Archive for October, 2009|Monthly archive page

‘ “MANCESSION” PUTS THE BURDEN ON WOMEN,’ by Linda Stern at Reuters via

In Uncategorized on October 31, 2009 at 15:14

WASHINGTON (Reuters) — The current recession has been called a “mancession” because men have lost more jobs than women have, yet some experts contend women are suffering more: The tight money environment is causing them to give up everything from sleep to children as they worry about finances and scale back their lifestyles and family plans.

“This is a transformative recession for women,” says Lisa Caputo, head of Women & Co., a program from Citi . “They are pausing to take stock of where they are and permanently changing the way they are saving and spending. They are protecting their lair.”

Working women say they are delaying having children and planning for smaller families because of the financial burdens imposed by the current recession, according to a study by Guttmacher Institute, a reproductive-health research organization. Working mothers have been hardest hit, with more than half (53 percent) indicating they work longer hours to make ends meet, compared with just 24 percent of women without children and 33 percent of men, according to a new study from Citi.

While they are holding on to their jobs better than men are — the unemployment rate in September was 9.6 percent for men and 7 percent for women — their jobs still tend to be lower paying, lower-level jobs. Women make up 45.5 percent of the labor force, but collect 38 percent of the wages paid.

And, as has been the case for many years, women spend more time doing housework than men do; and they tend to live longer and end up poorer than men do. They also are more likely to be in charge of the family budget than are their husbands.

All together, it adds up to a lot of financial and emotional stress as women need to figure out how to protect their own finances while caring for their families during very tough times. Here are some pointers:

Put the family first. The recession of 2009 is the first time that many families are finding themselves with the wives outearning husbands, or even being the sole breadwinners. That can be an emotional adjustment, even for generations raised on the concept of equality. It’s easy to argue about disproportionate workloads or earnings, and financial stress can add to the anger or resentment. Partners should work hard to stay on the same team and discuss ways to continue supporting each other emotionally. Creating practical schedules for housework, childcare and errands can help. Reviewing the spending rules, such as the amount either partner can spend without checking with the other, can help too.

Set good priorities. Current research says families appreciate experiences more than things. So, with family budgets tight, think of ways you can best deploy your resources so you can enjoy your time together. That may mean spending money for a cleaning service and having a stay-at-home game night, instead of spending money on movie tickets and stressing about the housework.

Save, save, save. Women need buckets of money to make it to the end of their days. A woman who has recently re-entered the workforce should make sure she’s maxing out her own retirement accounts. If she is not working, and her husband is, she should make sure to contribute to a spousal Individual Retirement Account.

Act like the breadwinner you are. Women should make sure they have enough life insurance to protect their families from losing their salaries and home-based contributions. They should not feel guilty about having to be at work, or apologize (even in their own heads) for earning money. They should take their benefits package seriously and make sure they have properly designated beneficiaries for retirement plans and insurance policies.

Career build. The middle of a recession may not be the best time to ask for a raise, but it is a good time to network, sharpen skills, and prepare for that next better-paying job. It’s also a good time to practice negotiating, so when the job market improves, you can demand a better position and a higher salary.

Invest, don’t just save. Women traditionally handle the family’s everyday budget while men make the mutual fund, stock and bond decisions. That’s not a good division of labor. Both should have some experience with the other piece of their financial life.

Help each other. There are a lot of mothers really struggling in this economy, but they can share resources. Single mothers, who have to do it all (and pay for it all) themselves, can lean on each other, living in shared apartments or houses, and trading off childcare, errands, meals and everything else. All can save with some time-honored traditions that never go out of style, like passing down toys and clothes, and taking the kids to the library instead of the book or video store.


Simon Johnson, Peter Boone & James Kwak at baselinescenario .com.

In Uncategorized on October 31, 2009 at 10:40

Yesterday morning I testified to a Joint Economic Committee of Congress hearing .  The session discussed the latest GDP numbers, the impact of the fiscal stimulus earlier this year, and whether we need further fiscal expansion of any kind.

I argued that a global recovery is underway and in the rest of the world will likely be stronger than the current official or private consensus forecast, but growth remains fragile in the United States because of problems in our financial sector.  While our situation today is quite different in key regards from that of Japan in the 1990s, the Japanese experience strongly suggests that fiscal stimulus is not an effective substitute for confronting financial sector problems head on (e.g., lack of capital, distorted incentives, skewed power structure).

We are well into the adjustment process needed to bring us back to living within our means. Although such a process always involves an initial fall in real incomes, growth can resume quickly as the real exchange depreciates.  The idea that we necessarily are in a “new  normal” scenario with lower productivity growth seems far fetched, but continuing failure to deal effectively with the “too big to fail” banking syndrome delays and distorts our adjustment process – it also makes us horribly vulnerable to further collapses.

The fiscal stimulus enacted in early 2009 had a major positive impact, particularly as it was coordinated with other industrial countries – this prevented the global recession from being even deeper (disclosure: I testified to the need for a major fiscal stimulus in October 2008).  But a further broad stimulus at this time is not warranted and the first-time homebuyers tax credit should be phased out.  We should extend unemployment insurance and focus our future efforts on improving the skills of people with less education, e.g., through strengthening community colleges.

Like all industrialized countries, we also need to look ahead to “fiscal consolidation” in order to stabilize our debt-GDP levels (and pay for the rising cost of Medicare).  The large contingent government liabilities implied by the existence – and potential collapse – of big banks are a major risk to medium-term outcomes.

My written testimony (with some small updates indicated) is below (pdf version).  This is now our revised Baseline Scenario.

Main Points

1. The world economy is experiencing a modest recovery after near financial collapse this spring.  The strength of the recovery varies sharply around the world:

a. In Asia, real GDP growth is returning quickly to pre-crisis levels, and while there may be some permanent GDP loss, the real economy appears to be clearly back on track.  For next year consensus forecasts have China growing at 9.1% and India growing at 8.0%; the latest data from China suggest that these forecasts may soon be revised upwards.

b. Latin America is also recovering strongly.  Brazil should grow by 4.5% in 2010, roughly matching its pre-crisis trend.  We can expect other countries in Latin America to recover quickly also.

c. The global laggards are Europe and the United States.  The latest consensus forecasts are for Europe to grow by 1.1% and Japan by 1.0% in 2010, while the United Sates is expected to grow by 2.4% (and the latest revisions to forecasts continue to be in an upward direction).  Unemployment in the US is expected to stay high, around 10%, into 2011.  [Update: the latest quarterly GDP data do not make us want to revise this view]

2. The current IMF global growth forecast of around 3 percent is probably on the low side, with considerably more upside possible in emerging markets (accounting nearly half of world GDP). The consensus forecasts for the US are also probably somewhat on the low side.

3. As the world recovers, asset markets are also turning buoyant.  Recently, residential real estate in elite neighborhoods of Hong Kong has sold at $8,000 US per square foot.  A 2,500 square foot apartment now costs $20 million.  Real estate markets are also showing signs of bubbly behavior in Singapore, China, Brazil, and India.

4. There is increasing discussion of a “carry trade” from cheap funding in the United States towards higher return risky assets in emerging markets.  This financial dynamic is likely to underpin continued US dollar weakness.

5. One wild card is the Chinese exchange rate, which remains effectively pegged to the US dollar.  As the dollar depreciates, China is becoming more competitive on the trade side and it is also attracting further capital inflows.  Despite the fact that the Chinese current account surplus is now down to around 6 percent, China seems likely to accumulate around $3 trillion in foreign exchange reserves by mid-2010.

6. Commodity markets have also done well.  Crude oil prices are now twice their March lows (despite continued spare capacity, according to all estimates), copper is up 129%, and nickel is up 103%.  There is no doubt that the return to global growth, at least outside North America and Europe, is already proving to have a profound impact on commodity markets.

7. Core inflation, as measured by the Federal Reserve, is unlikely to reach (or be near to) 2% in the near future.  However, headline inflation may rise due to the increase in commodity prices and fall in the value of the dollar; this reduces consumers’ purchasing power.

8. This nascent recovery is partly a bounce back from the near total financial collapse which we experienced in the Winter/Spring of 2008-09.  The key components of this success are three policies.

