Personal Finance 
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Inflation Doesn’t Tell The Entire Story

Here’s an interesting question – would you rather have $70,000 in 1900 or $70,000 now?

Those who are familiar with the idea of inflation are probably aware that $70,000 in 1900 is worth a lot more than $70,000 today. In fact, according to the BLS, $70,000 in 1913 (as far back as their calculator goes) is worth over $1.5 million today.

(Click to continue reading…)


 Your Take 
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Your Take: Double Dip Recession?

The Your Take question two weeks ago asked whether or not the Recession was over and the overwhelming opinion was that it wasn’t. With double digit unemployment and housing still underwater, it didn’t matter what economists said… we were still in a bad spot. So it might seem a little silly to ask if a double-dip is on the horizon when so many of us are still fighting to get out of the first dip.

It’s still an important question because regardless of where you personally are, in the dip, recovered a little, or recovered completely; the prospects of a second dip is really scary. Regardless of how you’ve weathered the first dip, a second dip will drag us all down and force us to battle through what many of have been fighting for the last year or two. If a boxer can take that first good punch, great… but few can take two good punches and still soldier on.

So, the question remains – will we have a double dip recession? The experts seem to change their opinion with each economic report and I’m of the mind that we will avoid a double dip as long as we have the fortitude to act. Despite what you think about the TARP and all the other various rescue packages, I think they softened our fall and quickened our recovery.

As an aside, as much as people may hate bankers, we didn’t vilify them when they helped fuel an economic boom. We didn’t complain when things were going too well for our own good… so it’s hypocritical to lambaste them now. If someone gives you a brand new Maserati and you crash it, you can’t blame them for giving you the keys.

I think it’s more likely that we float around in this holding pattern of malaise for a while, even for a few years, without seeing an actual fall. Hopefully we don’t have a Lost Decade like Japan but we’ll probably have a Lost Year or two.

What do you think?


 Reviews 
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On The Brink by Henry M. Paulson Jr.

On the BrinkOn The Brink by Henry Paulson is the first book I’ve read cover to cover in the last year. You’re probably not surprised to hear that I don’t read every single page of the books I review on Bargaineering but for On The Brink, I read every last page. On The Brink is Henry Paulson’s, then Treasury Secretary, account of the financial crisis that nearly brought the United States, and must of the world, to its knees. Throughout the crisis, I was reading all the news stories about various rescues, bankruptcies, etc. but I always knew there was more to the story. I knew that there were things going on behind the scenes that we wouldn’t hear about for quite some time and I didn’t expect to read about it in a book so soon.

If you want to learn what happened, what caused it, and what some of the most brilliant and hardworking financial minds in the world did to prevent a complete meltdown, then you need to read this book. It reads like a novel, Paulson is frank (which is awesome), and you walk away feeling like you actually understand what happened and why certain things were done. And for $14, it’s a bargain.

(Click to continue reading…)


 Career 
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How Comparative Advantage Affects Your Job

Comparative advantage is a principle in economics that explains how fair and free trade helps everyone involved and it’s an idea that I believe will affect everyone’s job, more than it already has, in the United States. Wikipedia has a detailed page explaining comparative advantage but essentially the idea is that two people, groups, countries, etc. that are better at different things benefit from focusing on their strength and “trading” with each other.

Here’s a simple example. Let’s take two people, Jim and John. In one hour’s time:

  • Jim can catch 5 fish or gather 2 lb. berries,
  • John can catch 1 fish or gather 10 lb. berries.

Jim is a better fisherman, John is a better berry gatherer. It benefits both to focus on their strengths and trade for what they lack if exchange rates are favorable. What is a favorable exchange rate? As long as the rate is better than 1 fish for 10 lb. of berries, John will trade. As long as the rate is better than 2 lb. of berries for 5 fish, Jim will make the trade.

