for resolving conflicts of interest? For example; I want to work out and continue paying down my debt. These goals seem to conflict when viewing my gym membership fees as a potential source for debt relief while still having the desire to go to the gym. What about when couples have goals that might conflict? How can these disagreements be settled?”

Discuss your values! People’s values aren’t always immediately known. Find goals you and you spouse have in common and branch out from there. Most couples have more values in common then those they do not. It’s all about negotiation, finding a common ground, and compromising where values differ. It can always be difficult to face conflicts head on but often, it is the only way to accomplish anything. It works the same way when dealing with your own personal conflicting values. Your example about the gym membership and using those funds to pay down debt might be as simple as buying a bicycle or some weights and quitting the gym to work out on your own equipment. You might also decide just to keep the gym membership because you use it and you enjoy it while finding other sources of spending for debt relief.

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“I have the goal of paying off all debt before retirement but am interested in retiring as soon as possible. Is it possible to retire while still holding debt?”

You need to do some retirement planning. It isn’t always necessary to pay off all debt before retiring. Most financial planners will help you estimate your benefits for social security, retirement account withdrawals, investment returns, and inflation costs. It is totally possible to retire while holding your debt as long as you have the cash flow to cover your financial obligations. While living without debt is a wonderful thing, it isn’t fully essential for retirement.

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Due to recent sub prime mortgages and market volatility, my accounts have suffered. Do you still believe that I am still on track for an early retirement and should I make any changes to my account allocations?

It depends on your situation and your risk tolerance. Depending on how close you are to retirement, you might want to consider looking more into target date retirement funds where the funds auto adjust your investments towards less risky fixed income securities. Depending on your REIT holdings, it might make sense to take a little money off the table but REITs have greatly outperformed the market in the past decade. A little bit of a recent loss is OK given the historical performance of the REIT sector. You will likely see a decrease in REIT prices over the next 6 months or so but since so many people are backing away from them, this might be the ideal time to buy, not when it is the hot ‘gotta have it’ sector.

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Back to basics, how to find your latee factor.

Track your spending using a program such as Quicken, Microsoft Money, Mint, Yodlee, or the Automatic Money Manager on David Bach’s website (With a free 30 day trial). You could also revert back to a simple pad of paper. Just write it all down so that you can visualize where your money is going! People often convince themselves that they know where all their money is going. The little things really do add up and the only way to find these expenses if often to visualize your spending patterns.

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“I am 55 and am not currently a homeowner. Is this still a good time for a first time buyer of my age even if I don’t have a down payment saved?”

Buying a home without a down payment is a fickle situation. Find out what you qualify for. A couple of years ago, you could have bought a home with 100% financing, that simply isn’t the case today. Find out what you are qualified for so you’ll know what you’ll need to save for a down payment. Statistically, you are likely to live for at least another 30 years, age is rarely an excuse for not purchasing a home.

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“I want to get my debt under control but my husband doesn’t think it is out of control. Is it possible for me to finish rich without my husband’s help?”

Getting on the same page is usually the best way to make progress. While it would be easier with his help, it isn’t a make or break situation. Financial pressure can lead to anger, any number of conflicts, or even divorce. It is about sitting down and relaying your feelings about the situation. “I need to feel safe. I don’t currently feel safe.” could be an expression of your situation. Hopefully, issues of conflict can be resolved in a low drama way that leaves both of you feeling better about the overall situation.

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“I’m a 43 year old mother with 2 young children. How can I find a legitimate job to work from home without causing too much stress to my husband? I have $37,000 in my 401K/company profit sharing plan that I could borrow from should I need it.”

This sounds like a disaster. The number one cause of destroying a family financially is when a couple goes from two incomes to one. If your family’s income gets cut by such a dramatic amount and you don’t make some major changes to your family’s budget, you’re headed for trouble. The only way you can really know if you can live off of one income is to practice. Try living off of just one income for just a couple of months while you continue to work and see if you can do it. If your family is not able to accomplish this, you are living in fantasy land if you continue to think that the situation will change without serious effort. I’m sorry to say it but it really doesn’t sound like you are in a situation where this is immediately possible without working part time, moving to a much cheaper location, or making some addional sacrafices. You might want to suggest telecommuting to your employer with the possibility of coming back full time once your children have grown up more.

