Free Money Finance

Cash for Clunkers: A Bad Idea

The following is a guest post from Marotta Wealth Management.

Recently President Obama signed an additional $2 billion into law, tripling the original expense of the "cash for clunkers" program. The president describes the program as a "proven success" because it is stimulating the economy and will reduce carbon emissions. You should examine such economic claims carefully regardless of your politics.

Most of our public officials evidently are willing to opt for the expedient solution, slapping a Band-Aid over a fracture and calling it healed. Unfortunately for the American people, these same politicians do not understand they are responsible not only to their present constituents but to future generations.

Henry Hazlitt's classic book "Economics in One Lesson" should be required reading. Politicians, especially those too busy to read the legislation they are voting on, could take Hazlitt's thesis to heart. He writes, "The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

To evaluate the long-term effects of the cash for clunkers program, consider the real-world example of Jerry and Janny. They have two children and are expecting a third. The couple owns a Ford Expedition with 144,000 miles that gets 14 miles to the gallon (mpg). They've been interested in getting a replacement and are taking advantage of the cash for clunkers program to subsidize it.

Thus the government handout is merely accelerating Jerry and Janny's plans to purchase a new car. But this small acceleration in new car spending won't last. Compare it to the energy levels of a college student who drinks caffeinated beverages all night cramming for an exam. The immediate stimulus is followed by the inevitable slump.

Neither is the cash for clunkers initiative truly green. The Ford Expedition still has value as a used vehicle. It may not be shiny new, but it could continue to serve Jerry and Janny or another family for several more years. Instead, the regulations require it to be completely stripped and destroyed within 180 days. To measure the true carbon offset from this program, you would need to compare the increased gas efficiency of a new vehicle against the energy it takes to scrap old cars and build new ones.

Jerry and Janny's car is usually full of kids. So the small hybrid vehicles that Obama touts when praising this program are too small for them. They are deciding between the GMC Acadia and the Saturn Outlook, which both average 19 mpg. They could probably help the environment more by just inflating their tires.

As a result of this misguided program, the price for used cars will increase both unnecessarily and artificially. Many cars worth less than the offered bailout will be traded in to be scrapped. Charities will receive fewer automobiles as donations. And people who are struggling financially won't be able to find a clunker that costs less than $4,500. The program seems to encourage new car ownership at the expense of the used car market. The rationale behind it is neither economically nor environmentally sound.

When considering the entire carbon footprint of this program, you will find that continuing to drive your current used car for as long as possible is one of the most green-friendly things you can do.

On one hand, the price of scrap metal may go down, and the price of used parts may go up. On the other, scrap yards may ignore the rules and salvage usable parts anyway. The more useless and wasteful the government rules, the more people learn to break them. Maybe that's why the Soviet Union developed such a large black market and the country today has such thuggery and disregard for the rule of law. A loophole exists when the government hasn't tied you down enough to remove your free will completely. A black market is simply the result when the government tries to remove all the loopholes.

A country can't prosper destroying perfectly good used cars. At the end of the day we still have increased taxpayer spending to pay for destroying a perfectly good car. Hazlitt describes the fallacy behind thinking that when a hoodlum breaks a baker's window it will stimulate the economy. The glazier may make a simple argument in favor of broken windows, but he overlooks the secondary consequences.

Bad economics is easier to present in a sound bite, but that doesn't mean we should heed the glazier. We must be willing to think holistically or else the hoodlums and glaziers will win and the breaking glass will continue. Only in this case, the government is the hoodlum and the automobile unions are the glaziers.

Consider who gains from the cash for clunkers program. Follow the money. General Motors (GM) makes both of Jerry and Janny's prospective cars. The three largest stakeholders in GM are the U.S. Treasury (61%), the United Auto Workers Union (18%) and the Canadian government (12%).

Any earnings that cash for clunkers generates for GM will not create additional profit and growth for the American people. It will be recycled back into government and union coffers. But like all government programs, it is an inefficient method of graft. Foreign automakers will benefit from many of the stimulated new car sales. Essentially, our taxpayers are also subsidizing the economies of Japan and South Korea.

The government chose the auto industry as deserving of such a redistribution of resources because it essentially belongs to them now, and it is failing. The cash for clunkers program surreptitiously serves to benefit their supporters to the detriment of others.

So should Jerry and Janny not purchase the car they want for a $4,500 discount? Of course not. If their children will have to pay the interest on the money we are borrowing from China and Japan to pay for this program, they can at least receive some of the inefficient benefit.

The great illusion of success in the cash for clunkers program comes from its visibility. You will inevitably know someone who appears to have benefited from the program, and it our elected officials will cite it as a reason for their reelection. Vote the bums out! Good economics requires us to consider what this $3 billion could have accomplished if we had never removed it from the wallets of American citizens or mortgaged against our children's future. Some people could have started a business or hired more employees. Some might have been able to buy a clunker for $3,400 and then been able to travel to a better job across town. Some might have paid off their mortgage or just paid down some of their debts. However they would have spent it, it would have been better spent.

The Price You Pay for Pride and Prejudice

The following is a guest post from Neal Frankle, CFP from Wealth Pilgrim.

A couple weeks ago, I had a post linked to from a popular website and many new readers visited Free Money Finance. Unfortunately, one of them made a comment that was either on the line or over it (depending on your point of view) from a decency standpoint. I debated back and forth what to do with the comment, but ultimately decided to leave it up since my on-going policy has been to leave all but the very worst up as I hate censorship (don't believe me, then see what I leave up on many of my Sunday posts.) Anyway, since the comment was about Jews, I asked Neal for his take on it before I made my final decision. He's Jewish and I thought would have a better perspective on the comment. He said it was certainly offensive, but he thought my response/comments on the post were good. In addition, he volunteered to write this guest post about the costs of prejudice.

Your preconceived notions about other people are costing you a fortune so stop it right now – for your own good.

I learned this lesson at the wee age of 12 when my father took me to meet a client of his – Mr. Williams.  The client happened to be African American and lived in a run-down part of Los Angeles.  Once the meeting was over I asked my father how that man could possibly have been an important client.  I told my father that Mr. Williams probably didn’t have any money anyway.  I based my statements on the man’s color and where he lived.

Turns out Mr. Williams was my father’s most important client.

My dad was ashamed of what I said and he spared no effort in “explaining” how stupid my racist comment was.  The fact that I meant no harm really wasn’t relevant he explained.  He told me that racism hurts people and he was right.

It was painful at the time but I’m glad he said what he did.

I’m not proud of that incident but I am happy I got to learn that lesson when I was young.

I was reminded of the importance of this lesson a couple weeks ago when I stumbled on a comment made by somebody at Free Money Finance.  The commenter suggested that if you wanted to bargain with a vendor, it was best to “act like a Jew”.

This stupid remark elicited some very angry responses as you might expect. At the end of the day, both the person who made the remark and the people who responded in anger paid a heavy price.

1. Their focus shifted from the lesson they could have learned from the post to the anger they were feeling for each other.

2. They lost the opportunity to bond closer with each other – one of the great benefits of getting involved with blogs.

3. They lost the opportunity to be open and share with each other.  Remarks like these and the corresponding responses tend to get everyone to shut down rather than open up. This refers to everyone who was leaving comments - not just the people involved in the altercation.

4. They caused a ripple effect.  Racism fosters racism.  That brings more and more people into this hurtful cycle. More and more distance.  Less and less opportunity. Just plain dumb.

I wish that I could say that I haven’t uttered a racist remark since the day my father pointed out how hurtful such remarks are.  Sadly, I haven’t done as good a job on this as I would like.  I’ve made mistakes.  Writing this post is one small effort to make amends for those errors.

I do know however that racist remarks add nothing positive.  Quite the opposite – my slips in this area hurt me and everyone around me.  It prevents me from forging relationships that could be meaningful, educational and profitable.  It releases negative energy that is hurtful to everyone caught in its wake.

You or I might make an off-color joke. We might restate something hurtful that we’ve heard others say.   But let’s just stop.  We’ve got enough pain. Let’s work together to stop this needless exchange that keeps us apart. 

I’m going to try my best to be mindful in this area.  How about you?

Wasted Opportunity

Here's a story from Yahoo about a guy that went from making $200,000 a year to $25,000 because of a layoff. A FMF reader emailed me the link to it along with his thoughts, saying the following:

This one rang true with me because I am also lucky enough to make good money at a high hour job but, unlike these guys, don't assume it will last forever (nor would I want it to).  This is not so much a Spend Less than you Make story, but a family that didn't take advantage of the huge salary that it had for 15 good years.
 
A $1million home and $200 bottles of wine on a $200k salary?  I guess this is normal because the article completely paints him a victim saying he "diligently managed" his family budget, stayed out of cc debt (like the $800k mortgage doesn't hurt enough), and had an emergency fund. I agree that is good money management if you're making $30K/year (I've been there too). But all I can think is that if he had bought a $600K home (he had a $200K down payment) and had saved 1/3rd of his huge salary over his 15 years of hard work/high pay/good luck, he could leave the city and do whatever he wants to, no matter what it pays.  At the age of 38. With his kids still so young.  What a waste. 
 
Seems a hard worker, so maybe the luck will come around again, but he's already squandered so much I'm not sure I'd want that luck wasted on him.

Some good thoughts here, IMO. My additions:

1. There WILL be rainy days. Whether it's a major unexpected expense, a health-related problem, or being let go from a job, things will happen. That's why you need an emergency fund of six month's expenses. They had an emergency fund, but it doesn't say how big it was.

2. In addition, having extra ways (other than your salary) of making money will soften any blow, especially a job loss. So whether it's income thrown off from investments, a hobby that adds a bit of side income, or a second job that you can work when needed, a "plan B" can often help.

3. He certainly over-bought on the house and didn't do himself any favors. He stretched his money a bit too and as a result was susceptible to bigger problems than normal if his income stopped. If he'd followed my formula for buying a home (and/or what the reader above suggested), he'd certainly be in better shape.

4. Where's the other savings besides the emergency fund? For someone making that sort of salary, certainly he has other money stashed away somewhere, doesn't he?

5. I know many of you don't want to hear this, but part of the problem is that he lives in a very expensive city. This probably kept him from saving as much as he could have otherwise. (I know some of you are going to say "yeah, but he would have earned less too." To you I say "look at the numbers". On average, you'll save more than you'll lose by moving to a lower cost-of-living city.) One option this guy has is to move to a much cheaper city and start over since his current job experience isn't doing anything for him. Then again, it may be hard for him to sell his home, so he may be stuck.

I agree with the reader -- this family wasted an opportunity (having a high income and didn't manage it correctly) -- and is now paying the price. That said, good for him that he's willing to do whatever it takes, even working at a job that's several notches below what he was doing before, to get his family through the trouble.

Can Money Buy Happiness?

After tackling the love work/money relationship, I thought this would be a good question to debate:

Can money buy happiness?