First, global coordinated monetary stimulus, in which the Federal Reserve has shown leadership by keeping interest rates near all time lows.  Of central banks in industrialized countries, only Australia has begun to tighten. [Update: and Norway, obviously affected by rising oil prices]

Second, global coordinated fiscal policy, including a budget deficit in the US that is projected to be 10% of GDP or above both this year and next year.  In this context, the Recovery Act played an important role both in supported spending in the US economy and in encouraging other countries to loosen fiscal policy (as was affirmed at the G20 summit in London, on April 2nd, 2009).

Third, after some U-turns, by early 2009 there was largely unconditional support for major financial institutions, particularly as demonstrated by the implementation and interpretation of the bank “stress tests” earlier this year.

9. However, the same policies that have helped the economy avoid a major depression also create serious risks – in the sense of generating even larger financial crises in the future.

10.  A great deal has been made of the potential comparison with Japan in the early 1990s, with some people arguing that Japan’s experience suggests we should pursue further fiscal stimulus at this time.  This reasoning is flawed.

11.  We should keep in mind that repeated fiscal stimulus and a decade of easy monetary policy did not lead Japan back to its previous growth rates.  Japanese outcomes should caution against unlimited increases in our public debt.

12.  Perhaps the best analysis regarding the impact of fiscal policy on recessions was done by the IMF.  In their retrospective study of financial crises across countries, they found that nations with “aggressive fiscal stimulus” policies tended to get out of recessions 2 quarters earlier than those without aggressive policies.  This is a striking conclusion – should we (or anyone) really increase our deficit further and build up more debt (domestic and foreign) in order to avoid 2 extra quarters of contraction?

13.  A further large fiscal stimulus, with a view to generally boosting the economy, is therefore not currently appropriate.  However, it makes sense to further extend support for unemployment insurance and for healthcare coverage for those who were laid off – people are unemployed not because they don’t want to work, but because there are far more job applicants than vacancies.  Compared with other industrial countries, our social safety net is weak and not well suited to deal with the consequences of a major recession.

14.  The first-time home buyer tax credit should be phased out.

15.  GMAC should not receive a further infusion of government money.  It should be turned down for any kind of additional bailout; as with CIT Group earlier in the summer, this would force a negotiation with creditors and some losses for bondholders (most likely through a pre-packaged bankruptcy process).  This would not cause a general financial panic; probably it would actually strengthen the overall process of economic recovery, as it would move incentives in the right direction.

16.  The lack of skills among people who did not complete high school or who did not attend college is a critical longer term problem in the United States.  The impact of the recession will exacerbate the problems in this regard.  We should respond by further strengthening community colleges, allowing them to offer more vocational skills classes and to provide a viable way for more people to work their way into four-year colleges.

17.  America is well-placed to maintain its global political and economic leadership, despite the rise of Asia.  But this will only be possible if our policy stance towards the financial sector is substantially revised: the largest banks need to be broken up, “excess risk taking” that is large relative to the system should be taxed explicitly, and measures implemented to reduce the degree of nontransparent interconnectedness between financial institutions of all kinds.

The remainder of this testimony reviews current U.S. macroeconomic issues in broad terms, assesses the lessons of Japan’s experience in the 1990s, and make proposals for further essential reform (both fiscal and financial).

Current U.S. Issues

To be a strong global leader in the future, America needs to generate an environment where entrepreneurship, technological innovation, and immigration ensure that the nonfinancial private sector can continue to propel the US economy.

It is premature to argue that the US economy has stumbled into a “new normal” paradigm that involves slower growth.  The factors that drove our growth over the last 150 years, particularly entrepreneurial startups and the commercialization of invention, remain despite the crisis.  Indeed, these drivers of growth may become even stronger in the future, if we can reduce the wasteful financial sector activities that grew since the 1980s (and really flourished over the past decade) and allocate resources to more productive activities in the future.

America needs a new framework to harness that growth.   That framework needs to address the following problems with our current economic structure.

Problem 1:  With the recent financial sector bailouts, we have sent a simple message to Americans: The safest place to put your savings is in a bank, even if that bank is so poorly managed, and has such large balance sheet risks, that just six months ago it almost went bankrupt.

Despite being near to bankruptcy six months ago, Bank of America credit default swaps now cost only 103 basis points per year to protect against default, and the equivalent rate for Goldman Sachs is a mere 89 basis points.  Goldman Sachs is able to borrow for five years at just 170 basis points above treasuries.  This is not a sign of health; rather it indicates the sizable misallocation of capital promoted by current policies.  American’s leading nonfinancial innovators would never be able to build the leverage (debt-asset ratio) on their balance sheet that Goldman Sachs has, and then borrow at less than 2% above US treasuries.  The implicit government guarantee is seriously distorting incentives.

Problem 2:  We have not changed the incentive structures for managers and traders within our largest banks.  Arguably these incentives are more distorted than they were before the crisis. So the problems of excessive risk taking and a new financial collapse will eventually return.  Financial system incentives are a first-order macroeconomic issue, as we have learned over the past 12 months.

Today bank management is strongly incentivized to take large risks in order to raise profits, increase bank capital, and pay large bonuses to “compete for talent”.  Since they have access to a pool of funds effectively guaranteed by the state through being “too big to fail”, there is the potential to make large profits by employing funds in risky trades with high upside.  Such activities do not need to be socially valuable, i.e. it could be that the expected return on the investments is negative, but as the downside has limited liability, the banks can go ahead.

Problem 3:  We have not changed the financial regulatory framework in a substantive way so as to limit excessive risk taking.  The proposals currently proceeding through Congress are unlikely to make a significant difference.

Problem 4:  The policy response to this crisis, with very low interest rates and a large fiscal stimulus, is merely a larger version of the response to previous similar crises.  While this was essential to stop a near financial collapse, it reinforces the message that the system is here to stay.

Problem 5:  The public costs of this bailout are much larger than we are accounting for, and people who did not cause this crisis are ultimately paying for it.   Taxpayers and savers are the big losers each time we have these crises.  We are failing to defend the public purse.

Our financial leaders have emphasized that our banks are well capitalized, and no new public funds are likely to be needed to support them.  This is misleading.  The current monetary stance is designed to ensure that deposit rates are low, and the spread between deposit rates and loan rates is high.   This is a massive transfer of public funds to the private sector, and no one accounts for that properly.

It is striking that the Chairman of the Federal Reserve himself, in a recent speech, stated that no more public funds were needed to bail out banks.  His institution continues to provide massive transfers to the banking system through loose credit and low interest rate policy.  That credit could instead go to others; the Federal Reserve has chosen to transfer those funds to banks.  This policy was used in the past to recapitalize banks (e.g., after 1982), but we have now a very different financial sector – with much more capacity to take high risks and a greater tendency to divert profits into large cash bonuses.

Today, depositors in banks earn little more than the Federal Funds rate and are effectively financing our financial system.  We are giving them very low returns on their savings because the losses in the financial system were so large in the past.  This is essentially public money – it is the pensioners, elderly people with savings, and other people who have no involvement in the financial system, that are being required to suffer low returns to support the banks.

We Are Not Japan

After the bursting of its real estate bubble, at the end of the 1980s, Japan faced a serious problem in its financial sector.  This fact has inspired many people to look for parallels with the current US situation, and – in some cases – to draw the implication that we should pursue further large-scale fiscal stimulus today.

There is a cautionary tale to be learned from the Japanese experience – on the need to promote, rather than to prevent, appropriate macroeconomic adjustment.  But this does not encourage a further expansion in the budget deficit at this time.

The property bubble and general credit bubble in Japan were actually much larger than what we recently experienced in the U.S.  The implied price of the land in the Emperor’s Palace, in central Tokyo, was worth more than all of California (or Canada) at its peak.  Land prices collapses and never recovered.  US house and land prices never got so far out of line with the earning capacity of homeowners.

The Japanese stock market rose to price-earnings ratio of around 80 (depending on the exact measure), also as a direct result of the credit bubble.  The US did not experience anything similar in the last few years.

