Your Cash Ain't Nothin' But Trash Part II
(Family Math • Economy)
Back in March when the Federal Reserve decided the best way to end an economic crisis was to print more money, I lamented the fact somewhat bitterly, and we moved our micro-cash hoardings into a mutual fund invested in Treasury Inflation-Protected Securities.
Not being rocket scientists but still possessed with rudimentary math skills, we simply figured if the government was going to double the monetary supply, the value of the dollars we held in our mayonnaise-jar bank account would drop by half if we just allowed them to continue to sit there.
Several of hallowed economist Paul Krugman’s acolytes apparently found our inflation concerns quaint back then, and the assurance seemed to be that, basically, printing play money was a pretty good idea, the details of which should be left to people with at least several academic degrees apiece.
That was then. This is now:
The dollar index, which tracks the currency’s value against six others, dropped to a 14-month low this week. The slide has caused some leaders to raise concerns about the dollar’s reserve-currency status.Asian central banks on Thursday intervened in the currency markets to check the appreciation of their currencies against the dollar, fearing their countries’ exports could be losing ground as a result.
The slide of the diluted dollar prompted Federal Reserve Chairman Ben Bernanke, a guy with several academic degrees, to promise that interest rates will be jacked up as a counter-balance, at approximately the exact moment you decide it’s time to refinance your home mortgage.
(Cross-posted at Splattastic!)
→ B.Dunn, Oct 09, 2009, 04 57 am
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Plastic of the Damned
(Economy • Family Math)
When I was much younger, small-town banks would, upon the request of a good customer, issue a line of credit. If you tapped it, they would charge interest on the amount you tapped until you paid it back.
Later, after almost every small-town bank was sold to a regional or “national” bank, doing the paperwork and interviews for lines of credit apparently became too much of a bother, and the bankers would tell you to apply for one of “their” Visa or Mastercard credit cards.
No longer dealing with a banker you knew and (more or less) trusted, you now had a “relationship” with a faceless call center buffer zone between you and a squad of bean counters who introduced an annual fee for continuing to “enjoy” your plastic line of credit. They raised the interest rate to whatever they wanted, LIBOR and the Fed rate be damned. If you wanted to use your line of credit to give yourself some traveling cash, they charged you instant interest at a much higher rate than if you used your plastic card to buy something directly. And if you were experiencing hard financial times and couldn’t pay off all of your bills within a given month, the faceless bean counters loved lashing you with “finance charges.”
Really, absolutely the only reason to carry around one of these plastic lines of credit stems from the fact that you can purchase things over the course of a month’s time and pay them off at the end of a month while obtaining a bill that itemizes your expenses.
But now the geniuses at the banks are preparing to do away with that lone convenience:
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”
As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time.
I hate to be indelicate, but Edward L. Yingling can kiss my ass. During the first minute after receiving a notice that I’m going to be charged immediate interest for using my credit card to buy the week’s groceries or fill up with gas, even though I have paid my bills on time forever, I am immediately cutting my card into tiny pieces and canceling it.
The obviously correct mathematical choice for every other family paying off their cards every month is to do the same. Unless you just like throwing your money out the window.
I can take another 30 seconds to write a check for the groceries, and walk inside and hand the gas station cashier $20 cash. It’s easy. That’s what we all used to do before the banks forced us to start using Plastic of the Damned a few decades ago.
I sincerely hope Yingling and his association members enjoy paring their credit card portfolios down to only those people who really don’t have sufficient credit scores to justify owning one.
Maybe at that point a lightbulb will go off inside the head of some credit union CEO somewhere, and some American institution will decide to provide the basic services one used to find being performed in banks.
→ B.Dunn, May 19, 2009, 05 29 am
Your Cash Ain't Nothin' But Trash
(Family Math • Economy)
At least this time when it decided it was going to screw us, the Federal Reserve announced it first.
For those who somehow missed it, the Fed’s “Open Market Committee”
decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
What this means to you and me and our families is that the real value of the cash we’ve been hoarding or are trying to save as a protection against layoff or other emergency is going to drain away if we just leave it sitting in a mayonnaise jar or, apparently, a bank.
Yes, the banking industry turned the mortgage business into a derivative-based craps game, the real estate bubble burst, the stock market has collapsed, we’re handing the bank officials who caused this mess billions of tax dollars with which to paper their vacation homes, and now the very best rate they’re willing to offer in Houston on a 12-month certificate of deposit is less than 2%.
So we’re faced with a situation demanding that the prudent family save the equivalent of at least several months’ worth of its net income, yet not only are the banks and markets not offering any liquid vehicle for making interest on the savings, now the government is going to start taxing it through (more) inflation.