Before I give you my thoughts, here's what US News recently said about this issue:

The old adage goes "Money can't buy happiness," but people usually mean "Material goods can't buy happiness." Spending time with the wife and kids on a camping getaway costs money, but it's the kind of spending that is worthwhile and fulfilling. At least, that's the conventional wisdom. "Most people think materialism is not a good thing," says Joseph K. Goodman, assistant professor of marketing at the Olin Business School at Washington University in St. Louis and one of the authors of the study. "They think you're not going to get happiness through possessions."

Ok, so they're twisting the situation a bit, but their point is well-taken.

Here are my thoughts on the issue:

1. Money alone, does not bring happiness. Otherwise, why would there be so many stories of wealthy people who hate life, themselves, etc.? Money and possessions in and of themselves are empty.

2. If you have the other things that generally make people happy (a good family, job you enjoy, positive self-image, and so on), then having money can make you "happier" because it can add experiences to your life that make you even more fulfilled. I think this is what US News was getting at above. If you have a great family and you can now spend more time with them, go on vacations that others can't take, etc., you will be happier thanks to the extra money you have.

3. That said, you can still be happy simply with the non-money situations noted above. Some of the happiest people I've known have been poor financially but very rich in other parts of their lives. Sure, more money would likely make them "happier", but they're happy enough as it is.

4. Then again, having more money doesn't always make people happier. Case-in-point: lottery winners. It's almost a fact of life that they'll crash and burn soon after they win a ton of money. Now some of these people have to have been happy before they won, right? So it's possible that great wealth can ruin an otherwise happy life (though I'd say that a bit more money would likely add to the happiness of an already happy person.)

For some other takes on the happiness/money relationship, see these posts:

• Give Away Money and Become Happier

• How to Have a Better, Longer, More-Fulfilling Life

• Guess What Makes People Happy?

What's your take? Do you think money can buy happiness?

How to Weather an Inflationary Storm

The following is another guest post from Free Money Finance reader Rod Ferguson.

It's been a while since I wrote for Free Money Finance; with the shenanigans of last spring, I spent more time focusing on preparing for what is happening today than trying to show people what we were heading towards.  Recently (March 18th) the Federal Reserve announced it was going to embark on a program of "quantitative easing" – a economist term for "inflate the currency" - in the form of buying more Treasuries and shifting it's asset base to absorb more toxic mortgages.  This program will reflect, almost directly, in the monetary base.

As you can see, we've already doubled it in the last few months and another rough doubling will, when the new paper begins circulating, translate to pretty severe price inflation.  Add to that the rumbles in the world about abandoning the USD as a reserve currency and moving to a fixed basket of currencies, and that spells serious trouble for the dollar.

Will this mean hyperinflation? I still believe probably not, but we're a lot closer to the condition than we were last year.  Even if we only hit inflation levels of 10% or 15% (the same as the 70's), the impact to daily lives will be noticeable.  Most people are not prepared for this, and with the recent disinflation (the drop in some prices and credit tightness that people are mistaking for deflation), many are even less prepared than they would have been a year ago.  I've spent the last few years preparing for it, and decided to spend some time outlining what I've done for those who might be interested.  I'll warn you that some of the steps I've taken and would recommend fall into what could be considered as "tin-foil-hat-wearing" mentality, but as the old saying goes, you're only paranoid if they aren't out to get you.  If we've learned anything in the last few months, its that the old rules are gone and new ones are being made up as we go along.

1) Food:  we've been stockpiling about a month's worth of the normal food items we consume.  This acts both as an inflation hedge and as a buffer for distribution interruptions.  For inflation, if you shop smart (as FMF constantly states) you can buy food at a lower cost and consume that food while avoiding higher costs and waiting for another dip in price.  Distribution interruptions are a common occurrence during economic turmoil; I don't know if anyone else has experienced this, but a few times we've gone shopping there is a big empty space on the shelf where the food we wanted to buy normally resides.  Sometimes, the shelf isn't stocked for a week or more.  We don't buy anything we don't normally consume and rotate the food to ensure we consume the oldest items first.  Even through disinflation, the system has netted us a lower cost for monthly food overall (by being able to wait for sales and discounts), and reduced our number of shopping trips per month in half.  If you decide to do the same, be certain to check your expiration dates; you'd be amazed at how long some of our food lasts (chips - about 3 weeks, tuna - about 3 years).

2) Gardening:  while we haven't done any gardening over winter (naturally), we're setting up for a larger garden than we have had in the past.  We've dug out our old canning supplies and plan on fleshing out the set to start canning this year.  Growing your own food is the most inflation-independent method for feeding yourself; you only have the cost of seeds and the labor to maintain and harvest your garden.  And, the food tastes better to boot!  We employ the square foot gardening method that yields about 2-3 times the produce as a conventional linear garden.  If you plan on gardening and don't already know how to can, you might want to consider looking at your community calendar for a class or getting a book that will teach you; the best garden in the world won't be as useful unless you can store your food longer than the week or two that it'll stay fresh naturally.

3) Money:  we have little in cash savings right now; just enough to cover about a month's expenses.  The rest of our savings are in hard assets, mainly metals and land.  As I've written before, metals tend to maintain purchasing power throughout inflation; an ounce of silver will generally buy about 4 gallons of gasoline regardless of what the price of the silver or gasoline happens to be.  We still maintain foreign currencies and stocks, but those are taking an ever-decreasing percentage of our overall portfolio.  If you wish to start converting your wealth, physical bullion and a safe or safe deposit box are your best avenues, although it's getting harder to find physical bullion these days.  Expect to pay a premium over spot when you do - the time to buy cheaply has passed.

4) Maintenance:  we've stopped replacing and started repairing things that wear out or break.  In the past, if the washing machine broke or the microwave stopped working or a pair of otherwise good shoes blew a seam, we'd replace it.  Now, we get a repairman out or attempt to repair it ourselves (I'm a decent leatherworker - one of my hobbies.)  We only replace if the cost of repair would exceed a replacement, and we go without using whatever it is until we find a sale.  It helps to have goods that are already in working order and can be repaired, but the market for used appliances especially is growing.  Craigslist, Freecycle and your classifieds section in the paper are your best routes to research.

5) Miscellaneous:  we purchased some land (part of our long-term retirement plan) that we were going to develop over the next three years (road, well, septic, cabin, etc,) that we are now going to let sit for those three years.  Our plan now is to relocate some of the saplings on the property to fill out the gaps in the unforested parts of it.  This will allow us to save more by not spending any more (the trees are already on the property, we're just going to move them around) except in labor; we'll also get the added benefit of more mature trees when we do finally use the land.  This will adjust our retirement plans slightly, but we both feel it's a necessary evil with the uncertainty in the economy now.

So, in short, we're stockpiling what we need and holding off on what we don't while converting our wealth into something that will still have value when this is all over.  There are a lot of things we were already doing that are natural inflation buffers:  eating at home 6-7 days a week, carpooling, shopping for bargains, waiting to purchase until we felt prices were reasonable, buy cars and drive them into the ground, keep the thermostat down in the winter and up in the summer, etc. - many of the things that FMF suggests.  But, last year I thought it best to "kick it up a notch" and have been preparing while it was still possible to do so easily.  It's still not too late, however; most of the inflation analysis is saying we'll start feeling it between 6 and 12 months from now (granted, that was before the Fed announcement, so I'd imagine that range might be dropped a few months).

You Need to Plan for Bad Times During Good Times

CNN is doing a series "about economic survival in this time of financial crisis." Most of their pieces are sob stories about how bad a person has it -- the foreclosures, the bad jobs, the marital problems, and on and on. They really pull at the heart strings in telling how bad someone has it.

Today's article follows this pattern and tells the trials of a Florida woman who has had a very rough time. I felt really, really bad for her and the unfortunate situation she found herself in. Then, about half way down, it says the following:

It hasn't always been this way for Lorenz, who said she used to be a "country club girl." There was a time when she spent money as if her financial well had no bottom.

She said she bought new homes when she became bored with the old, and bought Versace and Chanel at fancy department stores such as Nordstrom and Saks Fifth Avenue, often on credit.

She eventually appeared on Dr. Phil (of all places) and started getting her spending under control. However, for someone making $95k a year, it seems she didn't get it under control enough to have a decent emergency fund set up for herself. Now, she's paying the price for it with a very rough life.

Let this example serve as a reminder to us all that we need to prepare for tough times during the good years. We need to save, build up our emergency funds, invest in our career development and the like. Then, when times aren't so good, we'll have something to fall back on.

Poetic Justice?

This article amused me. The summary:

Glenn Steil Jr. can empathize with the thousands of Michigan residents trying to find a job during one of the worst economic times of the last half-century. Steil was a state lawmaker until New Year's Day and now needs a new job himself.

The Republican from Kent County's Cascade Township is one of 44 members of the Michigan House who left office because of the state's term limits law. Relatively few of them have found new jobs. The task of finding new gigs will be tougher than usual for this year's crop of term-limited lawmakers because of Michigan's highest-in-the-nation unemployment rate, which in November reached 9.6 percent — the highest monthly rate since March 1992.

It doesn't amuse me because Steil is out of a job (he was actually a good lawmaker, IMO), but that politicians are now getting a taste of their own medicine a bit. They've helped drive our state into the ground (of course, Detroit's problems are key too, but the government certainly hasn't helped the situation) and are now feeling the impact first-hand. Too bad the main person responsible for our problems isn't in the same situation.

Why We Should Take a Solutions Approach to the Crisis and Look at Some Things Differently

The following is an excerpt from The Little Book of Bull Moves in Bear Markets: How to Keep Your Portfolio Up When the Market is Down (Little Books. Big Profits) by Peter Schiff. I am NOT endorsing this book and I'm sure many of you will disagree with this piece. That said, I'm always open for new thoughts/ideas/comments, and I felt his writing was good enough to share.

I don't think we're going to see any light at the end of the tunnel until we have a clear, objective understanding of how we got into this mess in the first place. There is a tendency whenever major problems occur in the economy to place blame on external factors and to assume that the external factors can be prevented from causing similar problems in the future by expanding the government's
regulatory powers. The problem I have with this kind of thinking is that it makes government bigger and more intrusive without ever getting at the root of the problem, which is usually the government itself. The other thing it does is reduce the sphere in which market forces move freely and would otherwise prevent the problem from recurring. Finally, as we face the challenge of rebuilding an economy, whatever lesson might have been learned from the government's role in the problem is lost on us because it was never brought to light in the first place.

The real estate meltdown provides an excellent example. Here we are about to give the Federal Reserve Board new powers to regulate mortgage lenders, appraisers, and other parties to a crisis that would never have occurred if the Fed hadn't taken upon itself the responsibility, better left to the free market, of determining what interest rates should be, particularly true with the absurdly low rates set after the bursting of the tech bubble and the tragedy of September 11, 2001.

