New Year Resolutions

What resolutions did you make for 2012?  Have you already broken them? If you are on track, how would you know?

Typical resolutions for a new year are to lose weight, get organized and put finances in order. And, by the middle of January, most people seem to have gone back to their old ways.

How will you make 2012 different and better?  The best time to start is now!  Take one resolution, and write it as a “SMART” goal.  that means the goal should be:

SPECIFIC – You’ll know exactly whether you reach it or not.

MEASURABLE – There is a way to chart your progress toward the goal.

ATTAINABLE- You know how to reach it, step by step.

REALISTIC – The goal can be attained with the means you have to apply toward it.

TIME-BOUND – The goal has a deadline.

So for example, if your goal is to “lose weight,” you are almost sure to fail. You go off your diet plan because you never really had one, and you don’t know where you are each and every day, toward reaching your goal.

But if your goal is to lose twelve pounds by December 31, at a rate of one pound per month, by reducing calories and increasing exercise, you are a lot more likely to reach your goal.

As another example, if your goal is to save $3000 in cash by December 31 to increase your savings for emergencies, all you have to do is put $8.20 aside each day into a cookie jar.

There are two more things you can do:

1. Write the goal down on a sheet of paper (or in your smart phone – you get the idea) and look at it every single day.

2. Even better, find a partner so that the two of you can be accountable to each other.  You periodically call your partner and review progress toward each others’ goals.  Sometimes the need to tell your partner that you reached your next stage, instead of missing it, is enough to keep you on track when everything else fails.

The “SMART” goal acronym has been around for a long time and has many variations.  It is used continually, because it works – if you do the work.

May you taste success in 2012!

US Federal Debt now exceeds GDP

Based on statistics released by the Bureau of Economic Analysis (BEA), GDP in the third quarter of 2011 was $15.081 trillion.  The US national debt now stands at $15.088 trillion, as of November 1.

While this is not a surprise to anyone, it is a milestone.  Moreover, the debt keeps growing faster than GDP, so this ratio is headed higher.

What does this mean?

Eventually, it is likely to mean that borrowing costs will go higher.  European nations are struggling with rising borrowing costs, and this could come to the US.

Higher debt is also likely to mean slow economic growth.  IMF president Christine Lagarde has been traveling around, making statements that 2012 looks “gloomy.”  A little searching on her remarks shows this wasn’t an offhand statement; she’s made the same point at least three times in the last week, in different venues.

 

The Federal Reserve’s best explanation?

Is this the best they can come up with?

Back in April, the Atlanta Federal Reserve Bank published an article discussing the declining US unemployment rate. Employment growth coming out of a recession is normal, but the continued decline in the labor force is “a puzzle,” according to the article.

However, by now (end of 2011) the article forecasted a return to a growing labor force, of between 156 and 157 million

According to the article, the labor force was to resume its growth in the spring of 2011. Unfortunately, this prediction did not materialize, and the labor force remains at 153 million as of November 2011.

So it’s plausible that the Fed is still “puzzled.”  Maybe they should start looking for other explanations of why the labor force is not growing.

Protect yourself against a bank run

With all the talk about impending financial doom in Europe, perhaps this is a good time to talk about bank runs. No one knows how that situation is going to work out, but there are a lot of imaginations running wild these days.  Rather than talk about such arcana as “haircuts,” readers may be more interested to know how to avoid ruin.

A bank run takes place when people lose confidence in their bank and quickly try to remove their funds.  In the past, this was done primarily by literally going to the bank and withdrawing money.  Most of us have a mental picture from the 1930′s, of a line of people in front of a bank.

Bank runs like that don’t usually happen anymore, but there was one in 2007 when Northern Rock collapsed.  A couple of hours later, the UK government said it would back all the deposits, and the run was effectively over.  In general, these days, you and I will never hear about them until they are over. Money moves much faster over the internet.

Such a scenario happened in the US in September 2008, at the peak of the financial crisis.  At the time of Lehman Brothers’ collapse, there began a “run” on money market funds.  Within hours, over a hundred billion of dollars were withdrawn from these funds, and ultimately the US government stepped in over the weekend of September 18. The world economy stood at the brink of systemic collapse.

Now, there are news stories that a similar run on money funds may be about to happen again as a result of the situation in Europe.  If it is happening, it’s already too late.

So, how do you protect yourself against a bank run?  There is no surefire answer. Here are some ideas to implement well in advance:

1. Diversify among banks.  Don’t hold all your cash in one bank.  Some say that you should deposit it in stronger banks, but the FDIC can hardly pick and choose which guarantees they are going to ignore.  If you are burdened with so much cash that a single bank can’t insure it all, spread it around.

2. Don’t trust the banks? Hold your money directly with the US treasury.

3. Still want more diversification? Hold your money in other currencies.  Watch out for tax consequences of offshore accounts.

