A Dialogue With A Leftist Banker

I know, you probably are thinking "What is a 'Leftist Banker;". However, there are some people here in the US who consider themselves to be "revolutionaries" but are in fact, capitalists. The individual to whom this email was sent has held jobs as a real estate broker, a day trader and stockbroker, and most recently is employed in a responsible position for a large New York bank. He is an avowed liberal, 

Now, this might seem like a "conflicted" individual. But then again, how is it possible to be a "leftist banker?" The following was sent on November 24,2010 in response to an email. 

"Hi ----:

A general reply, as short as I could make it. I’m not a money guy, or an economist, but I am a “small” business owner, and have been since 1978.

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Americans are well educated. We remain one of the highest educated countries on the planet. I suspect part of the problem is that we have become “information parrots.” We hear something and we repeat it. If the President, or some congressman,  or some talking-head or anyone of purported importance says something, or quotes a statistic, frequently out of context, then the public repeats it. Just hit the button and Tweet! It’s so easy!

Here’s an example: “deflation.” If housing costs are removed from the current BLS data, then inflation (CPI-U) is about 1.9%. It’s the Fed’s avowed policy to control inflation at 1.5 to 2.0 %. Seems we are there, doesn’t it? (and this is using the “modern” CPI-U calculation, which significantly lowers the measurement of actual inflation). So what are the talking heads spouting about? There’s been a significant amount of talk this year about “the fears of deflation.” People who become “acolytes” and spread this stuff cause real problems, as well as do harm, to themselves and to others. At my condo association, we now have people who believe this stuff,  have been acting accordingly and now expect lower prices. They were convinced this would result in an association 0% fee increase, or possibly a decrease, just as we had last year. But that didn’t happen. Instead there was a 7% fee increase (long story as to precisely why). These same people then came to the board and complained “How can our fees go up? We’re in deflation and costs should be going down!” They assumed that because they heard “we are in deflation” and prices “always go down in deflation” (I’m quoting a unit owner) then it’s logical and only possible that their fees will go down! Of course, these people haven’t done the numbers, because using a calculator is a lot more difficult that turning on the TV, or browsing or texting or whatever their source of misinformation. So what really happened in 2010? In my county in 2010 we had a 12% water rate increase (because of larceny on the part of a government official). We also had a ComEd electricity increase. Gasoline is up about 10% since 11/1/2009. Food prices are up slightly.

So costs are up, and not by just 1%. Seems like modest inflation to me!  And yet, we have people saying or misquoting that we are in or near “deflation.” Meanwhile, back in “reality” our condo association costs are up. We use water for caring for 40 acres of grounds, and for man-made streams. We use electrical energy for outdoor lighting and moving the water over three waterfalls and connected “streams.” Our contractors fees go up as energy and the cost of materials increase. Another “real world” example; asphalt (bituminous concrete) increased about 200% in 2008-2009. Not good for anyone purchasing roofing shingles and doing street repairs, or new driveways. Our association is doing all of these. Duh! “How could my fees go up?” You get the picture. So in my practical life, which is to say, for most of the necessities of life, prices are in fact, “up”. Going a bit deeper, even our condo association insurance has increased and is now reached the point that it is double our electricity costs. In fact, my portion of condo insurance now exceeds my personal “homeowners” insurance policy cost. Deflation? 

Our problem isn’t education. It’s “critical thinking skills” and simple mental laziness. As organisms, we’ve become very sloppy. We can survive, and even thrive, even though we may exhibit, as individuals, incredible stupidity. Of course, this isn’t limited to the USA. Stupidity growth may be exponential, as people “grow up” and raise children, who then “grow up” and raise children, etc. Is it possible each generation is becoming, pardon the poor English “more stupid?” I sometimes think many of us exist in that third domain of knowledge, where “we don’t even know that there are things we don’t know.” It’s a complex way of saying that we are living a life of obliviousness.

Eventually, we may reach the point in which we have millions or billions of dumbed-down human beings on the planet. Perhaps the US is ahead on this curve, just as we have led in so many others. We certainly aren’t alone. I enjoy reading the “Darwin Awards” from time to time. It’s a barometer. As an example here’s a Darwin Award about taking “handicapped accessible” to a different level:

http://www.darwinawards.com/darwin/darwin2010-08.html

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Question of the day regarding education:

What is the value of an education that provides me with the tools to do whatever it is that “I” want to do, if that skill isn’t marketable? On a recent airplane trip, in which I was flying first class (very unusual), I sat next to a financial person, who struck up a conversation. He was sitting next to me, on a commercial flight, because according to him, the corporate jet was grounded, and he had to get where he was going; poor guy, things are tough all over. Perhaps the entire conversation was all BS, but the lengthy discussion had the ring of authenticity. He related to me how difficult things were in the banking and finance industry, what with all the new restrictions. We discussed the economy and employment problems. During the conversation he related employee and employment issues and problems. He also told me about a new employee just acquired. She has a masters in finance. How much is he paying her? $25,000 a year!  Welcome to the new reality!