The Fed's decision to set rates at artificially low levels to stimulate activity and growth in the real estate sector was directly responsible for the environment that naturally spawned such innovations as teaser rates, negative amortization loans, and other variations on adjustable-rate mortgages, which in turn had consequences that were extremely problematic. But the mortgage brokers and lenders weren't responsible for the root cause of the crisis, nor were the investment banks that securitized the mortgages, nor the hedge funds and institutions that purchased them. The Federal Reserve was. Yet the Fed is now being rewarded with additional powers to regulate Wall Street as well. So the fox ends up guarding the henhouse, which is bad enough, but anybody looking for the guiding lesson of the crisis probably wouldn't find it. The real lesson is this: Interest rates represent the price of money (or more precisely, the price of credit). A government agency has no more business deciding what the price of money should be than it has deciding the price of a pair of tennis shoes. Why are we so surprised that central government planning works no better when it comes to setting the price of money than it does in setting prices for other goods?

The price of oil is being blamed on speculators, big oil companies, environmentalists, and other external factors -- but never on the Federal Reserve, which created the inflation that debased the dollars in which oil is traded and is thus principally responsible for increased oil prices. Priced in gold, which adjusts for inflation, oil has actually changed very little in price.

What worries me most, however, is the almost automatic backlash that attributes the present economic collapse to a failure of capitalism and free-market economics and turns it into an argument for expanded government. Never mind that government created a crisis that the free market would have avoided altogether; the problem with this case of mistaken identity is that it almost certainly will result in expanded government, much as the New Deal did during the Great Depression. Of course, the greater problem today is that we can barely afford the old New Deal, let alone the modern version we're about to be dealt!

The approach we need to take to our present crisis is not to expand government, but rather to understand government's role in creating the problem. The solution is to limit and control the power of government, not to create more unnecessary regulation to interfere with the free market forces that would have prevented the problem.

Thoughts on the Upcoming Presidential Election and How It Might Affect Our Economy

I think what we've learned from this historic economic breakdown is that it represents a colossal failure of government planning. When you have the government taking control of something as important as setting interest rates, this is the kind of disaster you get.

At this critical political juncture, are we going to compound the problem by giving the government even more power, making it even bigger, and putting it in a position to do even more damage? The alternative, of course, is letting the free market self-correct, which I believe in strongly but which is not, I'm afraid, the way Americans are inclined to lean in a time of economic crisis.

The impending failures of Freddie Mac and Fannie Mae, events I forecast in my book Crash Proof, in commentaries on my web site, and on television, and the government's intention to bail them out, is a huge step in the wrong direction. These quasi-governmental agencies, with their implied government guarantees, provided much of the air that inflated the housing bubble, and should be
allowed to fail. Instead, they will be pumped up with more government money, compounding the fundamental problems in the housing market and worsening inflation.

In fact, early on in the housing crisis, most in government and on Wall Street were still so clueless that these agencies were actually touted as being the solution to the problem. In sharp contrast, I wrote in an August 2007 commentary entitled "It's a Shoo-In":

"In order to breathe life into the dying secondary market for nonconforming mortgages, some have suggested that Fannie Mae and Freddie Mac be allowed to buy jumbo mortgages. This overlooks the problem that many of these larger mortgages also feature adjustable rates that will likely show greater default levels when payments reset higher. Allowing Fannie and Freddie to buy larger loans now merely sets up a more expensive federal bailout down the road, as both of these entities themselves will likely need to be bailed out when the conforming ARMs they already insure go bad as well."

Bailing out Freddie and Fannie, as well as all schemes to bail out overextended homeowners and artificially prop up home prices are doomed to failure, and will only compound the problems they are attempting to solve. The recent failure of California-based IndyMac, a former leader in nontraditional mortgage lending, resulting in long lines of angry depositors, is but the tip of the iceberg. As more banks fail and the FDIC runs out of funds, the Fed's printing presses will be operating until they run out of ink.

Without getting into a contentious political discussion, I do see a parallel between the 1976 election of Jimmy Carter and the Reagan succession in 1980. Carter had taken office at a time when inflation and unemployment were issues. Voters were disenchanted by Gerald Ford and alienated by his pardon of Richard Nixon, whose abuses of power were still very much on their minds, and whose failed policies led to higher inflation and unemployment. The mood was very strong for a change from the traditional ways of Washington. The economy was so bad that Gerald Ford was even challenged in the primary by Ronald Reagan, who at the time was dismissed by the media and the party elites as too outside the mainstream to be electable. Carter ran as a Southern modernist and Washington outsider. He promised change and won. A similar situation exists today.

The Carter administration proved to be a turnoff and a disappointment for a majority of Americans, as the bad economy he inherited got even worse under his stewardship. As a result, the emergence of Ronald Reagan, an improbable candidate under normal circumstances, was actually welcomed as a timely alternative. Voters generally bought his mantra that government was the problem, not
the solution, and he won the election. Reagan and Federal Reserve Chairman Paul Volcker took on double-digit inflation with double-digit interest rates, inflation was pronounced dead, striking air controllers were simply fired in a no-nonsense way, and the Reagan years generally got high marks. The mainstream world was now finally safe for a conservative promising limited government, provided his predecessor had exhausted the public's tolerance for big government. Unfortunately, Reagan never really followed through with his promise to rein in government spending, the consequences of which we are struggling with today.

Similar to Gerald Ford, John McCain had one challenger in particular whose message of limited government and sound money resonated with a small but organized minority. I am referring to Congressman Ron Paul, who, despite being marginalized by his other opponents and the mainstream media, struck a chord unheard elsewhere in modern politics, and managed to raise more money than any of the mainstream Republican alternatives.

The 2008 election features two candidates likely to make the current problems worse. Ironically, Barack Obama, whose policies would likely prove even more disastrous than McCain's, probably represents the lesser of the two evils. This is because Obama is perceived to be the candidate of big government, while McCain has wrapped himself in the false trappings of small government.

In the unlikely event McCain wins, he will be the Herbert Hoover of the modern era, completely discrediting capitalism in the minds of the electorate and setting the stage for a disastrous ideological counterreaction in the election that follows.

If Obama wins, however, while the economy will fare even worse, it will at least be clear that big government is to blame. By the end of Obama's term, the voters will have had such a bellyful of noxious government solutions that the mere thought of any more will put them squarely at the wheel of the porcelain bus. In such an environment, a Ron Paul type of Republican, dismissed as unelectable à la Ronald Reagan in 1976, may actually be in a position to capture the White House in 2012 and finish the job Ronald Reagan started.

Ultimately, we are going to need a free-market president, who understands sound money and Austrian economics and has the toughness, courage, and leadership talent to take the bull by the horns and begin the process of shrinking government, dismantling programs we can't afford, minimizing regulation and taxation so businesses can operate without competitive disadvantages, and generally taking the steps that will put us on a path to becoming a nation of savers and producers once again. If suffering though four years of hellishly misguided big government is the price we pay for true reform, it may in the end be worth it.

What is Common for Personal Finances and Body-Building?

The following is a guest post from Kacper Wrzesniewski who wirtes a blog about personal development, finances and investing.

Personal finances and body-building are among few of my passions. I dedicate a lot of time to them and I definitely find this time is not a waste. Both cases are great investments that constantly bring a lot of positive results.

As I am always looking for various analogies, patterns and ideas that are similar in different aspects of our lives, I also decided to find what common for personal finances and body-building is.

• No instant effects -- Ok, there are some black hat techniques and hacks that may work, but they are high risk level. My advice: be patient. Don’t go for “get rich quick” or “get big quick” schemes. In most cases they are scams or they will waste your money and health. Once again – patience, patience, patience… and the effects will eventually come.

• Start with small steps -- Trying everything you have learned at once is next to impossible and usually this strategy ends with poor results. Start slowly. Set small goals. Don’t spend two hours everyday on gym. Your body will refuse and it will give results opposite to desired. Don’t try to incorporate all the financial techniques at once. This is way too much and there is high possibility you won’t handle everything in a proper way. Cool down. Take small steps.

• Track your progress -- Recently I have written on my blog about tracking expenses. It is one of the best things you can do for your finances. Track also your other financial goals. Track your progress at gym as well. It is essential to constantly add weigh in each of your exercises. Therefore, tracking it is a must. You will not forget how much you have lifted last time, and as a bonus it is a great motivational technique.

• Failure -- Failure is not a bad thing. You should expect failures and learn from them. At gym, when your muscles fail to lift, that means you have just taken a step beyond your comfort zone. Your body will adapt and you are about to progress. When you are investing on stock market, it is impossible to not to experience any failure. There are no investors that find only gainful picks. Remember to take conclusions and learn from your failures. As you can expect, tracking all your transactions, as well as other financial actions, might be really helpful there.

• Constantly increase your knowledge -- Both personal finances and body-building are dynamic disciplines. Things that worked few years ago can be no longer effective. Of course there are some timeless ideas and rules. But if you want to be good at what you are doing, then keep learning.

• Learn from better than you -- Find someone who is getting results that you want. Learn from that person, ask question, ask for advices and follow them, discuss with that person. Don’t be afraid. People love to talk about their passions and experiences and if person you ask is not a real dork, then you have big changes to get some help.

• Improve your health and diet -- Frugality and body-building teach you a lot about your diet and food. Most of frugal food habits and hacks; as well as diet advices that you can hear from your coach or nutritionist have great, positive impact on you health and wellbeing. Don’t miss these benefits.

• Satisfaction -- Finally, when you experience progress, it gives you a lot of satisfaction, joy and it motivates you to go farther.

What to Do About Recent Economic Events

For those of you interested, here are my thoughts on what individuals should do in these uncertain financial times (I wrote the post for the Consumerist.)

And for a different, though similar, set of thoughts, here's a video about how to handle the economy's changes.

The Financial Crisis is Worse for Older Americans

While the stock market meltdown over the past few weeks and the housing problems of the last couple years have been tough on many of us, we have time to recover before retirement. That is not the case for older Americans who were hoping to retire in the next few years. A summary of the situation:

For millions of Americans approaching retirement, events of recent weeks are delivering a clear message: Not so fast. With nest eggs shrinking, housing prices still falling and anxieties about their financial future growing, the oldest members of the baby-boom generation are putting the brakes on plans to leave the office.

A few thoughts for the rest of us:

1. This is why it's good to have as big of a retirement cushion as possible. In case something like this happens again, we can still retire as planned.

2. That said, you may want to save for retirement assuming their will be no Social Security help, then use Social Security payments to be your buffer/margin for error. Then again, it's not sure that SS will be around when many of us retire.

3. This serves as a reminder that as you approach retirement, it's good to move assets into less risky/volatile options to protect you as much as possible from large, negative impacts to your investments.

Living Within Our Means Will Hurt

Here's a piece from Washington Post writer Steven Pearlstein. It ran in my Sunday paper with the title "Living within our means will hurt" (a different title than in the link -- though the contents are the same.) With a title like that, it certainly caught my attention. Here are some of the key parts of the piece that I especially liked:

What is really going on, at the most fundamental level, is that the United States is in the process of being forced by its foreign creditors to begin living within its means.

Oh, no! Not that! Not living within our means! How horrible!

Two important things happened as a result of the availability of all this cheap credit.