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“My husband lost his job in July of 2007. We are now in tremendous debt. Should we liquidate his 401K in order to pay down our debts or take out a home equity loan?”

It is likely a better solution to take out a home equity loan. While taking on additional debt to pay down debt isn’t a good idea, it may be the best case here. It also depends on the level of debt and the amount in your husband’s 401K. If you have $25,000 in debt but $250,000 in your husband’s 401K, it might make better sense to reduce your asset base in order to avoid additional debt.

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If you are serious about getting your act together, you might want to check out
www.davidbachcoaching.com or you can call at 866-620-5725.

David described the experience as the following :

The responses to your questions won’t be the generic answers you read about on financial websites. Your plan will be catered towards your own goals and concerns whether it is retirement saving, paying down your debt, or starting your own business. Being coached gives you accountability. You check in with someone to track your progress and don’t just put your situation on the backburner. He also said candidly : “Coaching programs aren’t for everyone, they are for people that are serious about improving their lives and are excited about creating a better future.”

David Bach said: “This is the new year! Don’t just make a resolution, get your act together.” I can’t agree more with him.

Subscribe to their newsletter and check for their monthly conference calls on David Bach Website!

You can also sign up for their Automatic Money Manager which has a 30 day free trial. While unfamiliar with this specific product, I am familiar with several others but will check this product out and provide a review.

David Bach also has a new book on green investing coming out in April. He should be promoting it soon and I certainly plan on checking the book out!

I attended my first National Economist Club meeting this afternoon. We were given the opportunity to hear William W. Lewis speak about his book : The Power of Productivity which reflects on the research findings of studies performed by the McKinsey Global Institute.

His book provides an excellent statistical/factual basis for the claims that he makes in the book and I highly recommend his book. As the introductory speaker said : “His book is presented in such a straightforward manner that my father, who has a limited knowledge of economics, was able to pick it up and read it cover to cover and fully understand its subject matter.”

The slideshow and pod cast of his presentation can be found here.

The first observation that Bill made was to identify what is already widely known, the contrast of rich nations vs poor nations with very few middle income nations such as Spain, South Africa, and Korea to fill the middle ground. Only 5% of the world population lives in a middle income nation and the per capita GDP of countries such as China, India, and Brazil all fall well below the economies of the United States, France, Germany, Japan, and the UK. This wealth distribution has remained intact for over 50 years (with the exception of Japan) and without major changes to the world economy, our global economy will continue to operate in its two factions of rich and poor nations. The major factor was identified not as education, employment rate, or even as capital availability but as a simple matter of productivity.

The economies of ’successful’ economies have evolved from one where 250 years ago, ~95% of economic output was produced by agriculture. Improvements in farming techniques improved productivity and allowed the goods and services industries to greatly expand. The driving concept of economic transference was initially studied by Sir Arthur Lewis, the first Black person to win a noble prize in economics.

His two-tier model is described as : “an economy with 2 sectors - traditional (with low wages and a nearly infinite supply of labor) and modern (where the bulk of the capital resides). The traditional sector’s labor migrates to the modern capitalist sector, attracted by the initially higher wages. Competition forces the wages of workers in the modern sector down to the levels of those in the agricultural sector. This leads to high profits in the modern sector, which finances its further expansion.” Basically, there is a pull from the service sector which drives a movement away from agriculture and towards other industries. Our speaker stressed that this drive has lessened as a more established infrastructure has been developed which causes an additional hurdle for developing economies that are not faced with the same circumstances that allowed for the economies of today’s wealthy societies to surface.

The statistics that William Lewis and his associates presented which led to his book were quite controversial when they came out because they used the purchasing power parity (PPP) as opposed to the then used calculations which were based on market exchange rates. Essentially, the PPP takes into account how much ‘bang for your buck’ you get in individual countries rather than the pure dollar transfers within an economy. These findings would provide a factual basis for why the United States was in fact exceeding the output of the Japan and Germany who were then thought to be overtaking our economy.