Let’s say the exchange rate is one fish for two pounds of berries. Jim can fish for an hour and then trade one of those fish for 2 lb. of berries. After an hour, he has 4 fish and 2 lb. of berries, which is 4 fish more than if he was bumbling around the forest looking for berries. Likewise for John, he can gather 10 lb. of berries, trade in 2 lb. for a fish and end up 8 lb. of berries ahead. Get the idea? We’re better off doing what we do best and trading for the rest.

So, how does this affect you or me? Outsourcing. There are billions of people outside of the United States and the reality is that the cost of labor is extremely cheap in many countries. A lot of corporate call centers are located in India because the cost of living there is ridiculously cheap relative to the United States. Why do so many products originate in China? Again, cost of doing business is much lower there. (Before you complain about dealing with Indian CSRs and poisonous Chinese products, remember that Americans love cheap stuff and ultimately it’s American corporations choosing to work with particular subcontractors, responsibility is on American companies)

How do you protect yourself? Find a job that cannot be outsourced. Easy to say, not as easy to do! What are some jobs that cannot be outsourced? These are jobs where the work products cannot be easily transported or not legally transported.

  • Work products not easily transported: A car mechanic’s job will likely not get outsourced because he or she need to be near the cars he or she is working on. A doctor has to be near his patients. However, there are aspects of those jobs that can be outsourced. Perhaps one day a car mechanic’s diagnosis can be akin to the outsourcing of x-ray examinations. The x-rays themselves are easily transported, but the patient may not be.
  • Work products that can’t be legally transported: A great example of this work in the defense field. Product designs and configurations are easily transported but cannot be under law. If you work in the defense industry, it’s unlikely your job will be outsourced.

That’s comparative advantage in a nutshell, why outsourcing works, and how one can best protect themselves in these changing times.


 Personal Finance 
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Big Mac Index & Fun Food Economic Indicators

Baby Loves Big MacsThe Big Mac Index is the Economist magazine’s fun little twist on what economists call Purchasing Power Parity. Purchasing Power Parity is the idea that a particular amount of any currency should buy the same amount of “stuff” in every country and that, should it not, the currency should regress back to the mean of being able to buy that same amount of stuff. In this little analogy of Big Macs, the MacDonald’s Big Mac is the “stuff” and a dollar’s worth of Big Mac should be equal to a dollar’s worth, in another currency, of Big Mac, in that other country. When it isn’t, then you have an overvaluation or undervaluation of currency. It really helps people understand the otherwise complex topic within exchange rate theory.

Well, it’s not the only one, though it’s certainly the most well-known since it was the first and because MacDonald’s is so ubiquitous. There’s the popular Starbucks latte test, the Coca-Cola index, the sushi index, and my favorite one of them all, the Steakhouse index. Mmm… steak.

(Photo: jimmy_macdonald)


 Government, Personal Finance 
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The $700B Bailout Bill (Update8)

Update8: It’s done, both chambers have approved the updated bailout bill that contains a ton of other stuff… House Republicans got what they wanted. Bush just signed it.

Update7: The Senate will vote today, after sundown in observance of Rosh Hashanah, on a tweaked version of the bailout bill that the House rejected on Monday. There are a couple changes to it, none of which really affect the terms of the bailout itself but could sweeten the pot for House Republicans:

  • The FDIC insurance limit to be raised from $100,000 to $250,000.
  • Renewable energy tax incentives for individuals and businesses – this is something the Senate hopes will help get some House Republicans on board. (details)
  • Alternative Minimum Tax relief.

Update6: The bill didn’t pass the House. Back to the drawing table, lawmakers are working on a new bill.