The first was that the price of residential and commercial real estate, corporate takeover targets and the stock of technology companies began to rise. The faster they rose, the more that investors were interested in buying, driving the prices even higher and creating even stronger demand. Before long, these markets could best be characterized as classic bubbles.

At the same time, many companies in many industries expanded operations to accommodate the increased demand from households that decided that they could save less and spend more. Airlines added planes and pilots. Retail chains expanded into new malls and markets. Auto companies increased production. Developers built more homes and shopping centers.

Nice, short explanation of what got us into the economic mess we're now in. But the fix isn't so easy:

In the end, however, there is only so much the government can borrow and so much the government can do. The only other choice is for Americans to finally put their spending in line with their incomes and their need for long-term savings. For any one household, that sounds like a good idea. But if everyone cuts back at roughly the same time, a recession is almost inevitable. That's a bitter pill in and of itself, involving lost jobs, lower incomes and a big hit to government tax revenues. But it could be serious trouble for regional and local banks that have balance sheets loaded with loans to local developers and builders who will be hard hit by an economic downturn. Think of that, says Dugger, as the inevitable second round of this financial crisis that, alas, still lies ahead.

So, while "live within your means" is good advice for each of us to use when managing our finances, if everyone does it, the economy goes into the toilet. Somehow, I don't think the masses will start to live within their means (unless they have no choice -- forced by tougher credit standards), so my bet is we'll be ok. What do you think?

Lives of the Super Rich

I found this piece from CNBC on lives of the super rich to be quite interesting. A few selected quotes to give you a flavor for what it's about:

When most of us need a new car we take a drive to the local dealer. When Durham looks for an automobile he flies to Europe.

“I had a nail in the tire [of an expensive car]," he said. "It cost $22,000. Then I got another nail in it. And so I had to change the same tire twice.”

Many of the cars in Durham’s collection are worth between $1.5 million and $2.5 million. In total, he has over 70 cars, about 20 of which are housed on each level of his garage.

Durham grew up in a middle-class family — a typical background for the Super Rich. Today he lives a life of opulence in which money, or the lack of it, is rarely a concern. His main residence is a 30,000-square-foot, eight-bedroom home with a pool, two state-of-the-art kitchens, three bars, an exercise room, home theater and about 20 televisions, including two in his bathroom mirror.

The divorced father of four makes frequent use of a private jet that can take him, on very short notice, wherever he’d like to go. A few times a year he flies to Miami, where he keeps his four-bedroom, 100-foot yacht. The maintenance of this $6 million yacht runs Durham $5,000 a month — just for docking fees. That’s a steep bill, but for Durham it’s all a part of the game.

For him and many like him, making money when you don’t need any more, becomes a way to keep score in life.

“I don't think anybody can sit there and say, you know, 'I need another billion dollars,'" he said. "Does another billion dollars help Warren Buffet? No. He doesn't need it to live on. He can probably make it on the first 50. But why does he keep going? Because it's a challenge. And I think that that's really what making money is about. After you get to a certain level where you're basic needs are paid for. The rest of it is not necessary."

I have two opposite feelings on this issue:

1. Good for him. He's living the "American dream", something many people are striving for. He's worked hard, made it, and is now enjoying the fruit of his labor.

2. What a waste. Certainly some luxuries are reasonable -- he's earned them -- but isn't this over the top? How many people could a few of those cars or even the boat maintenance fees feed? There's no mention of charity in his life -- maybe that's because it's a piece about the excess of riches. Then again, maybe he's not very charitable. What a shame.

So, what do you think about these two perspectives? Which one do you think of when you read the quotes above?

Inflation Part 2: The Results of Underreporting Inflation

The following is a guest post from Marotta Asset Management. For more on the issue of inflation, see my post titled Inflation and Its Impact on Retirement.

Officially, inflation today is about 4%. Unofficially, it is over 7%. Inflation at this rate causes serious harm to our nation's economy and its citizens.

Since 1997 the Consumer Price Index (CPI) has manipulated the raw data and significantly underreported inflation. This tactic has saved the government hundreds of billions of dollars. Entitlement program recipients find their benefits reduced every year. And middle-class taxpayers are pushed automatically into ever-higher tax brackets.

Instituted by the Clinton administration and willingly continued by the Bush administration, this hidden tax burden transcends the political ideology of conservative and liberal. It threatens the idea of limited government.

As economist Milton Friedman said, "Inflation is the one form of taxation that can be imposed without legislation." John Maynard Keynes agreed. He commented, "The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." And none other than Vladimir Lenin wrote, "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

Lenin may have intended to grind just the upper class. But in America, everyone ends up as grist for the mill. Average Social Security recipients, that is, retirees, are crushed the most. Technological advances are factored out of Social Security cost-of-living adjustments. Seniors are left to live Amish lives in a digital age.

Productivity and technological advances should result in dollars that are capable of buying more each year. If inflation was being reported accurately, simply putting dollars in the bank would result in a 3% boost in purchasing power. These technological advances are the fruits of capitalism and innovation as businesses develop better products and services. Why should the government deny people the advantages of business innovation by deficit spending and increasing the money supply?

In fact, the CPI is deceptively labeled. The name takes something that government has done to confiscate capital wealth and blames it on businesses: rising consumer prices. But businesses aren't at fault. If the CPI was accurately named, we would call it "Capital Piracy by Inflation."

Instead of seeing their money grow in value, people with dollars in the bank experience the equivalent of an extra 3% tax on their savings. People on fixed incomes such as Social Security experience the equivalent of a 3% reduction in their benefit payments. Like any compounded taxation, the cumulative effect over the past decade has taken its toll. The lifestyle of millions of the elderly has suffered as a consequence.

Middle-class workers aren't exempt either. The alternative minimum tax (AMT), established in 1970, is not even indexed to official inflation. So middle-class taxpayers are pushed higher and higher into a tax intended for the ultra rich. The AMT punishes taxpayers for having children or living in a state with high taxes. Thus being hit with the AMT turns many of the tried-and-true rules of thumb on taxes upside down. Ironically, many of the wealthiest taxpayers are now avoiding AMT penalties entirely. Those with large incomes pay enough tax to avoid the AMT while the middle class is penalized.

There's another concern too. Underreported inflation also masks the current recession. Official first-quarter real gross domestic product (GDP) growth was 0.9%. Current reports suggest that annual economic growth for 2008 will be 2.4%. But if official inflation is at 4% and actual inflation is over 7%, then real economic growth is 3% less than reported. That means growth for 2008 isn't 2.4% but rather -0.6%. If it feels like a recession, don't let official government statistics fool you.

During inflationary periods, finding capital is challenging. No one wants to loan expensive dollars today only to be reimbursed with dollars that are worth less in the future. This situation also makes it difficult for companies to capitalize their businesses. Why risk valuable dollars today to create and expand production when inflation devalues the rewards significantly? So of course businesses are not investing. First-quarter fixed investments were down 7.8%.

We risk a business environment similar to the 1970s. Inflation then caused declining price-to-earnings ratios and hindered small business capitalization. Small businesses are responsible for the majority of GDP and job growth. Inflation slows the economy and increases unemployment. Drastic steps by the Reagan administration were necessary to deal with the stagflation of the 1970s and put the economy back on a secure footing. Our current malaise may require some equally bitter measures.

Historically, people worldwide counted on the U.S. dollar holding its value. We sometimes forget that a stable currency is not a given in every country. In the past, people outside the United States were willing to trade their goods and services for nothing more than our currency's safe store of value. The result has been a trade deficit where our biggest export has been U.S. dollars. About 60% of all U.S. dollars today circulate outside the United States.

But global confidence in the dollar has been shaken recently. Now foreign markets are not committed to holding dollars. They would rather trade those dollars for some of our real goods and services. All those dollars coming home to roost may be good for our trade deficit. But it only exacerbates the problem of too many dollars in this country chasing too few goods and services.

When we have no reliable way to measure the purchasing power of the U.S. dollar, all statistics calculated in our currency become suspect. How can economists or accountants measure anything accurately when their ruler is made of rubber? And if statistics aren't measurable, then business forecasting is impossible.

All of these are serious public policy concerns. But they don't have to block your personal financial goals. Despite inflation rates that are higher than reported, you can still protect your investments from being ravaged. In the final part of this series, we will describe practical ways you can hedge against excessive and unreported inflation and secure and guard a comfortable retirement.

Inflation Part 1: How the Government Lies About Inflation

The following is a guest post from Marotta Asset Management. For more on the issue of inflation, see my post titled Inflation and Its Impact on Retirement.

Officially, inflation today is calculated about 4%. Unofficially, it is over 7%. Since 1997 the government Consumer Price Index (CPI) has manipulated the raw data and significantly underreported inflation.

Recently I watched the 1997 movie "Conspiracy Theory" starring Mel Gibson and Julia Roberts. Before the opening credits have finished rolling, we understand that Gibson's character is a crackpot cab driver who sees conspiracies everywhere. But our perception changes by the end of the film when we realize for ourselves that some of his theories are true.

For years I've hesitated writing about the CPI, computed by the Bureau of Labor Statistics, for fear of being compared with a paranoid character like the one in "Conspiracy Theory." The message that the government lies to us about inflation and, as a result, quietly confiscates hundreds of billions of dollars from its citizens isn't the easiest message to swallow. It only goes down when accompanied by a healthy draught of political cynicism.

What's changed over the past year, however, is that we are closer to the end of the movie. It is clearer now not only that inflation is running rampant but also that the government's numbers are still ridiculously low. More Americans have come to mistrust official inflation statistics, and therefore they are ready to understand how and why the government skews these numbers and to learn how they can protect their family's savings.

Take 2007 as an example. Bread price rose 7.4%, gasoline 8.2%, health insurance 10.1%, whole milk 13.1%, eggs 29.2%, but according to the CPI, somehow inflation was only calculated as 4.1%. This year to date we have seen an even shaper rise, which still has barely affected the official numbers.

In 1975 programs such as government pensions, Medicare and Social Security were indexed to inflation. With rising inflation in the early 1990s, public officials realized that entitlement programs made government deficits impossible to control. Politically it was just too difficult to cut spending to this program. It was much easier simply to lower their cost-of-living adjustments.

So a commission of five economists in 1996 studied the CPI and issued a report stating that the index overstated inflation by at least 1.1%. Lower CPI adjustments would not only save money in entitlement programs but also raise tax rates mostly among the middle class. Tax brackets, personal exemptions and the standard deduction are all indexed for inflation. Lowering these adjustments has the effect of increasing the tax paid, with the greatest impact on middle-class taxpayers.

The argument that the CPI was overreported went something like this: In 1970 a mid-priced car cost about $3,500. Today, in 2008, the same size car costs about $25,000. After adjusting for inflation using official CPI data, today's car costs $4,515 in 1970 dollars.

It certainly looks like inflation has been significantly underreported, even though the government argues the exact opposite. In their 1996 study, they suggested that although it looks like today's cars are more expensive even in inflation-adjusted dollars and that CPI has been underreported, in fact it is the opposite. They claimed that today's cars are simply better built.