Specifically in Japan, productivity levels were studied for the major economic industries. While Japan greatly excelled and just plain kicked the crap out of us in the steel, consumer electronic, and automotive industries, their productivity just couldn’t begin to compare with our overall productivity levels. Japan excelled in industries that composed ~25% of their GDP but operated at ~40% of productivity (in comparison to the USA) in their retail, housing construction ,and food processing industries which are a much larger section of our economy. Perhaps a good analogy would be that if economic productivity was a decathlon, Japan dominated the long jump and the shot put but couldn’t even place in the 100 M, 400M, 1500M, pole vault, high jump, hurdles, discus, or javelin throwing competitions. It is doubtful that Japan will catch up to us in the major industries due to a lack of standardization in housing construction, their regulation laws which keep large retail stores from entering the competitive markets, and the dominance of small businesses in the food processing industry whereas the United States has adapted the standardization of home construction and the dominance of Wal-Mart, Target, and production plants which operate with well beyond ten times the production rates of Japanese factories.

It was very exciting to see Bill make these arguments because I was also previously duped into believing that Japan was a productive powerhouse when actuality, they are not.

Next up : Education isn’t important.

Qualifying statement from Bill “Education is important, it just isn’t the binding constraint.” Productivity isn’t created from intelligent individuals working in their jobs, it is created through effective job training and the establishment of efficient operating procedures in larger scale companies that are able to take advantage of the opportunities provided by economies of scale that encourage job specialization and not through a formal education.

The supporting study used in this case was a comparison of labor productivity in San Paulo Brazil versus Huston Texas in the construction of subsidized housing. The demographic for the workers was virtually identical, most being low educated, Spanish speaking (Houston = many Mexican immigrants) workers with similar backgrounds regarding home life, job experience, etc. The productivity levels in the United States were determined to be greater due largely to the refinement of building practices which were represented via job training and the procedure for which the building were constructed. It wasn’t the workers education levels but the manner in which they were instructed and organized that caused the difference in productivity levels. The binding constraint is NOT education, it is training.

As was previously mentioned regarding Japan ,(with an additional focus on India in his book) regulation and the imposition of any practice which prohibits the existence of free market competition destroys productivity. Bill cited the automotive, steel, and banking industries in the United States and the effect that the encouragement of free market practices had in the United States. Japan ate us for breakfast regarding the automotive and steel industries (the steel industries were also greatly threatened by Russia, their steel industry was top Times New Roman but was ultimately destined for failure because their centrally planned economy focused more on output levels than on allowing market demand to determine their steel operation) but the United States still had great opportunities in the banking industry. The deregulation of the banking industry in the early 1980s allowed for banking productivity to skyrocket. Previous regulation had fixed banking rates and operating practices but through the deregulation and allowing free market competition to operate, the less productive companies faded and the productive led the pack.

Free market competition often causes shifts in employment, people lose their jobs and are forced to enter other markets, and the changes that result may really hurt some people in the short term…but the customer is king. They vote with their feet and that’s how we operate. Wal-Mart has put thousands of businesses through the ringer; lots of ‘mom and pop’ operations were eliminated and everyone has heard people talk about the ‘evil Wal-Mart’ but the market decides and economic displacement is not always avoidable.

The next point made was regarding the productivity levels in the United States and the fact that they allow for our employment rates to stay high for those earning minimum wage. Our average employee is productive enough to keep our minimum wage employees producing enough goods and services for their employment to remain justified in cost terms. Other nations, specifically France, did not have productivity levels high enough to justify the employment of as many of their employees earning minimum wage at the time of this study. A member of the French embassy informed us that France has done a lot of work in the past several years and have dramatically improved their performance. During this study, 26% of French workers that could have been working for minimum wage were unemployed due to the fact that their productivity levels couldn’t justify employment.

The final point made was regarding developing countries and the percent of their GDP that is spent by their governments. The findings in this study are strong enough that I decided to save it for my next posting.

I’m headed to a Dane Cook event tonight, hope everyone else has a GREAT weekend!