Update5: The details of the agreed bailout bill have been released and they are:

  • As mentioned earlier, the $700 billion would be disbursed in stages with $250 billion made available immediately.
  • If the Treasury pays fair market value and if they overpay, the President would have to propose legislation to recoup the loss from the financial industry. The Treasury could also take ownership stakes in bailed out companies.
  • The government can adjust the mortgages that it takes over.
  • Executive compensation for firms that participate will be capped and companies can’t deduct any pay above half a million dollars. No golden parachutes for the top 5 executives of a company that goes into bankruptcy or if they fire those executives.
  • There will be two oversight board. The Financial Stability Oversight Board would protect taxpayers and the economic interests of the company. It will include the Fed chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. The second board is a congressional oversight panel that would review the state of the market, regulatory system, and the Treasury’s use of the funds. That panel would consist of 5 experts appointed by House and Senate leaders.
  • The Treasury must also establish an insurance program, with premiums paid by the industry, to guarantee the assets that were purchased before March 14th, 2008.

All that remains is the vote in both chambers and the President signing the bill. Whew.

Update4: A deal has been reached and all that remains is to put it on paper. The plan, according to a release by Speaker Pelosi’s office, stated that the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.”

The $700B would be broken up into three phases: $250B available immediately, $100B “upon report to Congress,” and the last $250B available upon Congressional action. There are additional details in the WSJ article.

Update3: It appears as though the once 3-page bailout bill has now gotten up to 102 pages but progress is being made and now the ETA appears to be Sunday. I don’t know about you but for once I’m glad a bill swelled in size, the thought of $700B in spending passed in a mere three pages was a little disconcerting (not to mention there was no oversight!).

Update2: Uh oh, looks like there have been some problems. From the front page of CNN: “Sen. Richard Shelby, ranking Republican on the Senate Banking Comittee, emerged from the White House to declare of the bailout plan: ‘It will not solve problems, it will create more problems.’” Yikes! But it sounds like only the House Republicans are having problems with it

Update1: Reports are coming in that an agreement in principle has been reached. According to the Wall Street Journal, the $700B package would come in installments with $250B available immediately with $100B to follow as necessary. The balance would be doled out as needed and Congress can block it. Word is that executive pay for bailed out firms would be limited, the government would get a stake in the companies, and most other major issues are resolved.

Original: If you’ve been watching the news, you’ve probably heard of this massive $700B bailout bill that Henry Paulson, the White House, and Congress have been arguing over for the last week. Republican presidential hopeful John McCain suspended his campaign yesterday and threatened to cancel Friday’s debate unless a bailout bill agreement was reached. Both candidates will be heading to Washington today to get in the way and take photographs.

Last night, President Bush gave an address in which he proposed “that the federal government reduce the risk posed by the troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” and that “Our entire economy is in danger.”

My eyes have popped out of my head for the fourth time in two weeks at the numbers being thrown around… it’s like each bailout is trying to top the prior bailout. This time it’s seven hundred billion dollars.

What’s In The $700B Bailout Bill?

The Treasury wants the authority to buy up to $700 billion in “troubled assets.” In reality, the proposal wasn’t much more than that and took up a mere three pages. At first, that proposal included language that gave the Treasury complete authority with no oversight from anyone (for the first time in history, I’m happy Congress was designed to move “deliberately”). Fortunately that was scrapped and oversight was included in future versions. Here are other provisions the Democrat Congress wanted included:

  • Curb executive pay at companies that sell assets to the Treasury (something the White House agrees to),
  • Let the government have the option of taking an equity stake in companies that participate (news reports say this has been incorporated into the final bill),
  • Require the government to encourage foreclosure prevention for the troubled loans it purchases.
  • Allow bankruptcy judges to rewrite mortgages for consumers nearing foreclosure (this is a “nonstarter” for Republicans and unlikely to make it into the final bill).
  • Proceeds the government gets from the bailout to to a fund to pay for housing for poor families (Republicans don’t like it, they see it as a backdoor means of funneling money to liberal political groups, so it likely won’t make it either).

As of this morning, they’d gotten close to reaching an agreement. This page will update as more details emerge.

Why Do We Need This?

Why is this bill necessary? Our financial system depends heavily on financial institutions being able to lend money to one to one another. When you deposit $100 into a savings account, the bank can lend 90% of it away to borrowers (car loans, mortgages), to other banks, and to the government (Treasuries). If they lend it to another bank, that bank can in turn lend around 90% of it and if it lends it to another bank, that bank can lend 90% of that. So your $100 turns into far more when it flies around in the economy and that has fueled our tremendous growth.