According to their logic, what we called a car in 1970 doesn't even qualify to be called a car today. It wasn't fuel efficient. It had no airbags, no power windows, no power door locks, no heated seats, no tilted steering wheel and no CD player.

The government has decided that the enjoyment you get from all of these extra features is why a car costs more today. Thus you are buying a better model than you did in 1970 and therefore it should cost more. The extra pleasure you get from the car should be measured as your choice, not as inflation.

You can see the problems with these government assumptions. You still need a car today. Apparently, you can't buy what we used to call a car in 1970. A combination of government mandates and changes in market preference have added features. Rather than being able to take advantage of these improvements simply because you are living in the 21st century, these improvements have diminished the value of your currency.

The official term for this type of adjustment is a "hedonic deprecator." If the computers available this year are twice as fast, then the government counts that as 50% deflation. You are getting twice the hedonism for the same dollar, so only half the price is reported in the price indexes. It evidently doesn't matter that you paid the same price. And it doesn't matter that a computer at the old speed won't run any of the new software.

Hedonic adjustments are a way to discount any improvements in productivity. Under the old method, when a reserved Federal Reserve kept inflation in check, productivity improvements resulted in every dollar of your paycheck buying more. Now, an unreserved Federal Reserve deflates the value of every dollar. By counting the bonuses from increased productivity, the government does not need to report the real inflation it is causing.

Not everything is more expensive. Clothes cost less, thanks to continued globalization. And communications costs less too, along with many other electronic gadgets. However even these items are used against consumers. In a concept called "creative substitution," the government CPI numbers did not count electronics when they were expensive but now counts the drop in their price as anti-inflationary.

The government's argument is that very few people owned a calculator when it cost $100. But now that the same calculator can be purchased for $5 and everyone owns one, it should be counted as deflationary. According to this mindset, the fact that your calculator and cell phone each costs $100 less should more than make up for the fact you can't afford to buy basic foodstuffs or drive your car.

With food, the government adjustments are a little more imaginative. They assume if the price of beef goes up, you will eat less beef and more chicken. If chicken goes up, you will choose pork. And if pork goes up, you will eat more tofu. They assume that when the price of something goes up, some people creatively substitute something less expensive.

Lacking any standard for a U.S. dollar, we can make two observations: your currency has been devalued, and this devaluing is not reported as inflation. Standard of living improvements due to technological advancements have been withheld from those who are on fixed incomes and those who keep their wealth in dollar-denominated investments.

It was none other than former Federal Reserve chairman Alan Greenspan who in 1966 wrote, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."

Unreported runaway inflation has made dollars unappealing to hold. This is good for our trade deficit because those outside the United States now want to trade dollars of diminishing value for real goods and services, but it could have detrimental effects on our country and its citizens. Next week we will describe those effects and how to protect yourself against them.

How Much Can the President and Congress Really Control the Economy?

I recently ran into this piece from Newsweek that says President Bush can't do much about the economy. Of course, he has some special problems that many presidents don't -- he's generally unpopular, the Congress is controlled by Democrats, and he's out of office in a few months. Yikes! Besides, there's not much he can do alone. I think he's just hunkering down and will let McCain or Obama handle the problems.

But this gets to a larger question:

How much can the president/Congress really control the economy?

It's a valid question -- one I've been thinking about for a long time. Consider the following:

• If the president/Congress really controlled the economy, wouldn't things always be great? Why would we have recessions, inflation, and the like if they really controlled what our economy did and didn't do?

• Even if control could be established somehow, would it be? We have so many different people (three branches of government, all with their own agendas -- not to mention the individual agendas people in power have) trying to influence what should and shouldn't be done. I'm guessing we'd never reach agreement even if there was a way to control the economy.

• The economy just seems too big for the government to control. So many factors (like business actions, individual decisions, etc.) that impact the economy in MAJOR ways are simply out of their control. And add on top of that the fact that what the economy does globally has a huge impact on the U.S., and it seems their impact is rather minor.

• This said, the government can certainly influence the economy with changes to spending, taxes, laws, etc. But in the short-term, do these even impact the economy that much? And when they do, does anyone even know what the impact will be beforehand? (For example, there are arguments on the ba-zillion different impacts made by only a few changes to the tax law.) Or are they just guessing?

• The whole thing seems to be more "luck" for a particular president or Congress than anything else. For example, Clinton lucked into the whole explosion of the Internet (sure, the bubble eventually burst, but it kept the economy hot for a long time.) Sheesh, I would have looked like an economic genius if I was president during this time. And Bush (while certainly making things worse with a war that's costing a fortune and unlimited spending elsewhere) had very little to do with the housing crisis. And is he really to blame for the gas/food prices we're all seeing now? Maybe, but probably not IMO.

So what sort of impact can the president/Congress really have? I think it can be significant in the long-term (five to ten years out) based on what they do with laws, taxes, spending and so forth. But I don't think they can predict in advance what impact their particular actions will have. And even if they could, there would be so much disagreement of what course was best that the actual "best" course probably wouldn't be followed. So, in effect, the economy is on auto-pilot. The government is not controlling it. And while they are impacting it, they don't know how they are actually doing so.

That leads me to this question: from an economic standpoint, does it really matter who gets elected (president and Congress) in the fall? Sure, the candidates have different ideas and what they do will certainly impact us all on the margin, but can they make any real, lasting, positive, quick change to the economy? I don't think so.

There are a lot (most?) of you out there who are waaaaaay smarter on these sorts of issues than I am. I'd appreciate your thoughts/comments on this topic.

A MoneyGram is Different From a CandyGram!

The following is a guest post from Dr. Bonnie Eaker Weil, an internationally acclaimed relationship therapist for thirty years. New York magazine named her one of the city’s top therapists and Psychology Today named her one of America’s best therapists. Her new book, Financial Infidelity, is available on her site.

Many of the ways you think about money are influenced by the ideals you grew up with as a kid – how did your parents handle money? Were you aware of a lack of money? Were you told that your family couldn't afford things? Were you given items or money as a reward? Analyzing why you act the way you do toward money can often stop a destructive cycle where people find themselves caught in an endless power struggle over money with their significant other.

Analyzing your family “moneygram” can help you do this. Asking certain questions will give you a window into why you react the way you do to money-related issues, and it will help you understand your partner better as well. Analyzing these “scripts” that have been handed down from generation to generation can help you change your money legacy. The money legacy most people leave is subconscious – a reaction to characteristics and traits they probably got from their families but aren't necessarily aware of. By addressing these questions, you'll be able to turn your legacy from unconscious to conscious, and hand down a different set of values and decisions.

Some of these questions go far back, and may require help from your parents or other relatives. Begin by asking and answering these questions about yourself and any siblings you have:

• Do you/they have successful careeres?
• Are you/they married?
• Has anyone been divorced? Remarried?
• Are you aware of any financial infidelities?
• Has anyone claimed bankruptcy?
• Are they savers? Spenders?
• Are they risk takers or are they cautious?
• Do any financial arrangements exist such as prenups or trust funds?

Then, work backwards answering these questions for your parents, aunts, uncles, and grandparents- maybe even your great grandparents!  Of course, these conversations will likely be challenging – as many people don't like to open up about these topics, even in familial situations. Obviously, don't press too hard as you don't want to alienate people. But do try to make it clear that you're only doing this for your success and well-being, and the well-being of future family members.

The answers to this “moneygram” will help you discover money behaviors and relationship dynamics within your family. This analysis will allow you to predict, prevent overcome and solve money behaviors you face now – and in the future.

All About Oil

The following is another guest post from Free Money Finance reader Rod Ferguson. Though not strictly a personal finance piece, I find this very interesting and think anyone who drives a car will as well.

Oil and Its Uses

Global output of oil is approximately 88 million barrels every day, or about 1,018 barrels per second – and demand is increasing.  People all over the world use oil to move around, by means of planes, trains, or automobiles (yes, I saw the movie.)  But people also eat oil (in the form of fertilizers, refrigeration, processing) and wear oil (in the form of synthetic fibers.)  People rely on oil to stay healthy (in the form of plastics) or get well (in the form of petroleum-based medicines).  Our entire distribution system in the US is based on oil; imagine of the trucks, ships and trains stopped running for just one day – while we’d all appreciate the lack of trucks on the road, our stores would empty out is short order.  Oil is as essential to our lives today as the very air we breathe.

What is Peak Oil?

“Peak Oil” is shorthand phrase for describing the condition of oil resource depletion, or more specifically, the peak in our ability to produce (meaning extraction and refining) this resource from the crust of the Earth.  The “peak” comes when we have produced half of the existing reserve; from the point of the “peak” on, easy to extract and process oil will decrease and production will become more costly, both in money and energy. 

People have, naturally, extracted the easier-to-access, cheap and clean oil first. The first oil well was built and began pumping in Pennsylvania in 1859.  Subsequent oil wells were also drilled on land, usually found near the surface, were under pressure, ‘light’ (which refers to the specific gravity of the oil) and 'sweet' (which means low sulfur content.) These wells made getting to the oil easy and the oil itself was easy to refine; moving the oil to refiners was quick and shipping refined petroleum to its usage centers was fast and efficient. Most of these wells reached peak decades ago, with the exception of some larger deposits in the Middle East.  What undiscovered oil that remains is more likely to be offshore, far from refineries, in smaller deposits and of lesser quality.  Producing this oil will cost more and take more energy turn it into gasoline than before; land-based deposits will encounter the same problem the emptier the deposit becomes.  Eventually, all deposits will reach a point where the cost (both in money and energy) to produce a barrel of oil will exceed a barrel of oil.  While we can manipulate the cost in money somewhat, doing the same to the energy cost is difficult; if it takes a barrel of oil to produce a barrel of oil, then why produce more oil?

When will we hit Peak Oil?

In 1949, a geologist named M. King Hubbert came up with the idea of Peak Oil and began to graph deposits in the US.  In 1956, he predicted a US peak somewhere between 1965 and 1970; we hit Peak Oil in 1970/1971.  Hubbert later graphed deposits around the world and made the same prediction about global production peaking between 2000 and 2005.  The dates vary across the world, but production has peaked in almost every major oil-producing region on the planet. 

Have we hit Peak Oil globally? It’s hard to tell; back in 1970 the prediction was forgotten as 1970 had the highest production levels in US history (3.52 billion barrels).  It wasn’t until many years later, when our oil production dropped significantly and our imports skyrocketed that we were able to pinpoint “peak oil.”  Many believe we hit global “peak oil” in May of 2005, but it could be another 10 years before we know for certain.

What does this mean?

In addition to peak oil, we also have exploding global demand as well as a lack of proper machinery to drill and a lack of properly trained personnel to operate that machinery.  Technological improvements have increased efficiency in extraction, but haven’t come close to offsetting the increase in demand; the situation isn’t going to get any better any time soon.  Our current initiatives to create and encourage alternative fuel usage is more than just a desire to control the monthly budget; it may be necessary in our (or our children’s lifetimes) to stop using oil to power automobiles.