Japan was – and largely remains – a bank-based finance system.  And their nonfinancial corporate sector was generally much more indebted (often using borrowed money to buy land, but also over-expanding their manufacturing capacity) than was the case in the US.  Total Japanese corporate debt was 200 percent of GDP in 1992 – more than double its value in 1984. The implication was a long period of disinvestment and saving by the corporate sector – in fact, this change from the 1980s to 1990s explains most of Japan’s increased current account surplus after the crisis.  Since Japanese corporates had accumulated too much capital, they exhibited low returns in the post-crisis period.  The US has strong bond and equity markets, and our corporate sector is not heavily indebted – so the cash flow of the nonfinancial sector should bounce back strongly.

In contrast to Japan, the US consumer has much more debt and saves less – in fact, on average over the past decade, the our household sector has saved roughly nothing (partly due to the effects of rising wealth, from higher house prices).  This sector will be weak in the US.  In contrast, in Japan during the 1990s there was no significant increase in household saving (and thus no contribution from this sector to their current account surplus.)

The obvious solution for any country in the situation faced by the US is to let the economy adjust, which implies and requires that the real exchange rate depreciates – so our exports go up, our imports (and consumption) go down.  This is a level adjustment downward in our GDP and standard of living, but then growth will resume on this new basis.

In contrast, Japan did not grow largely due to their over-investment cycle (in real estate, but also plant and equipment).  This created a much more difficult adjustment process, which worked for manufacturing primarily through depreciation of installed capacity and a gradual movement of production off-shore (e.g., to China and other Asian countries).

In addition, another major cause of Japan’s poor performance was its demographics, and the relatively lackluster growth of its trading partners in Asia due to the Asian crisis.  With its working population peaking in 1995, Japan lost a major driver of growth.  The country still has strong enterprises and decent productivity growth in the manufacturing sector, which allows them to grow.  But the pace is naturally slower than when they were “catching up” through the 1980s.  During the last ten years Japan’s has grown around the same pace as some of the continental European nations with better but also poor demographics, such as Italy and Germany (the comparison is from Q1 1998 to Q1 2008).

The Japanese policy reaction was to run budget deficits and maintain very loose monetary policy for over a decade, in an attempt to stimulate the economy and obviate the need for painful adjustment (including job losses, recognizing losses at major banks, and properly recapitalizing those banks).  Today Japanese gross debt to GDP is at 217%, and it is still rising (net debt, even on the most favorable definition, is over 110% of GDP).  The working population of Japan is now declining quickly, and so those people that are required to pay back the debt face ever rising burdens.  There is a real risk that Japan could end up in a major default, or need a large inflation, to erode the burden of this debt since their current path is clearly unsustainable.

Japan’s policy approach from the 1990s – repeated fiscal stimulus and very easy money – is not an appealing model for the U.S. today.  All dynamic economies have a natural adjustment process – this involves allowing failing industries to decline, and letting new businesses develop where there are new opportunities.

In fact, while Japan hesitated for over a decade to let this process work (particularly protecting the insiders at their major banks), it has finally moved in this direction.  Unit labor costs in Japan have declined sharply over the last ten years, helping making the country a more competitive exporter.  The forced recapitalization of some major banks, at the end of the 1990s, was also a move in the right direction.

The process of deflation – spoken of with terror by some leading central banks around the world today – actually makes industry more competitive, and while there are negative aspects to it (particularly if the household sector is heavily indebted, as in the US), the modest price declines seen in Japan are not a disaster.  In fact, real GDP per worker in Japan – annualized over the past 20 years – has increased by 1.3 percent per annum; while the comparable number in the US is 1.6 percent.  Over the past 10 years, real GDP per worker (annualized) increased by 1.3 percent in both Japan and the US – and now it turns out that much of the GDP gains in the US financial sector may have been illusory.

The Japan-US comparison is not generally compelling, particularly as Japan ran a current account surplus even during its destabilizing capital inflows of the 1980s.  The current US experience more closely matches the experience in some emerging markets, which have in the past run current account deficits, financed by capital inflows – with the illusion that this was sustainable indefinitely.

The long and hard experience of the International Monetary Fund (IMF) with such countries that have “lived beyond their means” – or over-expanded in any fashion – is that it is a mistake to try to prevent this process of competitive adjustment, i.e., bringing spending back into line with income, which implies a smaller current account deficit or even a surplus.  The adjustment can be cushioned by fiscal policy – and here the IMF has changed its line over the past few years, now offering sensible support for this approach.  But attempting to postpone adjustment with repeated fiscal stimulus is almost always a mistake.

Japan did not want to force its corporate sector to adjust (i.e., in the sense of going  bankrupt and renegotiate its debts), so it offered repeated stimulus.  As a result, it has become stuck with a “permanent” fiscal deficit program which is now threatening their survival as a global economic power, and will – regardless of the exact outcome – burden future generations for decades.

Some analysts further claim that Japan’s early withdrawal of stimulus is a major factor explaining why they have not returned to robust growth rates.  It is true that Japan introduced a new VAT tax in April 1997 not long before the Asian Financial Crisis began, and the Bank of Japan raised interest rates by 25 basis points in August 2000.  Subsequent to these changes the economy slowed down.

However, each of these measures were relatively small.  The Bank of Japan reversed course on interest rates quickly, and a negative turn in the economy was surely already in the cards – this occurred at the same time as the global economy slowed down, and a great stretch to argue that a 25 basis point move could explain the poor performance of Japan’s economy for years or decades subsequent.

As long as there are not major adverse shocks from the rest of the world, the US will experience higher savings, a fall in consumption, a recovery in investment, and an improvement in the its net exports (so the current account deficit will become smaller, or stay at its current level even as the economy recovers).  Growth will resume, driven by demographics, technical progress, and entrepreneurship.  The high level of unemployment also implies that rapid growth will be fuelled by willing workers, subject to the right skills being available.

Proposals For Change

The main threats to the recovery scenario come from the financial system, which has developed serious and macro-level pathologies over the past two decades.

We have weak bank regulation and supervision.  Politically we can’t let banks fail: they bend or lobby to change the rules in order to grow big, and then we bail them out.

New theories of deflation and zero interest rate floors attempt to explain why we need unprecedented large bailouts – with the experience of Japan and the Great Depression of the 1930s offered as partial justification.  More likely, we are on an unsustainable fiscal path with the potential for new financial bubbles.

The following changes should be priorities.

1. Reduce the impact of financial sector lobbying on bank regulation and supervision.  Today the US Treasury is filled with former finance sector workers in key positions responsible for financial sector reform and bailouts.  This is too large a conflict of interest.  We need to close the revolving door between government and the financial sector.

2. Put far greater regulation and closer supervision on the large remaining banks that are clearly too big to fail.  These should be broken up into much smaller pieces, so we have a more competitive system.

When major financial institutions request additional help from the government, such as GMAC, they should be turned down.  This would force their bondholders to take a loss and lead to better incentives for the future.  It is highly unlikely that it would cause a major financial panic.  The financial system is experiencing a sharp bounce back more broadly and GMAC can likely arrange a pre-packaged bankruptcy that would actually allow its debt to rise in value.

Banks can syndicate if they need to do large transactions. This is actually what they do for most capital raising transactions.

Banks should draw up “living wills” and raise additional capital as they become larger relative to the system.

3. We should also toughen our monetary policy to send a clear message that we will not maintain a pro-cyclical monetary policy which bails out banks at the end of each crisis.  The cross-liabilities on banks’ balance sheets should be reduced as far as possible to lower the risks involved with letting one fail. By doing this, we would free the hands of those running our monetary policy to take tougher actions to stop the next bubble.

4. We need to address the inequality driven by our bailouts as a gesture to show that we will defend the public purse beyond the simple accounting in the budget.

Increasingly, there is discussion of taxing “excess risk taking” (reflected in high profits and bonuses) in the financial sector, particularly if that is large relative to the system.  The terms in this debate have not yet been clearly defined and this initiative could go in the wrong direction.  But we should recognize that mismanagement at major banks has created huge negative externalities both for the financial system and for the economy as a whole.  Taxing activities that generate such externalities is entirely appropriate in other sectors, and the same reasoning is likely to be applied for banking also.