Dave

Questions and comments are welcome! You can reach me at david113@gmail.com

“It is central to what I want to do as president to do something about economic inequality. I do not believe it is okay for the United States of America to have 37 million people living in poverty,” he said in a meeting with Monitor reporters and editors this week. “And I think we need, desperately need, a president who will say that to America and call on Americans to show their character.”

John Edwards certainly does a good job in pulling on the heartstrings of Americans. 37 million people in poverty, over 10% of the American population, is living below the poverty line and Edwards is the cure…right?

In Edwards plans big for presidency by Lauren R. Dorgan, we are given some…interesting facts.

Edwards does a great job pointing out other’s ‘mistakes.’

“Are we going to hear six months from now, Bush invades Iran, ‘If only I had known then what I know now?’ ” Edwards said. “How long does it take to learn this lesson? There’s a very hard lesson that I’ve had to learn from Iraq.”

Perhaps there are some lessons that Edwards could learn in economic policy, this might make him a little more credible when he critiques someone else’s policy. The unfortunate thing is that the lessons that are bound to stem from some of his presidential policies won’t be learned quickly enough to remedy.

The current federal minimum wage is $5.85 (effective July 24th 2007) Edwards wants to raise it 62% to $9.50. It doesn’t make sense. Sure, it will get you some votes. “MORE MONEY FOR THE POOR!!!” is a great way to win votes. Your plan simply won’t fly.

I could repeat the same arguments I made back in a prior article but I’ll just cut to the chase. Minimum wage increase costs for employers. If you increase the minimum wage 62%, it will make more financial sense to hire less workers, increase benefits for workers retained, and just hope that the new unemployed will create new businesses to pick up the slack. Since ~50% of minimum wage earners are between the age of 19-25, many of whom are working parents, the resulting benefits should increase the standard of living for the cream of minimum wage workers and perhaps the increased tax income from low income worker’s wages will help to fund the increased demand for unemployment claims. But since 96.52% of taxes are paid by the top 50% earners the increased taxes on low income earners will NEVER cover the displacement of the resulting unemployment from worker displacement caused by employee cuts and business closings who simply can’t continue operations from HUGE increases in labor.

America’s gradual economic recovery continued in May as NFIB’s Small Business Optimism Index inched up a tenth of a point to 102.3. While sales prospects are getting brighter, increasing labor costs and a lack of pricing power are cutting into profits. Cut the profit in small businesses and profit margins simply aren’t worth the trouble of opening the doors for business, might as well outsource some additional services to other countries. (I actually support this because it frees up US labor for increasing long term efficiency in our market at the horrible horrible short term cost of kicking US citizens on their…asses) Solution: increase taxes on top earners to pick up the slack and brace for higher unemployment rates, disgruntled workers who now need to work more intense shifts, and a clean sweep for any future presidential candidate that can promise to cut unemployment by….DECREASING the minimum wage.

“Back when Hong Kong was a British colony and its wage rates were set by supply and demand, the Wall Street Journal reported that its unemployment rate was less than 2 percent. Then, after China took over Hong Kong and mandated various worker benefits – which add to labor costs, the same as higher wage rates — Hong Kong’s unemployment rate went over 8 percent. This was not high by European standards but it was unprecedented for Hong Kong. There is no free lunch in any part of the world.” -Thomas Sowell

The policy of John Edwards to increase the minimum wage is a cheap ploy with predictable economic impact that will end in HORRIBLE results. In a world economy that rewards economic growth to countries that can LOWER costs rather than increase them, Edwards is an idiot to think that an increased minimum wage will provide any long term solace to families suffering financial hardship.

It isn’t like Edwards hasn’t planned for this, he has plans to provide one million new section 8 homes during his unlikely presidential tenure. While current section 8 demand exceeds supply, one million new homes won’t even begin to cover the resulting unemployment from a minimum wage hike. Those one million new section 8 houses? Financed my more increased taxes.