My Opinion

Since I first heard about Peak Oil in the late 90’s, I have been concerned about what it may mean for us.  Most of what we think of as civilization is based on oil – if you want to imagine what life would be like without oil, imagine life as it was in the mid 1800’s.  Luckily for me, global production should reach the same levels we were at in the 1960’s by the 2050’s, which should be at the limit if not beyond my lifespan; I will probably have access to plastic and medicine in my sunset years.  But, the next generation might not be so lucky.

What can you do about Peak Oil?  Minimize your petrol consumption as much as you can.  I’ve been carpooling to work for years now; not only does it save money, but I use about half of the gasoline I used to use.  Use public transportation whenever possible; if you can get to where you need to go while reading a book and save money… why not?  Buy a fuel-efficient vehicle; yes, you lose the power, but you save the gas; the other effect of Peak Oil is the price per barrel – it’s now a sellers market.  If you think that oil prices have gotten out of control, you haven’t seen anything yet.

Sign of the Times: Sell Whatever You Can to Keep Eating

Time for a state of the economy update:

• Housing market crashing. Check.
• Stock market in turmoil. Check.
• Gas and food prices running amuck. Check.
• Government giving us our own money back to stimulate economy. Check.
• Fed cutting interest rates faster than American Airlines can say "your flight has been canceled." Check.

Ok, so we're in financial trouble.

But how much trouble? MSN Money points out that for many Americans, things are getting desperate enough that they are selling whatever possessions they can at whatever prices someone is willing to pay:

Struggling with mounting debt and rising prices, and faced with the toughest economic times since the early 1990s, Americans are selling their prized possessions online and at flea markets with rising frequency.

To meet higher gas, food and prescription bills, they are selling off heirlooms like Grandma's dishes, as well as other belongings. Some of the household purging leaves sellers agonized.

How many people are impacted? It's very difficult to tell, but here's what MSN Money uses as evidence of this trend:

At Craigslist, which has become a kind of online flea market for the world, the number of for-sale listings has soared 70% since July. In March, the number of listings more than doubled to almost 15 million from the year-ago period.

Craigslist CEO Jeff Buckmaster acknowledged the increasing popularity of selling all sort of items on the Web, but he said the rate of growth is "moving above the usual trend line." He said he was amazed at the desperate tone in some ads.

I'm not sure whether or not to buy this as a trend. Sure, selling your extra stuff has always been a great way to raise extra cash, but are things really so bad that people are selling their grandmother's teapot for $6 on eBay simply to pay for gas? Then again, look at the list that started this post. Maybe a large ground-swell of ditch-whatever-you-can sellers isn't that far from reality.

I Told You So

I just have to bring up the issue of bad mortgages again. Most of you won't remember this, so let me give you a bit of history.

I've written all sorts of posts on what I call "evil house loans." A few of them are as follows:

• 50-Year Mortgages
• Interest-Only Mortgages
• No Money Down Mortgages
• Other risky loans 
• 43% of First-Time Home Buyers Put No Money Down

In almost every case where I discussed these issues, I had one (or several) people tell me how I was wrong, how the loans were actually good, etc. I even had a mortgage broker join the fray and we went back and forth on the issue. But those people are pretty quiet now that we've seen the truth in what I was saying -- that many people who had no business borrowing as much money as they did were over-extending themselves and asking for financial disaster. And many of them are now living with the consequences of that financial disaster.

It's funny for me to see the press tout that people are headed back to "traditional" plans for buying homes -- selecting a home you can afford, putting a good downpayment on it, and so on -- exactly the sort of stuff I recommend in my formula for buying a house.

People, this isn't rocket science (otherwise, I couldn't write about it.) Personal finance really just boils down to a few, simple concepts that everyone can understand and everyone can follow. If you do decide to follow them, you'll end up being well off. If you don't, well then, you're going to face challenges in your finances.

I'm not saying "I told you so" to brag or to say "see, I was right!" but to remind you that next time you're tempted to go against sound financial principles, think long and hard before you proceed. The people who took out subprime mortgages thought they were "getting a good deal" or "making a good money move" or simply over-extending themselves. They went against wise financial counsel, thinking they were smarter than everyone else. And now we're seeing the fruit of those decisions, and it's not good.

Don't let the same thing happen to you.

Who's to Blame for America's Mortgage Mess?

There's been a ton of finger-pointing going on in regards to the subprime mortgage mess here in America. Banks are to blame -- investors are to blame -- the government is to blame -- individuals are to blame. No one wants to take responsibility for their own actions (what's new about that?) but sure can tell you why it's someone else's fault.

Here's a piece from Money magazine that says the right (or wrong) mortgage broker can make or break a loan and the people getting the loan. Let's start with the facts:

In the next five years, 1.4 million Americans will see their mortgage payments more than double. Already, half a million homeowners are 90 days behind on their payments. Foreclosure rates are up 30 percent from 2006.

Yep, the news isn't good. We've heard it over and over again.

Then Money asks the "blame" question I noted above and pins the tail on the broker donkey:

How did so many end up in trouble? Was it consumer overreaching or a bull market in bad advice? Many consumer advocates and legislators believe that the latter played a big role - and are blaming mortgage brokers, the independent agents who in the past few years have sold nearly 70 percent of the nation's home loans.

"We think brokers bear a lot of the responsibility for placing borrowers into these unaffordable loans," says Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. Critics like Fishbein warn that the system gives brokers powerful incentives to push consumers into toxic loans and little to fear if their customers can't handle them.

If you want to see what else they say, click through and read the article. But I'm stopping here at this point and making a few comments:

1. All financial planners, advisors, brokers, investment advisors, tax planners -- all the groups set up to "help" you with your money -- are compensated for doing so. Some (most?) are knowledgeable and fair (that's not to say their services are worth the cost, but that's a different post). But because money is involved, many will do close to whatever it takes to get you to buy whatever they are selling. And if that means setting up a deal that's good for them and bad for you, they'll do it. That's why you need to educate yourself about personal finances -- so you can at least understand the basics of what any advisor might recommend.

By the way, if you want more of my thoughts on this line of thinking, see these posts:

• Why Your Planner Wants You in Debt

• Would You Take Advice from a Financial Planner Who was Doing Poorly Financially Himself?

• Thoughts on Financial Advisors

• Make Sure Your Financial Advisor is Not a Loser

• Another Financial Advisor Can't Manage His Own Finances (Don't Worry, No One Else Can Either)

2. As such, I have no doubt that some mortgage holders were "duped" into signing up for a bad mortgage. Maybe even a good amount -- 20% or so (this number is a big guess on my part -- it's just my sense of how high this part of the problem could be.) But who's fault is that?

Consider this scenario: I go to the car dealership and see a great car I've been wanting. I decide to buy it and I give them $30,000 for it. I drive away happy. Four months later, my friend Bill tells me about his new car. It's the same car I bought and he bought it at the same time I bought mine. But his price was $20,000! I'm outraged! Obviously, this is the fault of big business taking advantage of the small guy! We need to get the government involved! We need legislation! It's everyone's fault that this happened to me, right?

No. The reason this happened was that I was an uninformed consumer who did something stupid. I didn't check around for prices. I didn't research the car-buying process. I didn't educate myself prior to buying the car. Whose fault is that? It's mine, of course!

So whose fault is it when people buy mortgages that are stacked against them? I think you know my answer to that. Why can't people admit they made a stupid mistake and take some personal responsibility for heaven's sake?

Now before I get a ga-zillion "but what about this case" or "what about these sort of people" comments, let me say that I'm sure there are some people out there who may have tried everything possible to do it the right way and still ended up burned. But these (and others) in my opinion are the exception. Let's not rationalize away the fact that most people got into this mess by themselves by citing exceptions in the situation. Exceptions are just that -- exceptions to the rule (or, stated another way, opposite of what happens in the majority of the cases.)

3. My experience in counseling people is that the majority of people will spread themselves as thinly as they can financially to buy the biggest house they can. Then if something impacts the perfect scenario they set up in order to afford the house (which it always does) -- something like an accident, job loss, layoff, child birth (and one parent quitting work), and so on -- the financial house starts to crumble.

Yes, I'm sure many brokers aided people in their efforts to stretch as far as possible to get that "dream" house, but again, whose fault is that for agreeing to such terms? And don't say they didn't know what they were agreeing to. That argument simply reinforces my point that they should know what they're agreeing to before the commit to it.

4. Besides, who needs a mortgage broker anyway? Don't people know you can simply make a few calls to get competitive rates and get a mortgage without a broker?

5. Now it's likely that the government is going to step into the fray. That's just what we need. If there's any way to make a bad situation worse it's to get the government involved. We'll end up with a mish-mash solution that's better for the political careers of those in Washington than for the people that need help.

Yeah, I've got an opinion on the issue, huh? ;-)

Sorry to rant, but it seems like much of this could have been avoided if people simply spent as much time managing their finances as they spend deciding what to have for dinner.

Going Against the Flow

FYI, as I post this, it's 9:55 am on Thursday, August 16, 2007. The post won't go live for another hour or so, during which the market may tank more, go up, or remain flat. Whatever happens, it won't influence my thoughts and convictions detailed below.

With all the doom and gloom over the stock market, the real estate market, the economy, etc., I thought it was time for me to comment on what I'm doing during these "troubled" economic times. As usual, you can take what I'm about to say or leave it. I'm certainly no expert, but I can say that I've done well the past couple of decades following what I'm about to tell you.

Here are my thoughts:

1. It's hardly ever as bad as people think it is. The media feeds the frenzy that the sky is falling because that's what the media does (see U.S. stocks set to tumble over credit worry and New home construction slowest in decade as examples). But the hyped-up fear of the unknown is usually worse than reality. And the market is currently reflecting the full force of the (unknown) bad news. (Yes, additional "bad news" may send the markets down more, but that's because of what happens due to point #4 below.)

2. If it does turn out to be as bad as everyone thinks it is, that's already reflected in the stock market. At some point, it will reach the bottom and go no further. I personally believe that we're not far from that point.

3. If it's worse than everyone thinks it is, I believe the US economy is strong and resilient enough to bounce back. It may take a few years (like with the Internet bubble), but past history will show that the economy usually comes roaring back. And if the US economy goes into a downward tailspin and never recovers, we'll all have much more to worry about than if our investments are doing well or not.

4. When everyone says things are really, really bad, that's the time to buy stocks. The market is a herd of lemmings following one another up in good times and down in bad times. Lately, there's been so much negative press about the housing crisis that everyone's saying the bottom's falling out. And when everyone begins to act on this information, it becomes a self-fulfilling prophecy. But the basic, fundamental value of most of the S&P 500 stocks has changed very little in the past few months. Yeah, they may take a hit for awhile, but when the tide turns and the lemmings start to say things are all better again, they'll skyrocket.