In addition, we should also require that Goldman Sachs, GMAC, and other non-banks (i.e., those operating without deposit insurance) with access to the Federal Reserve’s window pay a substantial long term annual fee to compensate taxpayers for that access.  This is a valuable insurance policy which they have – at this point – been given for free.

5. We should withdraw the fiscal stimulus over 5 years and aim for fiscal consolidation, including Medicare costs, at that time.  We should use extra spending to target specific issues that will help people improve their skills, but wind down the temporary public works programs that build jobs in the public sector.

6. All industrialized countries need to make a substantial fiscal adjustment over the medium-run, in order to stabilize public debt levels.  The size of this adjustment depends on assumptions (and policies) regarding longer-run medical costs as the population ages and medical technology becomes more expensive.  The US and almost all other members of the OECD most likely require a fiscal adjustment in the range of 4-8 percentage points of GDP.  In that context, further unfunded or nontransparent contingent public liabilities vis-à-vis the financial sector are untenable; the Japanese experience should be taken as a warning sign in this regard.

7. For the longer-run, we should focus on measures that improve skills for people with fewer years of formal education.  Supporting the expansion of community colleges and other practical skills training is the best way forward, although this will take some time to scale up.

By Simon Johnson, Peter Boone, and James Kwak

John Maudlin writing at FrontLinethoughts .com. On hyperinflation, the dollar, and much more.

In Uncategorized on October 31, 2009 at 10:31

I have been in South America this week, speaking nine times in five days, interspersed with lots of meetings. The conversation kept coming back to the prospects for the dollar, but I was just as interested in talking with money managers and business people who had experienced the hyperinflation of Argentina and Brazil. How could such a thing happen? As it turned out, I was reading a rather remarkable book that addressed that question. There are those who believe that the United States is headed for hyperinflation because of our large and growing government fiscal deficit and massive future liabilities (as much as $56 trillion) for Medicare and Social Security.

This week, we will look at the Argentinian experience and ask ourselves whether “it” – hyperinflation – can happen here.

The Ascent of Money

I will be quoting from Niall Ferguson’s recent book, The Ascent of Money. I cannot recommend this book too highly. In fact, I rank it up with my all-time favorite book on economic history, Against the Gods, by the late (and sorely missed) Peter Bernstein. There are very few books I read twice. There are too many books and not enough time. This book I will have to read at least three times, and soon, and I have a lot of underlines and mark-ups in it already.

If there were one book I could require every member of the Congress to read, it would be this one. As I read it, I am struck again and again by how fragile and yet resilient our economic systems are. Fragile in the sense that governmental policy mistakes, no matter how well-intentioned, can destroy the wealth of a nation, and resilient in that it doesn’t happen more often.

In his introduction Ferguson writes, “The first step towards understanding the complexities of the financial institutions and terminology is to find out where they came from. Only understand the origins of an institution or instrument and you will find its present day roles much easier to grasp.”

As is often said, those who do not understand history are doomed to repeat it. If you want to understand what is happening in the economy, what the consequences of our choices could be, then I strongly suggest you get The Ascent of Money. It is easy to read, engaging, full of moments where you are led to pull together different ideas into an “Aha!” Ferguson is a brilliant writer and historian, and we are lucky to have this book at a time when it is sorely needed. (order it at

As I have been writing, the United States in particular, and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was ten years ago. Now we face the prospect of painful decisions, no matter what we do. It is not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions, it is simply deciding how much pain we will take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.

Catching Argentinian Disease

At the beginning of the 20th century, Argentina was the seventh richest nation on earth. It’s very name means “silver.” “As rich as an Argentine” was a byword. Even after falling from the heights through a series of bad decisions, the country was still so wealthy that, in 1946 when new president Juan Peron first visited the central bank, he could remark that “There was so much gold you could barely walk through the corridors.”

Argentina had actually defaulted on its debt in the late 19th century, not once but twice! But still they managed to avoid destroying the currency and devastating the country. But in 1989, after years of massive budget deficits that were financed with borrowing from abroad and Argentinian citizens, the country was left with so much debt and no one was willing to lend it any more money, that the leaders felt compelled to resort to the printing press.

My Uruguayan friend and Latin American partner, Enrique Fynn, tells me of his experience of going to Buenos Aires and buying a pack of cigarettes one evening. He went into the store the next morning for another pack, and the price had doubled. He came back that evening and the price had doubled again (thankfully for his health, he has quit!). There were no prices on any items in the grocery stores. There was a man with a microphone who would announce the prices of various items, often increasing the price every few hours by 30% or more.

Workers would get their pay in cash and rush to the store to buy anything, as by the end of the week their pay would be worthless. Of course, shelves were empty. The US dollar was king, and could purchase things at amazing prices. I heard stories that were truly compelling. (It made me wish I had gone shopping in Buenos Aires at the time!)

Interestingly, the dollar is still the real medium of exchange. I was told by several people that if you want to buy a house for half a million dollars, you bring the physical cash to the closing. One person counts the money and the other checks the paperwork and title. Argentina has the second largest hoard of physical dollars in the world, only exceeded by Russia. Is it any wonder they are concerned with the value of the dollar?

Let’s look at some quotes from Ferguson (emphasis mine):

“The economic history of Argentina in the twentieth century is an object lesson that all the resources in the world can be set at nought by financial mismanagement… To understand Argentina’s economic decline, it is once again necessary to see that inflation was a political as much as a monetary phenomenon…

“To put it simply, there was no significant group with an interest in price stability…

“Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country’s political economy.”

Look at the chart below. Using realistic assumptions, It suggests that the annual US government fiscal deficit will approach $2 trillion in 2019. How can we come up with what looks to be about $15 trillion over the next ten years? The Argentinian answer was to print the money.

In the US, the short answer is that unless the US consumers become a massive saving machine, to the tune of 8% or more of GDP and rising each year, and willingly put their savings into US government debt, it’s not going to happen. So sometime in the coming years, interest rates are likely to start to rise in order to compensate bond investors for what they perceive as risk. That will bring us to some very difficult and painful choices.

As I wrote a few weeks ago, this scenario could be averted IF the Obama administration produced a credible plan to lower the deficit over time and stuck to it. But today’s thought process is about what happens if they don’t.

Ferguson pointed out in the quotes above that hyperinflation is always and everywhere a political decision. Governments have to choose to print money. In theory and in practice, what would happen if the Fed decided to accommodate a politicized US government that wanted to spend money on favorite projects and support groups, maybe even deserving programs like health care or defense or pensions or Social Security? Money they could not borrow?

Then Peter Schiff and like-minded thinkers would be right. Once you start down that path, it is hard to stop short of the brink. Brazil got to 100% inflation per month and has really lowered that level over time, but it is not easy.

In such a scenario, you want to own hard assets. Gold. Foreign currencies. Stocks. Almost anything other than the currency that is being printed.

I was asked at almost every speech about that scenario. In Latin America, hyperinflation is not a theoretical issue; it has been reality. More than one person commented on that no one in US economics schools studies hyperinflation. It is required material in Latin America. For many Latin Americans, the dollar has been their safe haven. And now they are worried, with good reason.

For the record, I do not think the US will experience hyperinflation as long as the Fed maintains its independence. Read the speeches from various Fed governors and regional presidents. These are strong personalities, and they understand that going down that path ends in massive tears. Bernanke warned just a few weeks ago that the government needs to get serious about the fiscal deficit. Watch the rhetoric from the Fed heat up after his reconfirmation and the confirmation of two new governors in the first quarter.

The Fed has committed to buy a fixed amount of government debt in its quantitative easing program. That commitment will be finished by the end of the first quarter (if I remember correctly). Then comes the tricky part.

I have been writing for a long time that the main force in the economy right now is deflation. The Fed will fight deflation tooth and nail. But they don’t have to buy government debt to fight deflation. They can buy mortgage securities, credit card securities, commercial paper, etc. That will have the effect of easing without encouraging the government to run massive deficits. And such debts are naturally self-liquidating, while government debt is not, at least not in the same way.