There is some hope though, low income people can expect matching savings accounts! Basically, the new money that retained minimum wage earners can allocate towards savings accounts can be matched by the government! Again, financed by increased taxes… Another problem…I remember reading that the savings rate in America is negative. Lauren Bruce over at bankrate.com explains in Negative personal savings rate: What does it mean? If people aren’t saving, how can the government match it?

But it is OK, “He also pledged to start a government-funded public higher education program called ‘College for Everyone.’ ” This means that the 19-25 year old workers that are displaced workers can go to college on Uncle Sam’s dime! Colleges will of course realize that they can collect more money from students, increase tuition rates for everyone in a response that is likely to generate when the government enters the educational system. This means that dutiful parents contributing to 529 plans will have to adjust their contributions to account for these costs under new pressure generated by…higher taxes (again) that will be required to fund these programs.

John Edwards. Higher taxes across the board, the redistribution of the low income earner’s wealth among a smaller number, more unemployed, more government funded housing, higher taxes, free money, increased costs to businesses, higher taxes, higher taxes, higher taxes.

John Edwards…not even close to the best choice for America.

“John Edwards says if he’s elected president, he’ll institute a New Deal-like suite of programs to fight poverty and stem growing wealth disparity. To do it, he said, he’ll ask many Americans to make sacrifices, like paying higher taxes. ”

I won’t sacrifice my country for you…

Kiva is an excellent way to use some disposable income to help stimulate third world economies with microloans to entrepreneurs that can use small amounts of money to expand existing business operations. (Check out Microlending : The Strongest Tool for Development in Third World Countries for more information) One of the few issues that I have with this excellent charity is that while loans are repaid, allowing you to either re-loan the funds or withdraw them into an account for your spending, there is no interest paid on the loans. There has been quite a bit of discussion about interest on microloans over on the Kiva forums. (Discussion found here) While I agree with many of the forum posters that Kiva loans are charitable and that the loan recipients should not be burdened with needless interest charges (charging interest also changes the charitable status of Kiva), potential defaults, inflation, the desire to grow loanable funds, and the potential involvement of ‘large money’ institutions are issues that I believe warrant charging interest on microloans.

I’m not the only one that feels this way. eBay owns Paypal. Paypal handles all of the transactional costs associated with Kiva for free which helps keep Kiva’s overhead low. eBay has what I believe are similar views regarding charging interest on microloans because they have just created Microplace.

Microplace is the newcomer to the microfinance field. They are allowing individuals to finance loans to third world entrepreneurs and are providing interest on these loans. Current interest rates range from 1-3%, not providing competitive rates with other fixed income securities but allowing for some financial gain to be had for lenders. Loan terms range up to three years, allowing the ‘microloan mutual funds’ to continue to reloan repayment proceeds throughout the holding period of the investment.

I believe that the interest rates currently offered from Microplace are an excellent step in the right direction, allowing people to make profit on the loans they make and thus providing an alternative to those who were previously only loaning their disposable income on Kiva. One of my disposable income savings accounts is currently paying rates of ~4.5%. I’m willing to take a slight decrease in the interest I will receive in order to help finance microloans for existing entrepreneurs and think that this is a balance between a charitable contribution (recieving less interest in order to help) and a profitable venture that allows me some additional exposure towards long term fixed income securities.

My first Microplace investment is going towards TPC via Calvert Community Investment Note, a fund with the following message “Our institution has been serving 2,793 poor villages in 9 provinces of Cambodia. Your investment will support our expansion plan in reaching more rural and remote villages in Cambodia and provide financial services to poor households.” Their current loan portfolio is made up of ~ $9.5 million, boasts a 100% repayment rate, and an average loan of $147. The organization was founded in 1994 and their established model of lending with 14 years of experience makes them an ideal loan. Three year loan, three percent interest, a fee less buck in interest, and a few more warm fuzzies for helping to provide some financial experience towards some Cambodians I’ll never meet.

Check out Microplace if you have a chance, it might not be the best short term investment on the planet but the long term implications of helping to stimulate an underdeveloped economy is an excellent long term way to bring more customers to our world economy and improve the overall standard of living for everyone.

Questions, comments, or suggestions? You can reach me at david113@gmail.com

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