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On your comment about “small business”, the SBA defines “small business” as having 500 or fewer employees. It’s natural for smaller businesses to take risks that larger ones will not. It’s very easy to move small businesses in different directions, and quickly. As an example, in the nasty “double-dip” recession of 1980-1982, I grew my business. It was very difficult to attract talented people in a recession, but I did increase in size by 1000 percent. It was very risky; how many people grow a business in the midst of a nasty recession? I did that, concluding that if I didn’t grow, I would fail. My business did survive; actually, it spawned a second business and that business also thrives today. Or, at least I believe it does, I haven’t had much contact with the principals in the past 5 years.  We parted in 1987, having achieved the purpose and I chose a different path. A large business would have great difficulty doing that.

Taking on the ideas of smaller businesses, larger businesses then develop or “exploit” the inventiveness of the smaller ones. It’s normal and natural for slower moving or constrained businesses to allow other, more nimble one’s to exist “on the bleeding edge.” It also entails much less risk. I consider “small businesses” as breeding tanks for ideas, many which never make it past the gestation period.  Small businesses, as you know, also have a much higher failure rate. I see the relationship between big and small as somewhat symbiotic. Merger and Acquisition activity is one of the results. It’s one way for a large business to acquire some of the characteristics of a smaller one. Google, HP, Microsoft, Oracle, etc. have all done this and it will continue to happen. What’s wrong with that? Many of the owners of “small business’ have retired rich that way, and very young.

On a personal note, I’ve been asked many times why I never patented some of the technology I have made. For a variety of reasons, I decided to keep a low profile for most of my career. That decision meant that I was seldom publicly acknowledged, but I was always busy and because of my success, was given increasingly difficult tasks. For most of the past 15 years, I have been frequently employed in situations in which success, as in meeting all goals and objectives, was considered to be somewhere between “difficult” and “impossible”. I conducted my own training for this. As an example, for one year (1988-89), I ran a consulting experiment in which I guaranteed to take on any problem and solve it, for a consulting fee of $3,000 a day plus expenses. That was a hoot, and I found myself in some really, really difficult situations in which I had to think way, way beyond the 9 dots, from preliminary analysis to completion. After a year, I decided I had learned whatever value I could from the experiment and focused my efforts on running my “normal” business. Of course, these situations go both ways. In 1991 I attempted to use a newer technology at a process plant. It looked good, passed pre-deployment tests, etc. However, on deployment in a real world situation, hidden flaws were revealed. It was serious, and not easily solved. One year later, and about $90,000 out of my pocket, I had a successful installation. You win some, and you lose some.

That decision not to patent was consistent with a desire to have low visibility and was a simple one. Once patented, and revealed, it’s very easy to copy technology and “embed” it into a much larger system, anywhere on the planet, and who is to know? If one is to be a “knowledge worker” it’s critical to retain control of that knowledge. So that was a consideration. Retain control and install only where I was explicitly paid to do so. Therefore I have never patented and never will. I also limit what I publish, for the same reason. There was a small danger of someone taking my ideas and patenting them, but in fact, most of the better ideas are somewhat difficult to replicate and require special skills simply to figure out how these systems work. Ideas, per se, aren’t patentable. So I don’t worry much about that. For about 20 years, I made it a point to embed my knowledge in computerized systems that were very specialized and difficult to copy, and NEVER in a PC. In that manner, I could control the dissemination and replication of that knowledge. I obviously succeeded. So much so, that I’ll be finally “revealing” or porting one of those systems to a general purpose programmable controller in March 2011. That system was invented by me and installed in a number of process plants throughout the U.S. in the 1980s. This one is in Texas, and I installed this application in 1989 in a specialized microprocessor controller, which I also provided to that Texas facility. It’s been running a critical process ever since (20+ years!), even though the production plant has expanded and evolved, and this processor is now integrated into a much, much larger and more sophisticated distributed control system. Of course, I was financially rewarded to allow that device to expand and evolve with the plant, and was paid to figure out how to effectively accomplish such integration. It’s like the “ghost in the machine.” God, I love my work! Now, I’ll be financially rewarded to allow this final change, so this process can become autonomous and not dependent upon me or the specialized controller, which is becoming a concern. It’s like getting paid to walk out the gate. I even volunteered a discount for the work, which led to a really great conversation with the engineer who is in charge of this project. I’m assuming others will figure out how it works, after it is in the new processors. There are a lot of really bright engineers in this country. If they can’t, well I suppose I can return to help them out.