I believe the Fed will maintain its independence. Not to do so is to court economic disaster of the first order. These are bright and serious men and women. They get it.

The Independence of the Fed Threatened

The risk is that something changes to compromise their independence. And sadly, there is some risk. Let me quote my fishing buddy friend David Kotok:

“It’s now official. The proposed legislation to reform America’s financial service supervision includes granting the Secretary of the Treasury a veto over Section 13(3) emergency action by the Federal Reserve Board of Governors. If this becomes law, it will be a sad day for the independence of America’s central bank.

“The Secretary of the Treasury, a very senior cabinet position, is appointed by the President and meets with the President in the Oval Office weekly. The governors of the Federal Reserve Board are also appointed by the President. Both cabinet officers and Federal Reserve governors are confirmed by the US Senate. There are supposed to be seven governors; politics has purposefully limited this to five throughout the three-year financial crisis period.

“The Federal Reserve governors are supposed to serve staggered 14-year terms with all seven seats filled. Instead, we have been governed by the present five-member, politically configured board.

“The original seven-governor construction was designed to insulate them from political pressure, for very good reasons. Decades of monetary history throughout the world have disclosed what happens when political influence on a central bank intensifies. The Weimar Republic and Zimbabwe are evidence of the worst inflationary effects of politics. The Great Depression in the US and the nearly two-decade deflationary recession in Japan demonstrate that monetary policy is not only inflation-prone. When central banks are under political influence you can get fire or you can get ice.

“In Japan, the central bank contends with two members of the cabinet sitting in on its deliberations. There is no way to know how much of the last 15 years of deflation and recession is attributable to the inside political pressures placed on the governors of the Bank of Japan. But there is evidence to suggest political influence, especially when you observe how little the Bank of Japan has engaged in asset expansion during this crisis.”

This is the nose of the camel under the tent. Starting down this road is very worrisome indeed. I find it appalling that Tim Geithner and Larry Summers went along with this. This is a very clear attempt by the political class to put political pressure on the Fed. I hope the Fed responds with vigor. I can tell you that the officials of whom I am aware will not take kindly to pressure. And that might be an understatement.

(Yes, I am aware of the problems of the Fed being able to decide whom to bail out and why. It is not a perfect world. But better the Fed than Congress.)

All that being said, if the Fed starts to increase its buying of government debt above its initial commitment, then my “optimistic” scenario of a very rough economic patch, which I have been outlining the past few months, is far too rose-colored. I do not think it will happen, but I can guarantee you, I and a lot of other people will be watching.

A Few Quick Thoughts on the Dollar, GDP, and the Recession

Just a few quick notes. When world trade collapsed, so did the need for US dollars, which is what the world uses to transact business. The data looks like world trade is finding a bottom and maybe even recovering somewhat. That means there will be the need for more dollars. And since everybody and their mother are short the dollar, there could be a vicious snap-back rally. I am still bearish the US dollar (and the yen and the euro and the pound) over the long term, but there is the potential for a real rally here.

And my friend Mish Shedlock commented on the US GDP report, which said the US GDP rose 3.5%:

“Today the market is cheering over what is actually an ugly report. A misguided Cash-for-Clunkers added a one-time contribution of 1.66 percentage points to GDP. Auto sales have since collapsed so all the program did is move some demand forward. Government spending increased at 7.9 percent in the third quarter which is certainly nothing to cheer about. Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers. The savings rate is down, which no doubt has misguided economists cheering, but people spending more than they make is one of the things that got us into trouble. The only bright spot I can find is exports. However, even there we must not get too excited as imports rose much more.”

John Williams notes that one-time stimulus or inventory items represented 92% of the reported quarterly growth. The nature of the stimulus-related gains was that they tended to steal business activity from the future. The months ahead are the future. Accordingly, fourth-quarter quarterly GDP change will likely turn negative, again. (The King Report)

And David Rosenberg writes: “Only economists see the recession as being over; the man on the street sees it a little differently, perhaps less enthused by the fact that a lower rate of inventory destocking is arithmetically underpinning GDP growth at this time. Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go — and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

“Only 29% of those polled believe the economy has hit bottom — imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally — not the onset of a new bull market) has not swayed their view (or ours for that matter).”

Uruguay, Philadelphia, Orlando, and then…

I am finishing this letter in Montevideo, Uruguay. I have been in Buenos Aires, Sao Paulo, and Rio de Janeiro this week. I must say that Rio is beautiful, very green and lush with marvelous beaches, which I sadly only got to drive past. I will come again. I fly back Sunday and am home for a week, then speaking trips to Philadelphia and Orlando. Then my schedule only shows a few days in New York in early December for Festivus with the gang from Minyanville, and Europe in January. I am sure other things will come up, but I am looking forward to being home for awhile.

My friends at International Living have been writing about Uruguay, and I was really looking forward to visiting the country. I have spent a few days with partner Enrique Fynn in this delightful place. Turns out it is the Switzerland of South America. Reasonable bank secrecy laws, and trades zones where you are not taxed on any business you do outside of Uruguay. Many international companies set up their headquarters here. Beautiful beaches, friendly people, and the charm of a small country, plus what will be a brand new airport in a few weeks, which can get you several times a day to any part of the region, directly to Europe, and one hop away from any major city in the world. You can learn more about the country, and other countries you may want to live in or have a second home in, by subscribing to International Living.

One of the laugh lines I use in my speeches down here is that if the Fed actually does start to monetize the debt, I will have to move to Uruguay. I could make worse choices.

Have a great week. I think this weekend I will switch it up from the heavy reading I have been doing and find some science fiction. Reality is way too scary.

Your ready to be in his own bed analyst,

John Mauldin

Copyright 2009 John Mauldin.

‘TIPS BUY PEACE OF MIND, BUT AT A STEEP PRICE,’ by Brett Arends in the Wall St. Journal at

In Uncategorized on October 30, 2009 at 11:25

TIPS buy peace of mind, but at a steep price


Current yields, high prices make short-term bonds less appealing; best bets at 20 years or more.

Inflation-protected US government bonds are generally a great core holding for ordinary investors. That’s especially true in uncertain times like these, when many worry that a spike in prices is just around the corner.


But here’s the secret of TIPS: You don’t buy them because you know where inflation is headed. You buy them so you don’t have to care.


Shares may boom or slump, inflation may rise or fall, but if you buy a long-term inflation-protected bond that pays 3% a year above inflation, that’s what you get.


TIPS have performed well this year — the sector is up around 9% since Jan. 1. But their good performance means that many of these bonds are now distressingly expensive. That’s especially true for the shorter-term bonds, which mature within the next five years or so. Today’s bond buyers may not realize it, but they are locking in poor investment returns. With prices at current levels, longer-term bonds, particularly those maturing in 20 years or more, look like better values.


Treasury Inflation-Protected Securities, or TIPS, have been around since the late 1990s. Unlike regular bonds, their price and coupons are adjusted to reflect inflation, which makes them a good safe haven investment. The bonds are safe from default because they are guaranteed by the U.S. government, and they are safe against inflation as well.


And inflation is a topic very much on investors’ minds right now. Some fear that the vast amounts of federal stimulus money poured into the economy will eventually lead to devaluation of the dollar and skyrocketing prices. Indeed you can see some of that already in the slump in the value of the dollar and the rise of gold. (However, falling yields on regular bonds, including non-protected Treasurys, suggest we might instead see deflation first.)


Inflation fears are one reason many ordinary investors have been loading up on TIPS, pushing up the price of those bonds. According to Financial Research Corp., a Boston-based firm that tracks mutual funds, investors have poured about $20 billion into inflation-protected bond funds so far this year — about the same amount they’ve invested in diversified emerging markets funds.


Buying TIPS buys peace of mind, but the price you pay for that peace matters greatly.


TIPS are generally quoted in terms of their “real” yield, which means the annual return above inflation. So if a bond has a “real yield” of 3% a year, if inflation comes in at 0% you’ll earn 3%. If inflation comes in at 10% you’ll earn 13%, and so on.