5. These four reasons are why I'm currently going against the flow and buying extra shares in index funds (i.e., buying stocks on sale.) It may take years for my current investments to pay off, but it may not. No one knows. But whenever they do go up, I think they'll go up strongly.

6. Why are the "keep your debt and invest instead" advocates silent lately? And those who thought zero-interest loans and all the other wicked forms of debt are pretty quiet too. What happened to their boldness? :-)

7. In short, it's times like these when cash and no debt are kings. If you have no debt and a decent amount of cash, you can get a piece of property for a steal of a deal. This is one reason I'm currently in the market for a new home. I can get a place worth twice what my current home used to be worth for 20% to 40% (or more) off it's "worth" a couple years ago. And why can I do this? Because the housing market's in the tank and I have no debt and enough for a good down payment even if I don't sell my current home.

8. How did I get myself in such a good financial position? By following the principles I write about here every day. The principles I write about aren't theory to me -- they are what I do myself, and that's what I share here. And they work -- if you stick with them over time and just keep doing the basics. I'm not trying to brag -- there's nothing to brag about -- this stuff is so simple that anyone could do it. But there are often a million miles between knowing what to do and actually doing it, and that's the reason many people aren't better off today.

Ok, I've blathered on for long enough now. In short, I'm going against the flow. I may be wrong (heaven knows that wouldn't be anything new) or it may be years before I see the fruit of what I'm doing now. But I'm willing to take those risks because in the end, it's never as bad as it seems and things are bound to get better.

Mary Poppins, signing out. ;-)

How the Middle Class Can Get Back on Solid Financial Ground

Ok, I've calmed down enough that I can talk about this article without my blood pressure shooting up -- but it's taken several weeks for me to get to this point.

I'm talking about a Parade magazine article titled Is the American Dream Still Possible? in which Parade spends three pages bemoaning the fact that America's middle class is so hard-pressed financially, people are fighting to keep the American dream alive, and blah, blah, blah, blah. It's really a bunch of rubbish -- their conclusions that is. Their basic thought is that it's difficult for middle class Americans to make it these days -- that they are struggling just to get by. Garbage.

The piece is not a total waste. In fact, there's some good information here that tells what's REALLY going on. It's just that Parade has some sort of agenda and is not willing to look at the facts. But that's just what we're going to do in this post.

Before I do that, let me say that I am aware that there are truly poor, disadvantaged people in America who are genuinely struggling. That said, that's not who Parade is talking about. They surveyed 2,200 Americans in the "middle class" -- people making $30,000 to $99,000 a year -- asking them their thoughts on money, how they were doing financially, and the like. This isn't your down-and-out crowd -- these people are making decent money. They shouldn't be struggling. Yet, according to Parade (and the respondents themselves), they are. Why? Look at these facts from Parade's survey:

• The savings rate for Americans is the lowest it has been in 73 years.

• Credit-card debt is at an all-time high, averaging $9,312 per household.

• 66% say they tend to live from paycheck to paycheck.

• 47% say that no matter how hard they work, they cannot get ahead.

• Nearly 83% say that there is not much money left to save after they have paid their bills.

I'll be brief about this: these people are simply spending more than they earn, racking up tons of debt in the process, and making stupid financial mistakes like taking out interest-only and no-money-down loans. What do they expect? Do they think they can spend whatever they like and everything will be fine? Come on, people!!!!! Hello????!!!!!

Yet they describe themselves as "struggling" and have quotes like the following:

• "The words retirement and vacation are not in our vocabulary."

• "For most Americans, the traditional American Dream is a pipe dream."

• "It used to be that if you stayed with your job, you were rewarded."

Well, if you spend like wild hyenas, retirement, vacation, and the traditional American dream are pretty much out of reach. And as far as staying with a job and being rewarded goes, people are rewarded in their jobs. It's called PERFORMANCE. That's what they are rewarded for -- not longevity.

So what do I suggest the middle class people do to get back on track? Here goes:

1. Spend less than you earn. This also means to quit borrowing to support an over-extravagant lifestyle.

2. Pay off debt -- credit card debt first and then get out of all other debt.

3. Establish an emergency fund so when a setback occurs, you're prepared for it.

4. Start to save, invest, and prepare for life's big expenses like college for the kids and retirement.

It seems simple to see it typed out -- just four easy steps -- but it requires discipline, something most Americans don't have much of when it comes to money.

Think it's impossible to save money because you earn so little? Check out page 30 of Kiplinger's Personal Finance May issue. It tells the story of Bob Przybylski who is 44, single and "invests $16,000 a year, about one-third of what he earns as a producer for a public-TV station."

Also see my post on eliminating 15 years of debt in 14 months. It can be done but it requires discipline. That's the one thing that many middle class Americans are struggling with.

Ok, the blood pressure did get a bit high there, but I'm ok now. ;-)

Over One-Quarter of the Population on the Brink of Financial Disaster, Need Discipline

Here's a frightening money statistic from the March issue of Money magazine:

28% of workers say they are one setback away from financial disaster.

Yikes!!!!

I can't say I'm really shocked to read this, but it's still unsettling to see it in print.

So what can people in this situation do to get out of it? Here are my suggestions:

1. Stop spending more than you earn. This also means to quit borrowing to support an over-extravagant lifestyle.

2. Pay off debt -- credit card debt first and then get out of all other debt.

3. Establish an emergency fund so when a setback occurs, you're prepared for it.

4. Start to save, invest, and prepare for life's big expenses like college for the kids and retirement.

It seems simple to see it typed out -- just four easy steps -- but it requires discipline, something most Americans don't have much of when it comes to money.

Think it's impossible to save money because you earn so little? Check out page 30 of Kiplinger's Personal Finance May issue. It tells the story of Bob Przybylski who is 44, single and "invests $16,000 a year, about one-third of what he earns as a producer for a public-TV station."

Yes, it can be done, as can eliminating 15 years of debt in 14 months. But it requires discipline.

US Debt Clock Running Out of Time, Space

Here's a piece I found a Yahoo about how the US debt clock is running out of time and space. The reason: the debt is getting so big that there aren't enough digit spaces to list it. The details:

Sometime in the next two years, the total amount of US government borrowing is going to break through the 10-trillion-dollar mark and, lacking space for the extra digit such a figure would require, the clock is in danger of running itself into obsolescence.

While this is news in itself, what I found more interesting in this piece were the bits of data about the US debt. A couple key facts:

• Tick, 20,000 dollars, tock, another 20,000 dollars.
• Last week, the "family share" readout on the clock stood some loose change short of 90,000 dollars.

I'm resisting the urge to rant about out-of-control government spending, but just barely. Is it any wonder that 1) average Americans spend like drunken sailors when our government does and 2) people resent paying their taxes when they think of all the waste that goes into piling up this debt?

Tax Cuts Make Money, But We're Spending It All and More!

I'm not turning this into a political blog -- and especially not a philosophical political blog -- but when I see a piece titled "tax cuts make money," I have to post on it.

This article is written by Senator Bill Frist, R-Tennessee, the Senate majority leader and makes the following points:

Many people in Washington have long known a dirty little secret about tax-cut measures: When done right, they actually result in more money for the government.

Republicans' decision to reduce taxes on capital gains and dividends provides a good case study in effective tax policy. When we enacted these measures in 2003, the Congressional Budget Office estimated that revenues would decline by $27 billion over the next two years. Instead, it turned out that the tax cut stimulated investment and increased revenues by $26 billion — a $53 billion difference.

If we really want to avoid burdening our children and grandchildren with debt — which does represent a major problem — we need to reform entitlement programs. Within the lifetimes of today's college students, the combined budgets of Social Security, Medicare and Medicaid will consume all federal revenues, leaving nothing for defense, education, housing or any other program.

Making sure that our children and grandchildren don't face the burdens of debt requires that we reform these entitlement programs and set them on a sustainable course for the future. A sensible low-tax policy that keeps the economy growing will play a major role in confronting our fiscal challenges.

Whoa. I don't know where to start on this one.

I'll begin by saying that I like Frist. I lived in Tennessee for five years and got to know him a bit and he's just enough "not-Washington" to be likable (plus he's a doctor in the mold of Marcus Welby, so that doesn't hurt). I also find him to be well-spoken and generally reasonable.

Furthermore, I'm not a lover of big government and high taxes. In principle, I'm supportive of smaller government and lower taxes.

I also agree that something needs to be done about Social Security before the whole thing implodes.

And I could even be convinced of the fact that lowering taxes does increase revenue. I understand the theory, though am unsure how it plays out practically. But I'm willing to accept the argument that it could happen.

But what bugs me about this piece is that he neglects the elephant in the room -- rampant government spending. We've seen ever-increasing deficits from the government over the past several years. It's worse than the typical American in debt who can't stop spending because the government has the power to borrow at will.

So while the tax cuts may have resulted in revenue gains, we know for a fact that spending has gone higher and higher. That's debt that we're going to have to pay back someday and, at this rate, that day is coming faster than I'd like.

Tackling the Social Security Mess

Here's a report from the The American Economic Association annual conference which details the mess the United States Social Security system is in. If you know anything about economists, you know that it's hard to get any two of them to agree on anything, much less anything significant. So when they do agree on a topic, it's a pretty important event. To that point, here's what the author had to say about the meeting and the economists' views on Social Security:

I came away believing that a consensus exists among economists across the ideological spectrum on at least one important issue: America's entitlement spending -- mostly Social Security and Medicare -- is not sustainable. And neither political party is willing to talk about what needs to be done to fix the situation.

Yep. We all know it's a problem -- but no one wants to do anything about it (or they do, it's just they want someone else to pay for it).

The piece acknowledges that one (or several) of the following have to happen to make the system work:

• Cut benefits for retirees.
• Raise taxes on workers.
• Allow more young immigrants into the U.S. who will begin paying taxes into the system.
• Make workers so much more productive that existing tax rates will generate enough new revenue to fund the extra burden of an aging population. (This option would be great, but we have no idea how to accomplish this.)

For me, I think the option that works the best and is in the spirit of the program is to raise the retirement age (which probably falls under "cut benefits for retirees".) But let's face it, Social Security was set up a long time ago as a safety net for those few people who lived long enough to need it. Well today, people are living longer than ever, which is one of the main problems of the current system. Just seems like the most reasonable and fair solution is to make the new retirement age something like 70 or 75 instead of 65.

It's not going to be easy, whatever the fix turns out to be. What are your thoughts? What alternative do you think will work best?

Wonderful Wealth

Wealth often gets a bad rap. It's often associated with greed, excess, and other less-than-desirable qualities.

But wealth can also be a good thing -- or even a great thing -- when used in the right way. That's exactly the point made by Forbes editor Rich Karlgaard in this piece titled "Wonderful Wealth". He starts by addressing those who think poorly of wealth:

Item from a hurricane Katrina-related Washington Post story last month: "John D. Podesta, former chief of staff to President Bill Clinton and head of a leading Democratic think tank, says Democrats must start by casting Bush's brand of conservatism--emphasizing an ‘ownership society' elevating individualism and private enterprise--as fundamentally flawed and hostile to society's collective responsibility to help citizens."

