Death by Debt by ~jessiechrist

I recently stumbled upon the exact figures of US Debt to the Penny which as of a second ago indicated that public debt outstanding was $11,043,588,980,678.90. The latest monthly report is available here. I was very surprised to see we still had such debt given this prediction to have the debt paid off by now. The FAQ encourages us, the private citizens, to help pay off this debt with the following statement:

“How do you make a contribution to reduce the debt?

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188″

I must say that this is not an April fools joke because research a bit further shows that people do make gifts to pay off the debt. However, before you make your contribution, please note this news story which indicates that the bailouts and the various expenditures could total $10.8 trillion.

Also please note that although we are all patriotic citizens who want to pay off this debt (and even if the whole world jumps in to help), this FED report says that there’s only about $8.3 trillion around (M3 is no longer published) and that money is created from around $2 trillion (soon to be $3 trillion) of reserves (interestingly we have only about $900 billion cash out there). If you know how the total debt can be paid off with all of the outstanding money, please help me understand this.

I also cannot figure out if the gifts to pay of the debt count as charitable donations for tax deduction purposes.

Americans are very smart people. I believe I have just understood why they choose to spend instead of saving.

The Falling Capital by ~Latuff2

My friend sent me a funny link about CNBC that brought forward a few thoughts about assets. What I am about to write you can and should safely ignore as it is likely to have little to no impact on your life. If you know me, you already know I don’t know anything and carry my cross like everyone else in the world. If you don’t even know me, how can you take what I say as anything of value, anything to use as basis for even a simple decision. Please apply this test to all the noise that comes at you at hundred miles per hour from all the sources of your information. It is actually fun to find the hidden assumptions, the flaws in arguments, the hard-to-notice issues with the opinions given out so freely by everyone. Find issues with what I say, and I’ll thank you.

I only watch CNBC, keep an eye on the papers, and the Internet to gather clues about public feelings. Don Chu’s eloquent points about the fractal nature of humanity come to mind here because just as we have good days and bad days, so does the society. Our aggregate public feelings appear in media. As an example, jokes are only funny because we can relate to them. These feelings in today’s complex and constantly changing world cannot be internalized without one keeping both eyes and ears open and watching and listening on all frequencies. Often the clues are subtle, insignificant and sometimes I cannot even verbalize what I’m “hearing” but I don’t stop listening. My only limitation is time. CNBC plays its vital role in filling in the picture of public sentiment. All of the networks cater to their audiences so well, that we can easily approximate the mood of the audience by simply keeping an eye on the media catering to that audience.

Why did I think about assets? Actually, I don’t like that word at all. The reason is debt. Assets can be acquired with debt. It is not difficult to have significant assets balanced by significant debt. I like the word capital much better. Much of the media, your neighbors, everything you see screams “assets.” Assets are visible and quantifiable. Debt is a hidden, private matter. Of the various definitions of capital, I like this one “any form of wealth employed or capable of being employed in the production of more wealth.” This concept is too basic, I agree. However, often the very basic and simple ones contain more energy than complexities (who would have thought tiny atoms could produce so much energy).

The first challenge is the preservation of capital which encompasses everything we do to make sure that whatever capital we have does not turn into nothing as a result of everything that happens around us. Public sentiment is critical for this because after all the vehicles for storage of capital only work if someone out there is willing to accept them in exchange for something we need. I lived through a period when currency turned into nothing after the collapse of the Soviet Union. Every day I would take the money I earned with my friend and buy something, anything I could buy (cheese, butter, dollars, etc.) because the next day that money would buy less. To contrast that, I was speechless when I visited the Vatican and realized how the Roman Catholic Church had preserved its wealth throughout centuries, changing regimes, wars, and changes in public sentiment. It is a superb lesson in wealth preservation which even includes sovereignty. Contrast that with someone trying to hold on to their property during the gold rush. Keeping in touch with the world and public sentiments is critical for taking the necessary measures ahead of time to protect one’s capital.