As a rough rule of thumb, TIPS deliver good value only when the real yield is over 2%, and preferably higher than that. (Last fall, during the depths of the financial crisis, some real yields shot up to 4% or higher as stricken financial institutions sold everything they could in a desperate bid to raise cash. It was free money, with effectively no risk at all.)


Even though TIPS have only been around for a little more than a decade, this rule has a long-term historic basis. Over the past half-century, investors in the benchmark ten-year Treasury bond (the non-inflation-protected kind) have earned compound annual returns of about 6.6%, according to the Federal Reserve.


The Consumer Price Index, over the same period, has risen by an average of about 4.4% a year. So standard nominal Treasury bonds have produced “real” yields of about 2.2%.


The real yield on five-year TIPS has tumbled and is now below 1%. The seven-year is merely yielding 1.22%, mainly because bond market players are betting on short-term deflation. For regular investors, what matters is that these yields look weak.


Today only the 20-year TIPS, with a real yield of nearly 2.2%, looks decent, though not awe-inspiring. But at least you’re guaranteed some return on your money.


What’s more, TIPS yields are based on the official inflation rate, which arguably understates true inflation for many people. The higher the “real” yield on your bonds, the greater your cushion.


That said, if you do decide to buy, some advice: TIPS can be bought through any broker, and should be kept in a tax-protected account, such as an IRA, because the government taxes both the inflation adjustments and the coupons as income. The main downside risk of buying TIPS is that a sustained period of deflation can cause bond values and coupons to fall reflect falling prices, though you’ll never get less than the real yield. Note, also, that they are bonds, not cash: The price is not fixed at the time of purchase, and can fluctuate considerably.


Rather than betting on specific TIPS, many investors choose to hold TIPS in mutual funds. These typically invest in short, medium and long-term TIPS bonds. Vanguard’s Inflation-Protected Securities (VIPSX | fund, and the iShares Barclays Treasury Inflation Protected Securities Bond exchange-traded fund , are both about 70% invested in bonds that mature within ten years or less. With happy timing, bond giant Pimco recently launched an exchange-traded fund that specializes in long-term TIPS, PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ



) , that’s a reasonable choice for investors, with a current yield around 2.2%.

‘DOES BERNANKE HAVE THE FACTS RIGHT ON BANKING? ,’ by Simon Johnson & Peter Boone at baselinescenario .com.

In Uncategorized on October 30, 2009 at 11:12

Does Ben Bernanke Have The Facts Right On Banking?

Posted: 29 Oct 2009 01:12 PM PDT

Ben Bernanke, chairman of the Federal Reserve, has stayed carefully on the sidelines while a major argument has broken out among and around senior policymaking circles: Should our biggest banks be broken up, or can they be safely re-regulated into permanently good behavior? (See the recent competing answers from WSJ, FT, and the New Republic).

But the issues are too pressing and the stakes are too high for key economic policymakers to remain silent or not have an opinion.  On Cape Cod last Friday, Mr. Bernanke appeared to lean towards the banking industry status quo, arguing that regulation would allow us to keep the benefits of large complex financial institutions.

Note, however, that Bernanke’s quote making this point in the NPR story (at the 45 second mark) is from his spoken remarks; the prepared speech does not contain any such language.  And Mr. Bernanke is wise to be wary of endorsing the benefits of size in the banking sector – the evidence in this regard is shaky at best.

There are three main types of evidence: findings from academic research on the returns to size in banking; current and likely future policy in other countries; and actual practices in the banking industry.

First, while academic research is not always the primary driver of policy choices, it is relevant when we can readily see the costs of big banks (in the crisis around us) but the supporters of those banks claim they bring important benefits.  In fact, the available research indicates that in the banking sector, economies of scale exist only up to a (relatively low) level of total assets, while economies of scope are elusive. The benefits from diversification across countries or lines of business are also small; moreover over the last few months we learned that correlations among different markets and asset classes increase rapidly during a crisis – thus reducing even more the benefits of diversification.  [See “Consolidation and efficiency in the financial sector: A review of the international evidence,” by Dean Amel, Colleen Barnes, Fabio Panetta, Carmelo Salleo; Journal of Banking & Finance 28 (2004) 2493–2519.  Note that one of the authors works at the Federal Reserve Board, and all four work in a central bank or ministry of finance.]

Second, policy in other countries matters because some fear that breaking up big US banks would somehow put us at a competitive disadvantage vis-à-vis big European or other banks.  But on this issue the European Commission spoke loudly this week – ordering the break-up of ING, and the presumption is that they will also soon put similar pressure on big UK banks.

Interpretations of this action vary – some see it as an implementation of competition policy, while others feel the Commission is (rightly) concerned about the unfair subsidies implicit in government ownership and support for large banks.  The Commission itself is being somewhat enigmatic, but the exact official motivation doesn’t matter – the important point is that the leading pan-European policy setting organization, which does not rush into decisions, has determined that whatever the benefits of size in banking, the public interest requires smaller banks.

Third, in terms of actual business practice, any big investment banking transaction is done with a syndicate or group of banks – there is sometimes a lead bank with a favored relationship, but that role is definitely shopped around.

Take, for example, General Electric’s October 2008 share offering, in which there were seven lead managers.  Or look at the prominent Microsoft bond offering, which had Bank of America, Citi, JPM, Morgan Stanley as lead managers and Credit Suisse, UBS, and Wachovia as “joint lead” (in this context, “joint lead” is the junior partner).  If a nonfinancial corporate entity takes out a large bank loan, this is also shopped around and syndicated – even for medium sized companies – so as to divide up the risk.

Similarly, if a company wants to do a foreign exchange transaction, it searches for offers and take the best deal.  It would be unwise to rely exclusively on one bank – they will naturally hit hard you in terms of higher fees.

One area where banks benefit from size is in terms of being able to put their balance sheet behind a transaction – e.g., to get a merger done they may offer a bridge loan, with the real goal being to get merger fees.  Bigger banks with a large balance sheet have an advantage in this regard. However, this kind of risk taking is also what gets banks in trouble (e.g., in the 1997-98 Asian Financial Crisis).  In the past, both Morgan Stanley and Goldman Sachs did not have large balance sheets but still did well in mergers and acquisition.

Goldman is an interesting case because it had $217 billion in assets in 1998 (that’s $270 billion in today’s dollars); it now has around $1 trillion.  Goldman was considered a strong global bank in the late 1990s.  Can it really be the case that the idea size for banks has risen so dramatically over the past decade?  (Lehman had $154 billion assets in 1998 and above $600bn when it failed).

For derivatives (and other instruments) it’s important to have deep markets, but not necessarily big banks.  If you want to buy and sell stock you want a liquid market, and the same is true for derivatives.

If you are a large oil company, and you want to hedge future risk, your choices are:

1.  Hedge with a “too big to fail” bank, because you know taxpayers will bail you out and these banks are subsidized by their government support, so they can give you a better price.

2.  Or you can hedge with several banks to minimize counter party risk.  They then sell of some of the risk – taking take less risk themselves as they are small enough to fail.

If you were hedging you’d prefer the “too big to fail” system because it comes with a nifty subsidy.  But this is not what the Federal Reserve should be supporting – Mr. Bernanke may still come out in favor of markets-without-subsidies.

By Peter Boone and Simon Johnson

‘FIVE WAYS TO HANDLE A TRICKY MARKET,’ from Fidelity Interactive at

In Uncategorized on October 29, 2009 at 12:03

You sold your stocks in the past year because of Wall Street’s plunge. Your cash is parked in a money-market fund earning practically nothing. Now you’re wondering what to do, watching from the sidelines as Wall Street posts one of its most powerful rallies in 70 years.


You’re certainly not alone. There is about $3 trillion in cash sitting on the sidelines – enough to fuel a further rise in stocks. Experts agree it’s a good idea to put at least some of your money back to work to build equity and protect against inflation over the long term. But how?


The truth is there is no “one size fits all” model here. Much depends on your comfort level with investing and, perhaps more importantly, when you’ll need to use the money. Is it for retirement, or something more immediate, like buying a new home?


“There’s no perfect answer for how an individual should get back into the market, because every individual has their own risk-tolerance level and financial situation,” said Bobby Straus, chief investment officer at ICON Advisers Inc., a mutual fund company in Greenwood Village, Colo.