In times like these, it’s tempting to listen to the siren songs of the gold bugs. Gold, silver and other precious metals are seen by many as a good hedge against inflation. We chose not to go that route. Gold is a commodity market, and it swings up and down based on some factors that have little or nothing to do with inflation.
For instance, this:
China’s gold industry has set the target to produce 290 tons of gold and add 800 tons of proven reserves this year, said vice minister of Industry and Information Technology Miao Wei at a recent meeting…China’s gold output and profits reached record high of 2.82 million tons and 12.4 billion yuan, respectively, last year, and presented average annual growth rate of 7.6 percent and 41 percent, from 2003 to 2008, Miao added.
Not having been in commodities before, and not having studied precious metals markets, we weren’t particulary comfortable with the idea of quickly sinking a significant portion of our meager savings into something so unfamiliar to us.
But we felt we couldn’t continue to do nothing. And unfortunately, putting money into CDs right now is pretty much the same thing as doing nothing. We expect the rate of inflation soon will exceed the rates being paid on CDs. Money market account rates are if anything worse, and most of them also aren’t insured. Does deposit insurance matter? It does to me, when I read statements from the Federal Deposit Insurance Corp. saying that unless it increases fees to member banks, its insurance fund could become insolvent.
We felt like we were faced with a definite lack of liquid choices for parking our cash. Then we looked at something called Treasury Inflation-Protected Securities. TIPS, as they are called, are U.S. Treasury bonds whose principal rises and falls based on the Consumer Price Index. Interest payments increase in times of inflation, and decrease in times of deflation. You aren’t going to get rich investing in TIPS; we think they may be the ultimate defensive investment.
Since we believe the future holds inflation, and the potential for serious inflation, we decided TIPS are as good a hedge against eroding cash value as we can find right now.
As you’ll see if you follow the link above, there are a few moving parts involved in the purchase of TIPS. We opted to simplify that process by purchasing TIPS through a mutual fund. Vanguard’s inflation-protected securities fund is highly rated, and we’re familiar with the company, so we went that route. Other similar funds are no doubt out there.
In the end, we put one-third of our cash into the fund, leaving probably a good bit more than we need in an (allegedly) interest-bearing checking account. For now, our intent is to add future savings to the TIPS fund in increments.
But for anyone who thinks they can beat government-backed inflation, through TIPS, gold, real estate or anything else, here’s the bummer du jour: the federal government is going to tax any success you have.
For instance, if you invest in gold and it increases in value due to heavy inflation, you will be taxed at a high capital gains rate when you cash in – even though you didn’t really “gain” anything, but only kept pace with the inflation foisted on you by the Federal Reserve.
Are these good times or what?
→ B.Dunn, Mar 21, 2009, 07 19 am
Family Math 102: Cutting Your Expenses
(Family Math • Economy)
Just before we last did our family budget exercise, I was concerned about how much we were paying for food, and had guessed that our two-adult, two elementary schoolchildren family was spending about $200 a week at the grocery store.
But the truth was much worse. We were spending $300 a week on groceries, making that by far our largest monthly expense category, nearly twice our house payment.
That won’t be the case for many families creating a budget for the first time, but calculating your exact monthly expenses will, one way or the other, be an eye-opening experience.
For many people, the house payment or apartment rent will represent your largest monthly money drain. We were lucky because, when we moved out here to the sticks from Houston six years ago, we found a house we liked that we could afford, we were able to make a sizable down payment and the mortgage rates were at near historical lows.
The other thing working in our favor is that we could be comfortable remaining in this home for the duration. Because of that, fluctuations in the real estate market aren’t of nearly as much concern for us as for many younger couples, who know they’ll be moving along with a promotion or new job, and need to make sure and get as much value out of their houses as they can, to be able to afford the next one.
Needless to say, a lot of people in that situation have been whipsawed, even in the greater Houston region, by collapsing real estate prices. It’s gotten so bad the New York Times’ Ron Lieber recently wrote a column weighing reasons to consider just bagging out of your mortgage.
I have to say that unless the alternative is certain bankruptcy, I would have extreme difficulty advocating such a move, because in the long run your word not only is your bond, it’s your credit rating. But then, I’ve never been in a situation where I’m making payments on a house worth a third of its value at the time I borrowed the money to buy it.
Digression aside, once you have your list of monthly expenses, including annual expenses divided by 12, you have just acquired a new tool for improving your financial situation.
The first thing my wife and I did with our expense list was to sit it next to our income list and imagine what would happen if one or the other of us were to be laid off. What could we do without on that expense list if we had to?