The second challenge is employing the capital to produce more wealth. I actually consider this an easier challenge than the preservation of capital but there is nothing easy about this. CNBC and millions of “advisers” are ready to give us that one perfect method that will surely increase our capital. They (referring to the money machine) even convinced a lot of people to borrow someone else’s capital (mortgage or margin put into stock market). They “help us” with enormous amounts of data (real-time quotes, hundreds of statistics, derived metrics, research reports, derivative instruments, etc.), with “education” contrasting investors with speculators (no real difference here), with language (buy and hold, dead cat bounce, MBS, ABS, CDS, etc.), and everything else one would ever “need” to turn capital. The US government wants constant turnover of capital because at every turn increases can be taxed. If capital is not turned (artwork passed from one generation to another), no worries as there are laws to tax the transfer. I still cannot understand how the capital gains are taxed fully but capital losses are only used to offset gains (+$3,000 break). People unfortunately do not often understand what capital is because we sometimes start out with negative capital (student loans, mortgages, etc.). By the time we create enough value to pay off these loans by helping someone else turn their capital, time (our most valuable resource) becomes depleted. CNBC, the mutual fund companies, the government, our friends, this blog, and nothing else in the world can tell you how to preserve and increase your capital. Once this became clear to me, CNBC and all forms of media and information took their proper place in my mind.

Firewood by *LadyRSanti

Growing up in an apartment building, we had a hallway that had four doors to four homes. My mother would always clean the entire hallway but for some reason our neighbors would only clean the small area between their own door and the hallway entrance. It would always puzzle and bother her why they only cleaned in front of their door. Did they think dust in other areas would not move? A few years later, when none of us had any heat in the winter, neighbors would gather together in one of the apartments to conserve firewood. After those days, somehow the hallway was also kept clean by everyone.

It is not uncommon to see entire neighborhoods full of foreclosed homes these days. Just a few days ago, I heard how a condominium association could not pay its bills because many units were empty under foreclosure proceedings. Towns with high foreclosures have similar issues of being unable to cover their expenses. Homeowners in such towns find themselves under greater burdens for town expenses and under heavy pressure of dramatically lower equity of their own homes. We have learned the lesson that when our neighbors become poor, we too become poor.

As we are witnessing right now, when consumers (that would be us and our neighbors) are unable to spend as much as we typically spend, companies that sell us stuff, sell less. When companies sell less, they need less workers and they invest in machines and equipments less; they also spend less. When companies spend less and we also spend less, there’s really no way to sell more than the year before. It’s all too obvious… When we do not sell more this year than last year, our economy doesn’t grow and we know that stock values increase when the economy and companies grow. As a result, we earn less money (remember inflation even if you get no pay cut), stock values decrease, we become more unemployed, and we spend even less. Bottom line, when our neighbors spend less, they become poor. When they become poor, we too become poor.

When our neighbors have no homes, we have more homeless people. When our neighbors have no money, we have more poor, unemployed people to help. When our neighbors are hurting, we are hurting. This is because we’re one and the same, all interconnected, affecting each others’ lives, hurting together, happy together. There are many examples of this starting from global warming (if we do not all cut our emissions, the results do not change) to local crime (if we do not all keep our neighborhoods safe, the results are unchanged).

America has a vibrant individualistic society with everyone in constant motion pursuing our happiness. As you chase your own dreams and fulfill your objectives, consider your neighbors and your community.

Monopoly by *Aldalambe

“Remember when we play Monopoly, there’s you, me, and the bank? Now imagine if there was another player (let’s say mama) who borrowed from the bank a lot of money to buy a property. So, you and I have some money, but mama has no money because she bought the property, and the bank has no money because it lent the money to mama. Now you come to pass Go, but the bank has no money, should we give the bank money?”

His initial reaction was no we shouldn’t because that’s our money. But then I mentioned to him that if the bank had no money, the game could not go on. It was fascinating to see his face as he internalized our conversation. He suggested some decent solutions one of which was to take some paper and make fake money with it.

This description is unfortunately not too far from reality the way I see things. The only solution that is being suggested is to basically print more money. Sure that may cause the game to continue but I fear that we’ll not only pay more in taxes to cover the massive deficits, but also we’ll pay in cut programs and jeopardized future initiatives, and most importantly in further dilution of our currency and our reputation. I won’t even mention the moral hazard issue and a number of other issues.