You may even want a financial adviser to help with the difficult task of matching your investments to your personal goals.


“Coming out of this market environment, people need to be honest with themselves about their comfort level with the day-to-day volatility that different investments have,” said Chris McDermott, Fidelity’s senior vice president for investor education and financial planning.


McDermott said it’s important to stay focused on your long-term goals and stick with a plan. “The key is to get invested and have the discipline to remain invested.”


Once you’ve picked a mix of assets appropriate for your age, retirement timeline, risk tolerance and other factors, such as how much income you’ll need in retirement, you’re ready to get back into stocks. Here are five ways to do it:


1. Jump back in all at once. “By being fully invested from the start, we can enjoy all the potential gains” stocks can provide, according to Gregory Singer and Ted Mann, analysts at Bernstein Global Wealth Management, a unit of AllianceBernstein LP.


“Setting aside the risk tolerance issue, it’s always best to put your money in yesterday – all at once yesterday,” said Clint Edgington, president of Beacon Hill Investment Advisory, a fee-only investment advisory firm in Columbus, Ohio.


But that’s not easy for everyone, especially after last year’s financial crisis.


In a recent article in the CFA Institute’s online newsletter, Singer and Mann at Bernstein Global Wealth noted that over the last 80 years the stock market has risen more than 70% of the time. “The odds that the market will outperform cash are in our favor,” they wrote.


Singer and Mann said the stock market’s average gain in all the rolling 12-month periods from January 1926 through November 2008 was 12%. A strategy known as dollar-cost averaging, or investing a set amount each month, returned 8%. Staying in cash returned 4%.


And this is going back to when people parked much of their money in “passbook savings” accounts. Rates today for similar short-term holdings are at historic lows, usually 2% or less.


2. Dollar cost average. Even if jumping back into stocks feet first tends to produce the best returns over time, it’s not for everyone. Some investors may lack the stomach to pour tens or hundreds of thousands of dollars into stocks all at once. In that case, dollar cost averaging may be the ticket.


“That’s always a sound strategy that gives investors an opportunity to get the average cost over a ‘period of time’ rather that just ‘today’s price,’ and it works especially well during sideways and volatile markets,” said Wes Moss, chief investment strategist at Capital Investment Advisors, a fee-only advisory firm in Atlanta.


Many investors are familiar with the strategy, but here’s a brief refresher: Invest the same amount each month, spreading your purchases across the market’s ups and downs over a period of many years.


To put this strategy to work now, think about committing your cash to stocks over three to 18 months, depending on how comfortable you are with risk and your overall financial situation.  True, you may miss out on some gains as you “average in,” but you’ll limit your losses if the market retreats.


“It reduces the volatility of your returns while getting into the market. But it also reduces the returns you can expect during that time period as well,” said Beacon Hill’s Edgington.


3. Take “baby steps.” “A lot of people were shell-shocked by what happened last year. They were too scared to pull the trigger and get back into stocks,” said David McPherson, a fee-only financial planner and principal of Four Ponds Financial Planning in Falmouth, Mass.


His advice: “Start with some baby steps. Invest in some conservative bond funds a little bit at a time.”


McPherson advocated funds that invest in short-term, investment-grade corporate bonds with a one- to three-year maturity. This should help bolster returns and calm your stomach, so you’ll eventually feel better about buying stocks again. “I look at it as a way to build confidence,” said McPherson.


4. Don’t just stash it in cash. This may be prudent if you expect to buy a house soon. But experts don’t advise keeping all your money in cash for the long term, particularly if you don’t need the funds for at least five years.


Singer and Mann, in their article, said holding cash “did not come close” to the returns earned over time from investing in stocks, all at once or via dollar cost averaging. “You’ve got to keep pace with inflation over the long term,” added Fidelity’s McDermott.


But if you do decide to take a more conservative approach, there are ways to help keep inflation from eroding the value of your cash. One is to buy U.S. Treasury Inflation-Protected Securities, or TIPS, whose value is adjusted based on the Consumer Price Index, the government’s main inflation gauge. Another is bonds and bond funds, which provide yield. But beware:  These investments can fall in value when interest rates rise.


5. Don’t try to time the market. Maybe you think the market’s run-up since March is going to evaporate, and you’re waiting to pick the bottom. Good luck.


“We have yet to find a person on record who has consistently and perfectly picked the bottom to invest and then gotten out at the top,” said ICON’s Straus.


So there is no one-size-fits-all solution.


If you can stomach short-term losses, getting back in all at once may be for you. Otherwise, consider a gradual approach, perhaps even baby steps. Over the long haul, though, one thing is clear: Getting back into the game is better than sitting on the sidelines.


‘A 90-YEAR OLD SHARES THE 45 LESSONS LIFE HAS TAUGHT HER,’ from the Cleveland Pain Dealer. A half a lesson per year. About right!

In Uncategorized on October 28, 2009 at 17:35

Written By Regina Brett, 90 years old, of The Plain Dealer, Cleveland ,

> Ohio


> “To celebrate growing older, I once wrote the 45 lessons life taught me. It is the most-requested column I’ve ever written.


> My odometer rolled over to 90 in August, so here is the column once more:


> 1. Life isn’t fair, but it’s still good.


> 2. When in doubt, just take the next small step.


> 3. Life is too short to waste time hating anyone…


> 4. Your job won’t take care of you when you are sick. Your friends and parents will. Stay in touch.


> 5. Pay off your credit cards every month.


> 6. You don’t have to win every argument. Agree to disagree.


> 7. Cry with someone. It’s more healing than crying alone.


> 8. It’s OK to get angry with God. He can take it.


> 9. Save for retirement starting with your first pay cheque.


> 10. When it comes to chocolate, resistance is futile.


> 11. Make peace with your past so it won’t screw up the present.


> 12. It’s OK to let your children see you cry.


> 13. Don’t compare your life to others. You have no idea what their journey is all about.

> 14. If a relationship has to be a secret, you shouldn’t be in it.


> 15. Everything can change in the blink of an eye. But don’t worry; God never blinks.

> 16. Take a deep breath. It calms the mind.


> 17. Get rid of anything that isn’t useful, beautiful or joyful.


> 18. Whatever doesn’t kill you really does make you stronger.


> 19. It’s never too late to have a happy childhood. But the second one is up to you and no one else.


> 20. When it comes to going after what you love in life, don’t take no for an answer.

> 21. Burn the candles, use the nice sheets, wear the fancy lingerie. Don’t save it for a special occasion, today is special.


> 22. Over prepare, then go with the flow.


> 23. Be eccentric now. Don’t wait for old age to wear purple.


> 24. The most important sex organ is the brain.


> 25. No one is in charge of your happiness but you.


> 26. Frame every so-called disaster with these words ‘In five years, will this matter?’

> 27. Always choose life.


> 28. Forgive everyone everything.


> 29. What other people think of you is none of your business.


> 30. Time heals almost everything. Give it time.


> 31. However good or bad a situation is, it will change.


> 32. Don’t take yourself so seriously. No one else does.


> 33. Believe in miracles.


> 34. God loves you because of who God is, not because of anything you did or didn’t do.

> 35. Don’t audit life. Show up and make the most of it now.


> 36. Growing old beats the alternative — dying young.


> 37. Your children get only one childhood.


> 38. All that truly matters in the end is that you loved.


> 39. Get outside every day. Miracles are waiting everywhere.


> 40. If we all threw our problems in a pile and saw everyone else’s, we’d grab ours back.

> 41. Envy is a waste of time. You already have all you need.


> 42. The best is yet to come.


> 43. No matter how you feel, get up, dress up and show up.


> 44. Yield.


> 45. Life isn’t tied with a bow, but it’s still a gift.


In Uncategorized on October 28, 2009 at 13:16

There are few relationships more complicated than the one we have with money.


Some of us are intimate with our finances, endlessly doing research and keeping track of every penny. Others are more distant; they have a general idea of where their money is going, but aren’t sure if it’s the right move or if it’s enough. Then there are the emotional ones, those who cling to money at the wrong times and make impulsive decisions.