In our case, we are spending between $500 and $900 a month for child care (more in the summer months when two children are attending). If one parent is laid off, the kids can stay at home, and that expense goes away.
We’ve been spending far more than I think is necessary on what I’ll roughly call communications – roughly $235 for land-line phone service, cell phone service, Internet service and satellite TV. In case of layoff, I could easily lop more than a third off of that number and get along with less but adequate service.
Then we have a monthly charge for my wife’s gym, and precious little else that could be shaved in an emergency.
Our insurance costs are pretty much static, as we’ve shopped for the lowest-cost reliable provider of the coverage that we require. The amount we’ve budgeted for clothing, car repair and home repairs also appears to be set at the proper level and isn’t optional.
What we’re left with is the ability to squeeze some savings out of our natural gas and electricity bills via conservation and adoption of things such as a solar hot-water system, and that big, fat food bill.
More on the food later, but another issue with which we were confronted was the fact that we had an income stream a good bit larger than the money running away in the form of set monthly expenses. This was a good thing, except that we weren’t saving very much of that difference. Instead, it was going away in the form of discretionary spending – restaurant meals, birthday gifts, landscaping, software, home decorating, miscellaneous gizmos.
We decided to cut the discretionary spending back to the bone and save the money instead. Since the Re-depression still appears to be getting deeper each month, and both of us are employed in what we consider vulnerable sectors, it makes sense to us to prepare for a financial crisis in the event one materializes.
We realize that also means we should proceed to cut expenses beyond discretionary spending, and convert that to savings, too, at least until we have something close to the sum of our two annual salaries.
One annoyance in our effort to save is the fact that a 12-month, $5,000 certificate of deposit pays about 1.6% interest, which is approximately as attractive as keeping your cash in a well-hidden mayonnaise jar. Yet the same bank happily sets its best credit-card interest rates at 12% or more. Don’t get me started on banks.
Everyone’s budget situation will be different than ours. But some similarities apply to everyone:
→ Your debt is almost certainly costing you more than you can earn on any savings vehicle or “investment,” so you should concentrate on reducing your highest-interest debts first.
But that strategy has its limits. Over time, we have paid off all our debts except our monthly mortgage. No loans, no car payments. We have so far opted, however, to pay little or no extra principle on our home mortgage. That’s because we think cash is more valuable than additional home equity right now, even though it would reduce the length of the mortgage. Around here, the real estate crunch is likely to be worse next year than this year, we believe. The year after, who knows?
We may need cash at a moment’s notice. If it’s tied up in additional home equity, it won’t do us any good in an emergency.
→ After you have your debts in order, you need to start saving. That probably means you need to quit spending money on non-essentials. It’s no fun, but neither are hurricanes. In a financial sense, that’s what you’re guarding against.
→ After you’ve cut out discretionary spending, you can still save more money by paring down your expenses. We just went through the beginning of that exercise above, remember?
Which, in our case, brings us to food – the biggest “flexible” item on our expense list, with $1,200 a month going to the grocery stores.
Unfortunately, I don’t think there’s a silver bullet for cutting food spending down to size. In part this is because we’ve already decided to chart a course toward buying local produce, eggs and at least some meat, in order to lessen our dependence on crappy, nutritionally questionable factory food in favor of healthier whole foods grown or produced by people we have come to know and trust.
Right now, local producers can’t offer their vegetables or fruit or eggs or meat for the same low prices the big chain grocery stores do. Of course, their products are generally of better quality, so you’re getting more for your money, and that’s the trade-off.
But the tide is likely to turn in favor of the local food grower or producer, as a variety of global factors hit the fan simultaneously when the price of oil reaches and then passes $130 a barrel again, which I believe is inevitable current Re-depression notwithstanding.
Here’s the nut graph of a fairly likely scenario from a UK agricultural scientist adept in the ways of risk assessment:
Cereal grains are increasingly used for livestock feed. Most, for example, of the huge USA corn and soybeans crops goes for animal feed. When this use is combined with the increased demand for biofuels, it puts a serious strain on resources such as fertilizer that underpin grain supply. Asia—with 57% of the world’s population—is now attempting to adopt more of a Western style diet as well. This pattern is not sustainable, especially if oil and natural gas supplies are expected to decline over the long term.
The general trend, I expect, is that food prices will rise, faster than most other commodities. All the more reason, we think, to continue growing as much of our own fruit and vegetables as we can, and to extend the harvest by freezing and, like grandma used to do, canning or drying the overflow.
Coming next in Family Math: How to use less electricity and pay lower rates for it, even in Texas.
→ B.Dunn, Mar 15, 2009, 04 27 pm
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