Really? The hole in Podesta's logic is of Category 5 size. Which groups did the better job in aiding Katrina's victims--government or the loathed individuals from the netherworld of "private enterprise"? That's easy: the private sector. Government, at all levels, failed New Orleans. Paralysis prevailed in the public sector--from Mayor Ray Nagin to Governor Kathleen Blanco to the Bush Administration. But it is the poor souls stripped of their dignity and initiative by living for 40 years under the umbrella of welfare who are paying the price.

He then uses examples of how privately-owned wealth was used for good to respond to Hurricane Katrina. First, let's see what businesses did:

• Wal-Mart, even before Katrina hit, had mobilized its world-class distribution network to stock New Orleans-area stores with bottled water, canned food and other essentials. It gave $3 million worth of items, $2 million to the American Red Cross and Salvation Army and has pledged $15 million to the relief fund run by former Presidents George H.W. Bush and Bill Clinton. According to published accounts the Walton Family Foundation has donated $8 million to the Bush-Clinton Katrina Fund and $7 million to relief organizations, including the Salvation Army, America's Second Harvest, a food-bank network, and the Foundation for the Mid South.
• Microsoft engineers, in four days, developed Katrinasafe.org, a Web site to help evacuees locate missing family members.
• IBM and Lenovo sent more than 1,500 laptop and desktop computers, worth more than $1 million, to several Katrina relief groups.
• Home Depot gave $1.5 million to relief efforts. As of mid-September its employees, on their own, had given $700,000.

Now, let's review how some prominent people gave:

• Paul Allen, Microsoft cofounder, is giving $500,000 to the Red Cross for immediate relief efforts for food, shelter and medical care. He pledged another $500,000 to aid in longer-term efforts.
• Bill Gates and his wife are giving $1.5 million to the American Red Cross, $750,000 to the Baton Rouge Area Foundation, $500,000 to America's Second Harvest and $250,000 to the NAACP. Meanwhile, Microsoft is working closely with local and state governments and businesses to help repair IT systems and is giving away $9 million in cash, technology and hardware.
• Michael Dell and his wife pledged $2.5 million to be used immediately and another $2.5 million to help in rebuilding. Dell's company pledged $1 million in cash, set a target of $1 million in employee donations and gave away computers, servers and storage units.
• Robert McNair, majority owner of the Houston Texans football team, and his wife, Janice, are giving $1 million to the Red Cross Disaster Relief Fund to help displaced Gulf Coast residents now taking refuge in Houston. McNair has also offered to let the New Orleans Saints use Reliant Stadium, where the Texans play.
• Oprah Winfrey, the billionaire Queen of Talk, was one of the first celebrities to visit the Gulf Coast. A native of rural Mississippi, Winfrey delivered an emotional broadcast from New Orleans on Sept. 6, just days after the hurricane. Her charity gave $1 million to America's Second Harvest and reportedly shipped 500,000 bottles of water to the area via FedEx.

He then quotes one of the most prominent Democrats in the past century to support his point:

"Dependence [on welfare]," said FDR in 1935, "induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole our relief in this way is to administer a narcotic, a subtle destroyer of the human spirit."

The creation of wealth does the opposite. It builds up the human spirit. It strengthens the national fiber.

So, what do you think?

Being Poor

I've seen several people link to this post, but I had to as well. It's really moving -- not only the post itself but the comments.

As a summary, the post is about what it means to be poor. The ones that stand out to me are the ones impacting children. A few of them are:

• Being poor is going to the restroom before you get in the school lunch line so your friends will be ahead of you and won't hear you say "I get free lunch" when you get to the cashier.
• Being poor is a box of crayons and a $1 coloring book from a community center Santa.
• Being poor is your kids getting excited on Dumpster-hunt day, because that's the only time they get to eat "real food" like cookies, fresh fruit and desserts.
• Being poor is staying with a man who beats your kids because you can't afford to keep them out of foster care without his salary.
• Being poor is scrambling under the car seats to make up enough change to get two happy meals to split between a family of 4 - and everyone is ecstatic when you do so.
• Being poor is finally realizing that when your Mom says you can be anything you want, she doesn't really believe it, but feels she has to keep saying it anyway to keep the whole family from falling into despair-based lifestyles.
• Being poor is discovering that that letter from Duke University, naming you as one of three advanced students in your class invited to test out of HS early into their scholarship program, is just so much firestarter because the $300 it costs to take the test may as well be $3 million.
• Despair is finally realizing, at nearly 36 and with a barely-afforded AA in English from a community college, just where you could have been by now had you had $300, and what that missed opportunity has truly cost you.

I'm pretty much a "pull yourself up by the bootstraps" kind of guy, but this post even got to me.

I can remember living alone with my mom and her working at a minimum wage just to keep us going. We lived in unsafe places, got free lunches at school with a "special" card, made a $0.19 packet of Kool-Aid last two days, and put gas in our car in increments of $1 or $2 at a time (this is when $2 actually bought more than 2/3 of a gallon). But I never really felt poor. We had each other and as long as we were together, things were fine. Plus, I just knew that this was only temporary for us. That we were both destined to be in a better spot financially. Several decades and lots of hard work later, we are in better places financially.

Can all poor people aspire to this or were we just "lucky"? After reading this post, I'm not sure.

Money Can't Buy Happiness

Recently I cleaned out a bunch of old files and one contained money articles I had saved over the years. It was from Money magazine's October 2004 issue and dealt with people's feelings on how money contributed to their happiness. Here's what they found:

85% agreed that "Money doesn't buy happiness, but it helps."

29% said "The more money I make, the more money I find I need."

39% reported "I am sometimes frustrated that I do not have as much money as others my age."

I have two thoughts on these findings:

1. Many people think that money and happiness are correlated and to a certain extent, they are right (if you have enough money, it does eliminate some of life's headaches and makes things a bit smoother). However, as wealth grows past a reasonable/average level, it often becomes negatively correlated with happiness. In the end, money certainly can not buy happiness by itself, and if you're not happy and get a lot of money, it's likely that you'll be even less happy.

2. I think 29% of the people in this survey were honest on part #2. In reality, needs seem to creep up with income for almost everyone.

Don't Gamble on Your House

I found an interesting piece today at CNN/Money that talked about the following phenomenon happening as part of the current "housing bubble":

"The biggest gamblers are attempting an extremely tricky maneuver, according to Christian Coleman, district director for Zip Realty, a publicly traded real estate broker with offices in 10 states. They're selling their houses with the intention of buying back into the market at a lower price in a couple of years or so -- after the bubble bursts, they believe.

The advice from the real estate industry pros is: Resist this temptation. It's almost impossible to time this market."

Have people lost all common sense? Does this really sound like a good idea to anyone?

This is one time I agree with the "experts."

Really, when it comes down to it, money management is very simple. Stick with the tried and true principles of spending less than you make and doing so over a long period of time. That simple advice will steadily increase your net worth over the years and you won't have to try something crazy (like the idea above) to get rich.

How Do You Lose $750,000?

Yesterday I posted on a story titled State Governments Reap Growing Caches of Unclaimed Cash. One comment that stood out to me from that article but that didn't really fit the first post is this one:

A Baton Rouge man recently learned that the state of Louisiana owes him about $750,000 in stocks and dividends from an investment account he had lost track of years ago.

Here's what struck me about this sentence: Just how does someone "lose track of" $750,000?

Don't Believe Financial "Experts"

If you've read this blog for any amount of time, you know that I'm not a fan of so-called financial "experts". In fact, one reason I started this blog was to combat much of the misinformation they put out there.

So I really enjoy it (in a sick sort of way), when an "expert" gets exposed (like I discussed on Wednesday) or when someone else recognizes that the "experts" don't really know that much.

One of my allies in this effort is The Motley Fool.  (Or maybe since they're somewhere near a billion times bigger than this blog, maybe I should say I'm an ally of theirs.) Either way, I loved the article I found on their site titled Make More Money: Ignore the Experts where they comment:

"Here at the Fool, we've always made our living thumbing our collective nose at Street Wisdom. It's not just because it's so much fun to do. It's so profitable, too."

They then go on to cite examples where experts said one thing and another actually happened.

Yes, I'm feeling a bit smug on a Friday. ;-)

Thanks to Consumerism Commentary for pointing me to the article.

An "Expert" Debunked

Ok, before I get a gazillion hate-monger comments or emails on this post, let me state the following:

1. I don't have anything personally against Jim Cramer (the current host of Mad Money on CNBC).
2. I don't regularly watch Jim Cramer (I'm not a "hot stock tip" kind of guy -- I prefer to buy and hold).
3. I know lots of people who follow him almost religiously.

So I'm not on any sort of personal vendetta against Jim Cramer, so if you happen to like him (or you are him and stop by this blog), please don't take the following personally.

With those disclaimers out of the way, let me say that what I don't like are financial "experts" who claim to have some sort of expertise and give people advice as if it's factual or even worth anything.  Really, many of these "experts" are simply good TV personalities.  They draw ratings, so they stay on the air.

So it's with much delight when I find a post like the one titled Deconstructing Cramer today.  Here are my two favorite highlights:

"Mr. Cramer is right about 50% (25 out of 51) of the time with his stock market predictions, prone more to headline hyperbole than equivocation."

"In summary, Mr. Cramer's stock market calls since May 2000 have low consistency and approximately coin-flip accuracy. He seems more an entertaining (to some) stream of uncalibrated opinion than a stock market maven."

Jim Cramer and other "experts" like him are the main reasons I started this blog -- to promote solid, proven money management ideas and to combat the "experts" out there who think they know better than you do how to manage your money.  Don't be fooled by them or take their advice at face value.  Learn the principles yourself so you'll be fully equipped to be your own financial expert.

Another (Wasted) Mailing from Sam's Club

After I posted awhile ago about Sam's Club sending me mailings with terrible offers, I got another mailing the other day.  It's still the same offer: Come and see their store.  And if I want to buy anything, I can help myself.  All I have to do is pay 10% more than the listed price (since I'm not a member).  Again, I ask, is this supposed to entice me?

BTW, did I mention the great deal I got at Costco the other day? :-)

Finally, someone commented last time that I should contact Sam's and let them know what I think.  I'm going to hold off on that for now and see how web savvy they are.  I'll see if they pick up on these negative posts and take any action.  More to come.

Congress Needs to Do Something about ID Theft

I've commented on ID Theft before a couple of times and it seems like a story that's just not going to go away.

Today I saw an article titled "ID theft concerns grow, tools lacking" which started out as follows:

"Overwhelmed by a flood of bad ID theft news, consumers in search of a raft say the government isn’t doing enough to protect them."

Ya think?

Congress is too busy dealing with steroids in major league sports (obviously something that's of pressing national interest) to be worried about a "small" problem like this.

When will our representatives in Congress get a clue and do something to hold both criminals and companies accountable for the problems of stolen ID's and loss of sensitive information?

What do you think?