This marks a final shift in my career, which includes training others to make their own good decisions, or  giving some of it away. How stupid of me, you might say! But how freeing! I’ve never based my survival, or success, on avoiding the educating of others. That approach always forced me to create new and better ideas, acquire new skills, and to test and develop them. Survival, financial viability and relevance was dependent upon a continuous succession of innovations. At this point, I suppose I could possibly sell my ideas or my company. But then what? Invest the proceeds, or purchase an large annuity, etc.?  I prefer to continue on my path and chart my own way, as a creation, albeit a very, very small one. But isn’t that what living one’s life is supposed to be?  

Returning to the patent concept. Of course, if one can develop something that has true “mass production” possibility, then a patent makes some sense. However, there are other ways, and I succeeded by developing ‘niche market’ devices, programs and strategies, and retaining an independent identity. I always assumed I’ll never get rich using my holistic approach (my definition of rich = accumulating a liquid net worth of $5 million or more, by my own means, by the time I reached 60). I think I could have made it, but a divorce was financially devastating, and set me back about 15 years. However, if “getting rich” was my goal, I certainly would have done so, divorce or no divorce.  I had decided at 28 that “making a difference” and “making a contribution” was more satisfying and rewarding than “making money.” So I changed my path in life, and began the pursuit of learning how to “make a difference.” It’s a personal choice. As a consequence, I have a somewhat different view of the consequences of pursuits which have a monetary reward, or tie us to “success” as defined by this consumerist driven, narcisstic society. That includes the negative impact of living a life with a significant commitment to the accumulation of wealth, the avoidance of disappointment, of avoiding risk or transferring such risk to others, or of taking the easy road.

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Small businesses are important to the economy, but for adding jobs, business startups are probably more significant. There are currently very few startups, using published statistics. I am aware of the issues facing small business, and I do use my personal experience as a barometer. Small businesses are usually internally funded; one exception is the short term funding of receivables, which many banks will still do. However with constraints on credit cards, and a continued weak economy, many small businesses which survived the recession are now reaching the limits of their capital. Many have been consuming cash for two or three years (or longer; I first saw the signs and experienced a slight pre-impact of the recession on my business in 2006/2007). I’m sure other businesses saw this reduction also. These businesses all contributed to the decrease in truck and rail shipments in 2007 and thereafter; rail peaked in 2006. (These shipments are now increasing and it is expected there may be a shortage of truck drivers in 2011-2012; another job opportunity in the new economy?).

Because of the duration of this downturn, the next wave of business closures is occurring as these underfunded and undercapitalized small businesses run out of cash. I get calls about once a week from brokers who want to assist me with a SBA small business loan; one of the advantages of the “service economy” is having these firms out there to assist me and other small businesses? Fortunately, I don’t need their help.

In my case, even with the recession, I never saw a business loss, so I paid corporate income taxes each and every year. That was because I had prepared, and because I was lucky. I began shedding unnecessary expenses in 2005-2006. In 2007, as a protective measure and part of that preparation, I obtained a large home equity loan. This was a very cheap “line of credit” which is very typical of the financial avenue available to small businesses, because banks are willing to lend to secured individuals, but not to their businesses. [My spouse] nearly freaked when I told her of my intentions, but at the time I told her “It will be years before we can do this again.” I also assumed real estate prices would drop, reducing the potential available should we seek such a line of credit in the future. So she agreed and we got it. It was a much better deal than using credit cards, etc. So far, I haven’t had to tap that “line of credit”, and I won’t except in some form of emergency.  

As I said, I’m lucky and overall, my business is operating at about 3% ahead of it’s long term (10 year) average, with 4 of those years above and 5 below the current fiscal year’s net level. However, I am doing NO sales or marketing this year (but I’ve done very little for three years; less than $5,000 worth each year). It’s a calculated decision on my part and will probably reduce my business activity level for FY 2011. Had I succeeded in convincing my business partners in my office building venture to sell in 2006, when I wanted to, I’d probably be working even less today. But I gotta pay the office rent! So it’s not all perfect in the real world.