What role does bad mortgage debt play and why do we need a $700B+ package to buy up this bad debt? The simple explanation is that financial institutions no longer trust one another. Let’s say I lend you money and you put your house up as collateral. If you default, we could always sell your house and I can get some of my money back. If we’re suddenly in an economic environment where your house could be worth far less than what your appraisal says… I’m going to slow down and maybe not lend you as much money (or none at all). That’s kind of what’s going on now. With all the bad debt rolled up in good debt, financial institutions don’t trust one another and that’s why it could cripple our economy.

Why is it better to shift the debt off a company’s shoulders and put them on MY shoulders? That’s an excellent question and I don’t have a good answer for you. We will have to see how the plan goes forward to really know but I believe the reasoning is that the bad debt can improve in the long run, much like how housing prices will go up in the long run, and the U.S. Government can wait that long. Ultimately, the belief is that this bill will infuse life in the same financial markets that have fueled prosperity in the last few decades and I think that helps everyone (but we’ll have to see!).

This is similar to the logic behind the AIG bailout. AIG had its credit rating reduced, forcing it to raise collateral in a short period of time. The government swooped in to keep AIG solvent and took an 80% piece. From what I’ve read, AIG’s subsidiaries were all profitable, it was just a short term liquidity issue. Is that the whole story? Who knows, that’s just what I, and everyone else, read in the newspapers.

As news breaks, I’ll keep this post updated.


 Your Take 
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Your Take: What The Heck Happened These Last Two Weeks!?!?!?!

Last week, the stock indices had both their single greatest losses and single greatest gains in the last six years. Despite all the insanity, the market as a whole lost little from Friday the 12th to Friday the 19th. We were short a few companies as Lehman collapsed and 80% of AIG went to the Feds but despite all that turmoil, the various market indices were OK. We also lost the last of the investment firms as Goldman Sachs and Morgan Stanley became bank holding companies. Oh, and did you hear? JP Morgan Chase is picking up a few pieces of WaMu yesterday.

A heck of a week huh?

What I’d like to know is what do you think about the last two weeks, what do you think about this $700B bailout bill (yeah, the one where one second there’s agreement and the next there isn’t?) and what have you been doing with your finances as a result of all this craziness?

Me? I haven’t touched a thing, fortunately I’m far enough away from retirement that I believe we can weather it. I don’t think we’re going into a Great Depression or anything like that (the central bank understands monetary policy and economics well enough to prevent that) but I wouldn’t be surprised if things were slow for a few years as a result.

As for that bailout bill? I only have eight classes of economics (that’s all I needed for that Econ double major, w00t w00t) and I am wholly unqualified to either justify or tear down the bailout bill. I understand the reasoning behind it but I don’t know if we’re going down the right path or whether we’re just signing yet another IOU. All I know is that the provision to snip the golden parachutes of executives at bail out firms better make it into the final draft. TGIF.


 Career 
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Try Services Before Signing A Long-Term Contract

How many times have you heard of someone signing up for a three year contract with a gym only to find out that they don’t like the gym? Or don’t have enough time to go? How many times have you heard of someone signing up for a two year contract with a cell phone only to find out that they can’t get service inside their house? As consumers, we’re savvy enough to extensively research our major purchases but are less savvy when it comes to services. We’re quick to sign a gym membership without using the services but would have difficulty buying gym equipment without trying it.

You should, whenever possible, try something out before you sign any long term contract. It won’t be possible in all cases but try whenever you can. With gyms, you can request a one or two week trial. In addition to trying the facilities, the trial weeks allow you to integrate the gym into your existing schedule. Can you really go as often as you think you can? If you can’t hit your targets during your trial weeks, is it really worth signing up for a longer term contract? You may find that paying on a per trip basis ends up being cheaper than the contract because of how often you’ll really go!


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