4. Finally, consider physical gold and silver, if it makes you sleep better at night.  But remember, a world in which the US dollar is not honored is also going to have other severe inconveniences.

There is no way to completely protect yourself from a bank run or from systemic collapse, but the above strategies may be able to minimize the impact of any such disaster. The most important thing of all is to remember there are things that are much more important than where (or whether) we keep our money.

Our greatest asset

When I was growing up, my mother would often say, “just be thankful you have your health,” for what seemed like no particular reason.  Now, I’ve reached the age at which she used to say this, and I find myself thinking the same thing.  I hope I can resist repeating it to my children as often as she did, but she had a point.  When we are young, disease and death seem distant. As each year goes by, it seems there are a few more deaths among “people my age,” and today these eventualities seem much more tangible.  The same things must have been going on in her mind.

Each year, Fidelity investments releases a study which estimates lifetime healthcare costs for retirees.  This year, they estimated that a 65 year-old couple retiring in 2011 would need $230, 000 for lifetime medical expenses.  That is in addition to having Medicare coverage. Considering that most people don’t have that amount saved when they reach retirement, let’s just say that some compromises will have to be made.

Another approach is to take control of our own health.   Some people get a wake up call in the form of a heart attack, and others are more self-motivated. Considering the costs, my mother had a point in her saying about health.  Our health truly is worth working to maintain, and beyond just the monetary aspect.  Not everyone is able to maintain good health, despite heroic efforts in some cases.

The two bloggers mentioned above would both agree that quitting smoking, eating right, exercising, reducing stress and cutting back on alcohol are probably some of the best investments we can make.  Their articles are valuable reading if you’re still on the fence.  All these things are simple, but not easy.

 

Economic Process and the Recovery, Part II

In the last post, I described my view that the US economy is about halfway through a long-term cyclical decline, and estimated that this process will continue through 2018 or 2020.  Forecasts are rightly met with a great deal of skepticism.  Today, I turn to one of the causes of this extended decline, and offer some hope that the United States’ fortunes may change for the better after these long years.

Following the second World War, the US economy was approximately half the world GDP.  Slowly, the industrialized world began to catch up. Since 1970, the US share of the world GDP has been flat, between 25 and 30%.  During this time, Asia’s share has moved from 15% to 25%.  A combination of increased political stability, increasingly skilled workers, and low wages, have brought many manufacturing facilities to Asia, both from the US and from Europe.  As factory after factory closed, Americans began to despair that all jobs would eventually migrate to Asia.

Industry after industry has had its technological base hollowed out as jobs moved to Asia.  Whole supply chains have moved there, and it’s been good news for the people who lived there.  Living standards have steadily risen for Asians, and have flattened and declined for most Americans.

This trend has been extrapolated to infinity in the minds of many people, but like most others, it will not continue forever.  Wages have been increasing in Asia, as has GDP in many countries.  However, at some point, wages will reach equilibrium in some industries.  Recent work at the Boston Consulting Group suggests that the “crossover point” may be as close as 2015.  One report forecasts that transportation goods, electrical equipment and furniture sectors are likely to gain, as manufacturing returns to the US.  Quite simply, if US worker productivity is higher than that of workers elsewhere, those jobs will migrate back to the US.  It’s worth following the link to these reports.

This post has zeroed in on just a single trend – outsourcing for lower wages – to explain why the US economy is not going to decline forever.  In doing so, I’ve risked oversimplifying the situation by overlooking the myriad of other forces in play.

It’s also true that the road from here to the turnaround is still going to be a long one.

 

Economic process and the recovery

In conversations, often the discussion will turn to the state of the economy.  The person, or people I’m with will ask when I think the economy will recover. I generally first answer that there will be no noticeable upturn for a while, and things may get much worse than they are today.  Hopefully, I add, we’ll be fortunate and economic conditions will simply remain stagnant for a while.

Next, I’m asked when to expect a recovery. I generally will say that I’m not in the business of making predictions, but it would not surprise me if a recovery begins in earnest around 2018-2020. By this point in the conversation, half the people have written me off as a doomsayer.

Sometimes, I’m pressed for my reasoning.  Why, they will ask, am I so pessimistic?  Let me say right up front that I don’t think I am pessimistic, but I try to be an observer of what is going on, and at the same time, remain aware of similar periods in the past when there were long periods of stagnation. Economists generally do not accept the notion of predictable, long-term economic cycles.  The most famous example of such a cycle is the Kondratieff wave, or K-wave, as it is sometimes called.  Kondratieff published his theory in 1925, and shortly after that, was dismissed from his post as an economist in the Stalin-era Soviet union.  He was later sent to Siberia where he died in 1938. So believe me, I understand this kind of talk can get people upset.