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 I don’t consider “grey market” or “black market” businesses in quite the same light as “small business.”. I consider a “small business” as one which produces something and from that production, generates income and pays taxes. It issues W-2s and 1099s, purchases unemployment insurance, pays FICA, FUTA and Department of Unemployment Security fees in the state in which it resides, has commercial liability insurance, and purchases similar business insurance for automobiles that are used for business purposes. These are the basic characteristics of what I define to be a “small business.” A more stringent interpretation would include one that pays rent for an office or manufacturing location, or owns such assets. I don’t want to exclude “home based“ business, or “very, very small businesses.” However, many of those pay few taxes, avoid special business taxes, such as business based telephones and cellphones (which paid taxes designed to pay for computers in libraries, etc.) and in that manner, these very, very small businesses seem to have more of the characteristics of very large businesses which also avoid taxes.

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Re: your question about the “scattergun” which was a military shotgun, going back to the blunderbuss (Dutch donderbuss, 1700?). The earliest were sometimes filled with small rocks, nails, other junk and then fired with black powder. This would damage the barrel which was softer brass, and they could explode or misfire, damaging the user or others in the vicinity. Later versions sported iron barrels.

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Re: the “scattergun” and the Fed move. It lacks focus, can have unexpected outcome and is dangerous; there’s a 50% probability it will backfire, and in some unusual ways. It is unlikely this will stimulate U.S. job growth or stimulate the economy. Just the opposite; it may inhibit the very modest recovery we are currently experiencing. It will punish those international savers who are holding U.S. debt. Some will trade in that debt for the dollars being printed. And purchase what? The underlying assumption of this move is seriously flawed. Will debasing the dollar put unemployed financial workers, or automotive workers, or all sorts of manufacturing workers, whose jobs are now in China, back to work “doing what they did before”? Of course it won’t. Will it accelerate business startups? Probably not.

The fed move will help the devaluation of the dollar and will cause a continued rise in commodity, energy, and food prices. This will reduce disposable income and may reduce retail sales.  Just what we need at this juncture, isn’t it?

If the Japanese or the Chinese shed (sell) U.S. debt, it will result in an increase in inflation.  Will that be helpful?

The fed move is designed to force savers into riskier markets. Where they can then lose money in the next big Dow drop? I can hardly wait to see the consequences of the panic of 2012 or whatever.  

I think the U.S. government is out of bullets, and is firing blanks. This entire move is one of desperation. Any day now, I expect Obama or, should we make it that long, his successor, to don a sweater, sit in front of a fireplace and tell the American people “It’s going to be difficult.” Just as Jimmy Carter did when he was president!

Will this Fed move lead to another recession? Who knows? That’s as much psychological as anything else. The employed are nervous, have been saving (5%) and simultaneously reducing revolving debt (at an 8.75% annual rate).  At present, due to optimism on the part of the consumer, and a much better personal balance sheet, retail sales are supposed to be OK this holiday season. In other words, the wallet is apparently open, if only slightly. However, give “Joe and Jane Consumer” a jolt and he or she will quickly close that wallet or purse and hunker down. That’s what happened in winter 2008. It could very, very easily happen again. Consider what happens if there is a slight reduction of “growth” statistics, a shock to the Dow, or the “talking heads” start mouthing “double dip recession” and then “depression” instead of “deflation.”

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One way to stimulate employment, is get those boomers out of their jobs and into retirement, creating opportunities for new workers. That may be the one thing that does stimulate the economy. The government can assist by printing more money to pay back those “IOUs” in the trust fund drawer. So the choice boomers face is this;  continue working, saving and paying income and SS taxes, or retire and begin receiving, which will only exacerbate the balance of payments problems and deficit spending of the US government. Debasement [of the US currency] seems impossible to avoid.

For the boomers, there will be means testing, or a reduction in benefits, or both. This will be a wide net and current retirees will be pulled in. The 0% SS COLA adjustments are the “shot across the bow.”  Most of the boomers have figured that out. That’s why most boomers who can, are working longer and saving more. At least, that’s what I’m being told by the ones with whom I can have an intelligent and honest conversation.

Of course, spending of retirees in retirement will be squeezed by the consequences. That won’t help the economy either, will it?

I can hardly expect that those in the “Y-Me” generation, who are in college today or just out, will be thrilled to discover limited job prospects and the added joy of paying for the boomers social security retirement and medical benefits. There was a lot of noise when companies cut back on 401K contributions during the most recent recession. When younger people begin to realize that about 7.65% will be taken “off the top” to pay for retired boomer’s benefits (SS + Medicare) and a matching 7.65% is taken from their employer’s pocket, while they get minimal 401K contributions or reduced wages, or both, I then suspect things will get interesting.  