I understand that the alternatives are not easy. However, remember that the people who bought the houses and paid the incredible inflated amounts for them, paid these sums to another player(s) in this economy. Where did this money go? To be sure, some of it got invested in Lehman stock (and other instruments including houses with inflated values) and lost its value but certainly not all of it has been lost to depreciation of values. Take a look at this graph about the money supply.

I’m not an economist but in my humble opinion, if we print more money, we’ll simply dilute the value of the dollar in the long run even more (read groceries more expensive and retirement accounts able to buy even less) and we’ll perpetuate the bubbles exacerbating their effects. I have faith in Secretary Paulson and Chairman Bernanke and hope that they have excellent teams at their disposal. However, I believe Congress needs to take its time in crafting a solution to the fundamental issues. This decision is too big to be made in a week because this country is too big to fail.

In the meantime, we’ll just continue playing the Monopoly game on our kitchen tables, since there’s no room for us at the table where the real games are being played in our name…

Battle Over the Market by ~WesternWitch

The recent volatility in the stock markets around the world has put me on an emotional roller-coaster. The governments are doing what they can to prevent a global recession/depression but are they solving any fundamental issues? Absolutely not!

I think of every country as a family. The United States family has an enormous working potential and earns a lot of value for all the good that it creates every day. Every morning it wakes up, goes to work, creates new value, earns a salary and puts that into its “bank account” from which it pays its bills. Because of its hard work, this family has earned a lot and has invested a lot over the years. It is a generous family and provides significant aid to others. It invests in different initiatives to help the kids get better education and to provide decent health-care for most. It even provides some benefits for its senior members. This family also likes to live well and because it has a solid reputation, everyone lends it money. In the recent decades, the lifestyle of this family has required it to accumulate an amazing amount of debt. In the past few months, some of the family members have acted irresponsibly and this family is helping them out. However, since it already has a huge amount of debt, it must borrow more to help them out. This is how I see our current situation (in very simplistic terms). As long as we have major national initiatives with hefty price tags (Iraq war, Social Security, Medicare, MANY MORE….), as long as we spend as much as we spend, and as long as everything we buy is made outside the family, we’re perpetuating the situation.

The main question is how can this family get on a stronger financial foundation with a system that can withstand high levels of shocks and uncertainty in foreign countries?

First, we need to produce innovative new products, services, and technologies to be exported. These must be produced here in America. We need to produce new energy sources cheaply, new medical technologies cheaply, new drugs, new computers, new knowledge, and everything else that we can innovate and sell. We must produce these competitively here in the US! You ask how can we make something cheaper than in Asia/Africa where labor is much cheaper? We do not need to make it cheaper. We need to make it better. Let’s invent even better machines that can do the work. Then let us produce many things China, India, Russia and every other country wants to buy, let us buy less from them and more from our internal producers, let us innovate so we can be the cheapest producer in the world with the highest paid workforce, let us create jobs in research so we can invent the new energy sources, let us get rich as a family!

Second, we need to cut wasteful spending of our governments. This is a long-term issue. Outdated programs should be replaced with new innovative interesting programs that people need. Let’s make it an initiative to run the programs as effectively as possible with objectives and achievement bonuses.

Third, let us create incentives for people to OWN rather than pretend to own. Most people have a mortgage against their homes. Instead of having a tax incentive to have a mortgage (the home mortgage deduction) why not have a tax incentive to not have a mortgage? Instead of giving businesses advantages to go overseas for labor needs, let us reward those who have all-American teams. Instead of taxing people’s estates, let us come up with creative incentives for people to build estates. Let us fund financial education and discipline from middle school to graduate school, so people will not borrow when they cannot repay. Instead of promoting sales of cheap Chinese made products, let us have sales of American made products.

If you agree or disagree with anything I have said, feel free to comment. These are my humble thoughts and I know it would take an act of God for the government to agree. So, I will pray…

What is news? dictionary.com defines news as a report of an event, information, intelligence, also a person or anything worthy of journalistic treatment. The problem is separating valuable information from noise defined as “incomprehensibility resulting from irrelevant information or meaningless facts or remarks.” I define news simply as information with an effect where the key is the effect. Information with no impact is not news. Furthermore, information I cannot use is not useful news to me. A few points come to mind here.