So, what kind of investor and saver are you?


Not sure? Ask yourself these questions: Do I consistently keep track of my spending? And do I do so weekly, monthly or annually? Do I feel that I’m OK financially as long as my checks don’t bounce? Do I plan and save for big purchases or do I buy on a whim?


There also are online quizzes, such as J.P. Morgan Chase’s “Financial Styles” found at, that can help you determine your investing and saving profile.


Once you determine your style, you can use certain strategies and tools to reinforce the positive aspects of your approach — and contain the negative ones.


Understanding your financial approach can help you figure out where your “strategy is most vulnerable to pitfalls or problems,” says Hersh Shefrin, a professor of behavioral finance at Santa Clara University who helped J.P. Morgan Chase develop its quiz.


The analytical investor

You’re a stickler for details and data. And while it’s good to be thorough with your research, if taken to an extreme people can forget to take their personal situation and goals into account when making financial and investment decisions.


This type of investor can get hit with what some advisers call “analysis paralysis,” where they have trouble making decisions because they can’t help thinking there is always more research to be done.


“They’re what I call ‘see mores’ — they always want to see more,” says Bryan Place, founder of Place Financial Advisors, a financial-planning firm in Manlius, N.Y. “Rather than overwhelming themselves and spending too much time digging through content,” they should limit themselves to three or four reliable sources, he says.


If you have a tendency to delay acting on your financial goals, Mr. Place says, make a list of the pros and cons and give yourself a deadline to decide — and stick to it.


While you may be great at budgeting, you might benefit from online expense-tracking tools offered by or financial-planning software from Quicken ( that can help you distance yourself from your day-to-day transactions to recognize spending and saving trends over time.


At, you can build graphs that show how your spending, income, debt or net worth has changed over a specific period. You also can see changes in spending in certain categories, such as groceries.


The big-picture investor

You know your bottom line, but you don’t keep track of every transaction or plan every action or expense. While this approach can be less stressful if you’re able to consistently save and meet your financial goals, it can leave you unsure about exactly where your money is going and where you can cut back.


To avoid falling into a set-it-and-forget-it routine and ending up with outdated and unsuccessful strategies for investing and saving, review your strategies at least once a year. For instance, the retirement-savings plan you started five years ago might not be on pace to fund the lifestyle you live today given the recession, so re-evaluate allocations at least once a year, says Carlo Panaccione, a financial planner in Redwood Shores, Calif.


Break down your expenses into two categories: “necessities,” which would include mortgage payments, utility bills and food; and “lifestyle,” optional costs such as cable television and gym memberships, says Larry Rosenthal, a financial planner near Washington, D.C. Tools at and Quicken’s software allow you keep track of spending in each category.


To monitor your spending, use a debit card or credit card instead of cash, says Mr. Place, and look at your accounts online at least once or twice a week. But make sure to pay off the credit-card balance each month.


Meanwhile, online calculators such as the one offered by Discover Financial Services

, can help you devise a monthly plan for reaching a long-term savings goal.


The emotional investor

Emotional investors are reactionary, often making financial decisions based on what’s happening at the moment and ignoring long-term needs and goals.


“They might look at it as ‘Gee, my kid’s education is really coming up soon, I have to focus on that and kind of put their retirement on the back burner,” says Mr. Panaccione.


For such investors, he suggests creating two lists: one with short-term goals, such as a vacation or car purchase, and one with long-term goals, such as saving for retirement.


Then, set up savings or investing accounts for each goal — one account for, say, the purchase of a house, one for retirement and another for college tuition. To ensure that each portion is funded consistently, set up automatic deposits to each account, says Mr. Rosenthal.


Matt Havens, partner at Global Vision Advisors, a financial-services firm in Hingham, Mass., suggests forcing yourself to plan for emergencies by building a cash reserve to cover at least six months of expenses. Having that safety net will help you avoid an impulsive move.


And when it comes to investing, don’t make drastic changes to your asset allocation. “A main weakness of this group is that they tend to buy high and sell low because of emotion and fear,” says Bryan Hopkins, a financial planner in Anaheim Hills, Calif. It might help to sit down with a planner to create a long-term investment plan.


Copyright © 2009 Dow Jones & Company, Inc. All Rights Reserved.


In Uncategorized on October 28, 2009 at 12:08

The Key to a Happy Marriage? A Younger, Smarter Wife (and Sex)


The practice of “marrying up” might be looked down upon by some, but when you’re talking age, it might be the key to a happy marriage. A recent study showed that the couples who were happiest and had the lowest divorce rate were those where the woman was at least five years younger than her husband — and when she’s better educated.

But it doesn’t work both ways. The same study claims that when the wife is older by five or more years, the couple is three times more likely to break up than if they’re the same age. (We’re looking at you, Demi.)

Does this mean that men with younger wives are destined to be happy? Perhaps. Another factor might be that we’re getting better at staying together; at least that’s what a different poll conducted by The Times of London stated: 54 percent of those polled hadn’t even considered having an affair.

What’s the key to remaining faithful? Pretty obvious: a decent amount of sex. Of the respondents, 44 percent said they had sex at least once a week and 32 percent are having it two to four times a month. Two percent of the couples, who are obviously a little more limber, are having sex every day.

But that doesn’t mean everyone is remaining faithful. Compare the U.K. research with a 1991 survey from this side of the pond conducted by the National Opinion Research Center at the University of Chicago. The study found 22 percent of married men confessed to being unfaithful, while only 10 percent of married women admitted the same. In 2006, the same survey by the NORC found that 16.7 percent of women admitted to infidelity — a dramatic increase.

What makes a person cheat on their partner? It’s a deeply personal issue, but according to Dr. Lauren Rosewarne, quoted in The Times, “People cheat to feel younger, different or challenged.”

Maybe, for those couples facing an age gap — and possibly an intelligence one, too — those extra years are enough to make the difference.

‘ TAX CREDITS, SCREWDRIVERS, & SUPPLY & DEMAND CURVES,’ by James Kwak at baselinescenario .com.

In Uncategorized on October 28, 2009 at 12:04

Tax Credits, Screwdrivers, and Supply and Demand Curves

Posted: 27 Oct 2009 06:32 AM PDT


Our Washington Post online column today is another cry in the wilderness against the homebuyer tax credit.


There are many arguments against the tax credit. One argument we make is that the tax credit is a benefit for sellers of houses more than for buyers of houses. This is simplest to see if you imagine  a permanent credit available for all buyers: “Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.)”


It turns out Nemo had made a similar argument already.


Small point: Nemo (in a follow-up post) says that the tax credit should boost prices by exactly $8,000 (leaving aside leverage for now), because in the short term the supply curve is vertical. I’m not convinced. The reason we said “close to $8,000″ is that the supply curve is typically upward-sloping, not vertical, as shown on the graph in that follow-up post. The supply of houses can shift quickly, because people can decide to sell their houses (say, retirees planning to move to apartments in the city can move that decision forward). Also, if the credit is not available to everyone, it won’t shift the demand curve by exactly $8,000 at every point, because the demand curve for houses is the sum of every individual’s demand for houses, so only some people’s demand will change. This is why expanding the tax credit to everyone is such a bad idea. When you restrict it to first-time homebuyers, they get at least some of the benefit.


Bigger point: Nemo points out that the $8,000 increases the homebuyer’s ability to make a down payment; since mortgages provide leverage, this means the potential impact on prices is much higher. If you are buying a house with 3.5% down, then arguably an extra $8,000 in cash (which some states will advance you) can boost your buying power by $200,000. Now, this is a complicated issue, since unless you can get a no-doc loan, you still need to qualify for the monthly payments. (Nemo discusses this here.) But I think it’s fair to say that at least some buyers are constrained by the down payment more than by the monthly payments, especially with interest rates so low (I saw this in my summer legal services job). So the potential impact on a household’s buying power could be a lot more than $8,000, as Nemo says.


The net effect is that the buyer pays an inflated price for a house, which will get deflated when the tax credit prop gets taken away. I believe in some places you can effectively use the tax credit as your down payment; this means you will have close to zero equity when the credit goes away, unless housing prices rise.


By James Kwak