Kondratieff, and other economists, have analyzed reams of economic data and concluded that these long economic cycles last anywhere from 50 to 70 years.  Various factors are said to be the cause: the passing of generations, credit and debt cycles, economic innovations, and so forth.  Disputes about what years were tops and bottoms are also vigorously debated.  Maybe some day, and with the passage of more time, there will be a greater consensus about the lengths and timing of these cycles.

I prefer not to look at these long-term economic highs and lows as cycles, but rather as seasons.  The analogy isn’t perfect, because the seasons do take place on a known repeating cycle, the year.  In the case of the economy, we go through stages of rising, stagnant, or declining economic activity.  Generally, over time, conditions have improved, but there are periods when economic output has declined, and stayed at the lower level for quite some time.  Everyone’s favorite example of this is the economic depression, which is generally dated from 1929 to 1940.

Seasonal weather does follow patterns: In the summer, temperatures are generally warm, fall brings a declining temperature trend, winter has the lowest temperatures, and so on. Here in northern California, winter also brings nearly all of our rain. Rain storms generally follow a predictable pattern, and generally occur during the winter months.  While it’s often hard to predict what day the first rain will fall, by the time you see clouds, you can tell rain is likely to be coming.  And when the rain starts, the storm often lasts for several days. It generally does not stop until it has run its course.

In a similar way, we can look at the high debt levels that exist today (highest since the 1930s), and see that we are in that phase of the economic process where these debts are likely to decline, either due to default, or simply being paid down.  Like the California rain storms, these episodes of debt-clearing have followed a pattern in the past.

This post is already too long to go into more detail, but I’ll jump right to the conclusions:

Based on the stock market, debt levels and other economic factors, I assert that the US economy entered a declining phase in about 2000. The government and the Federal Reserve took measures to forestall this decline, by lowering tax rates in 2003, and by lowering interest rates throughout the decade, and is currently adding debt at an unprecedented pace, with a plethora of new spending, in addition to exponential increases in existing programs, principally Social Security and Medicare.

We can expect the present situation of stagnation to exist until the decline can no longer be contained, or until debts are cleared in some other way.  Based on history, this process takes about 18-20 years.  Hence, the bottom will be in at about 2018 to 2020.  And like forecasting rainfall amounts, it’s hard to say what the economy will look like by the time we get there.

Like weather forecasts, economic forecasts are notoriously unreliable.  However, if the remainder of this decade is to be as described, prudent persons should consider steps to protect themselves and their finances.

In future posts, I’ll expand on the reasons why I believe this process will take time to work itself out, and discuss the consequences for our financial lives.

 

The Fed can print as much money as they want, apparently

No one outside the Federal Reserve knows how much money it has created since the economy turned sour some four years ago.  One estimate puts it at two trillion dollars.  With this much new money flowing around the economy, fears have mounted that inflation will rise at some point.

At the same time, powerful economic forces are causing deflation as well. Since the decline of real estate prices, CNN Money estimates eight trillion dollars has evaporated.  In addition, wages have been stagnant due to high unemployment.  A surplus of workers means that inflation can be expected to remain low.

But now comes this news: further confirmation that  real median household income has declined by about 10% since the “end” of the 2008-2009 recession was declared.  Private economists have begun collecting monthly data showing that, not only has income declined, it appears to be trending sharply lower with no bottom in sight.  Felix Salmon’s blog tells the sad story, but the comments also make for interesting reading.

In truth, no one can forecast whether the inflationary or deflationary forces at work today will win – or whether the US economy will continue with relatively stable prices.  But it seems clear that wages are headed down.  As one commenter to Salmon’s blog wrote that the Fed can print as much money as they want, as long as it doesn’t fall into the hands of people who would spend it.  That sums it all up.

Could a recession be starting?

The Economic Cycle Research Institute has made the call: we are entering a recession. While not infallible, ECRI is regarded by many as credible, so this must be taken seriously.  Watch the video at the link and decide for yourself.

Number on “food stamps” drops slightly

In past posts, I’ve noted the steady growth in the number of people in the Supplemental Nutrition Assistance Program, SNAP, also known as “food stamps.”  For the last two years, year-over-year growth in participation has been nearly 15%. The most recent numbers, published September 1, show a slight drop (0.5%) in the number of people participating, and the year-over-year growth has slowed to 9.5%.  Approximately 1 in 7 people currently participate. While still unacceptably high, participation could be peaking.

Meanwhile, the employment picture continued to deteriorate in September. While the number of unemployed remained stable, the number of involuntary part-time workers and those marginally attached to the workforce continue to climb.  Still, these increases are small, and could reverse, if employment conditions are bottoming.

In short, there is no good news here, but the bad news seems to be slowing down.  We haven’t long to wait for October’s report.