First, news media, reporters, people all over the world commenting and reporting cannot screen what they report for impact. Just as we cannot control the consequences of our actions, they cannot and must try not to control the effects of the information they report. Therefore, they MUST simply report the facts and leave the effects alone. Attempts to try to control the impact are wrong and should be avoided because of the possible unintended consequences. Separating fact from opinion and language used to guide the reader should improve the quality of the facts reported. This applies to news and not analysis and opinions clearly marked as such. Any source which reports more than the facts as news, or provides the conclusions we must draw based on the reported facts, should probably be ignored as noise. Second, we as consumers of information must be very careful to understand what is fact and what is conclusion or analysis. We must be able to separate the opinion words from fact words used in the same sentence. Third, we must see clearly our own bias and the bias of the report/reporter/media source. Awareness of our personal screens is required for proper processing of the vast volumes of data thrown at us every second. Fourth, we must cross-validate the facts. Often the facts are incomplete or reported with a bias. In extreme cases facts are distorted and reported specifically to mislead us in a certain direction. It is our responsibility to make sure that the facts that affect our minds and consequently our behaviors are correct to our standards.

Imagine a world where news comprise of only facts, newsworthy, valuable facts that you can use, facts with effect. Also imagine all opinions and commentaries are clearly marked. In that world, we would all make better decisions every day. We would enjoy the news rather than running away from it. We would all benefit greatly. For this, I just ask reporters to stick to reporting of facts as news and I ask you to be more skeptical of what you hear, watch or read, be more aware of your screens, and be more willing to check the facts. Never fully trust what you see, hear, or read.

There is no excuse for anyone not to know exactly how much cash they have (1), how much their assets are worth (2) and how much they owe others (3). Even more critical is knowing how these numbers change over time. It’s this simple!

Do not let financial jargon scare you. On a piece of paper or spreadsheet write down the three figures above and save it. A month later write the updated three figures down and try to understand what caused the changes. You are not a corporation or a government, you can do this in five minutes.

The three figures represent your balance sheet. The changes represent your income statement. Without these, you have little chance of ever properly planning and funding any major project or event. What I have outlined above is almost too simple but that is precisely its power.

People often think of their salaries as their income and what they pay for things they buy as their expenses and tend to look at numbers from the income statement perspective. Even the financial packages are created to show the income broken down into expenses — lots of numbers. I believe the above method represents a far superior acid test. There are many reasons for this which I can discuss in another entry. For now, if you haven’t already done so, go figure out the three numbers above and write them down and date your entry. One month later on the same day, repeat this process and study the differences.

I believe the total cost of every item is significantly higher than just the price tag when you add the value you place on your time. From small purchases to once-in-a-lifetime large purchases, you commit yourself to at least the following:

• The purchase itself – time spent getting to the store, ordering online, or with a purchase like a car or a house time spent researching, planning…
• Disposal of your other items which are being replaced – here the costs are time, impact on the environment…
• Sorting out what you’ve bought – time spent reading a manual, sorting the new items, or recycling away the box they arrived in, trying out your new pair of shoes…
• Using your purchase – this does not count if you thoroughly enjoy your new item; however, in all other cases, this also costs you in precious time…
• Storing your items – you have to heat them, cool them, organize them, move them around from one house to the next…
• Maintaining your items – cleaning the stove top, securing that swing set every once in a while, washing your car, cleaning your basement…
• Disposal – again don’t forget your time and the impact on the environment

I suggest that you apply this test in whatever form you choose to at least some degree to all your purchases and then see if you still need to accumulate them or perhaps it is best to rent, borrow or otherwise get your needs addressed.

The key is this: the incremental costs associated with one more item are small, but when you add up all of the costs for all of the items that most people own, you realize that many around you spend all their life tending to their purchases rather than enjoying reading a book, for example, or going for a walk, or just talking with a friend.

Your time is the most precious of all your possessions and when it comes to time, having less things often results in more time.