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As for the hedge funds, Soros, etc., they hardly excite me. The problem in the U.S. is structural. True, the hedge fund people and their ideas and money “manipulation” have done harm and do cause problems. However, most of our problems were caused by millions of Americans who either sold or bought, or built real estate for 30 years. The seeds of this destruction can be found in the shift to a service economy, where millions entered high paying jobs for the sole purpose of becoming very skillful salespeople. They made and many continue to make extraordinary amounts of money, be they realtors, mortgage or stock brokers, lawyers in that sector, or financiers and bankers. Another contributor was the government shift to a perception of a home as an investment, in the early 1980s. Finally there were the government policies over the most recent 20 years, which were intended to put everyone in a home, even if someone else was to pay for it.

Even at this late date, after four years of resets, there remain about $400 billion in mortgages which will be recast or reset in 2011 and 2012. As we all know, there is an additional $200 billion purported to be in need of bailout at Fannie and Freddie. I sometimes think the Fed policy is intended in part to keep interest rates low to protect these people until 2013.

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One final thought on the “critical thinking” issue, and here is an example. I see that electric cars continue to be promoted as “zero pollution” vehicles, although such vehicles require a big, smoking power plant to make them work. The facts: 50% of the electrical energy produced in the US comes from 600 coal burning power plants. Of those states producing power from coal, based on capacity, 15 of the top 16 are located east of the Mississippi. Combined, those 15 states  generate 66% of the electricity produced from coal in the entire U.S. Many of these plants were built prior to 1970 and are inefficient and use older technology. But the cars that will be recharged from the electrical grid fed by these smoking, polluting, behemoths are called “zero pollution vehicles.” Does this make sense? Of course not, but if you purchase one, you can feel good about yourself as you helped “save the planet.” Plug it in at night, and turn on your electric blanket, while you are at it, and keep those power plants humming along. And get a really big screen TV, too!

The nail in the coffin; it might also be useful to check on the methods and energy required to make those exotic batteries under the hood of that electric car. But that would further spoil the fun, wouldn’t it?

Here’s another spoiler; as someone pointed out a couple of years ago, those wonderful “electronic picture” frames do consume electricity. I saw them being advertized again for Christmas 2010. Supposedly, the quantity sold in the US in  2007 consumed the entire electrical output of a medium sized power plant. So we should each give one for Christmas! Let’s accelerate global warming, and then go with a loved one, or boy friend or girl friend, to a movie about the poor polar bears!

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That’s the problem with large numbers of people, as in hundreds of millions, who all do the same thing; collectively we consume huge quantities of everything.  That’s the real source of the current problem. Millions of consuming Americans! There was a line in the movie the Matrix, that compared human beings to bacteria. At times I think the writers had a valid point. There is one difference, however, bacteria, it is said, can’t think. Give us a few years and perhaps we’ll be just as mindless.

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The good news? Lots of people are again making money in real estate. Just as they did 40 years ago. It’s probably a “once in a lifetime” opportunity. It will be a long term venture, and there are risks, but people do have to live somewhere, don’t they?"

IMF Bailout of Greece

Here's a "blast from the past" as this was written in early May, 2010:

No, it is not a higher percentage than first discussed.

At first, it was discussed that the Eurozone would lend 30 billion Euros and IMF 15 billion Euros (i.e. 33% of the total) for 2010 only.

At the end, we have 80 billion contributed by Eurozone and 30 billion by the IMF for a 3-year period. This is 30 in a total of 110, i.e. 27% of the total amount getting lent by the IMF.

Since the US have an 18% IMF quota (much lower than their 24% share of the global GDP), the US will end up contributing (via the IMF), around 4.9% of the total amount, i.e. around 5.4 bil Euro. This is significantly lower than the German and French contributions and lower even than the Italian and Spanish ones. It exceeds by not a wide margin the Dutch and Belgian contributions.

Also, the IMF is a sort of insurance fund (or blood bank). The US may need it some time in the future too, who knows? What was once the British Empire ended up resorting to the IMF in 1976... As Aesop wrote, the mouse may help the lion some day - no-one is too big to end up asking for help, or too small not to be able to provide some.

Response to Morningstar about "Your Retirement Plans"

This is an expanded version of a recent response to a Morningstar article. 


I just finished an 18 day working marathon, so I missed the opportunity to give my two cents; better late than never, they say. I'm 66 and in "phased retirement," whatever that means! Perhaps it means I'm "out of phase" with the rest of America??

I'm pragmatic and cynical. I have been for decades and I have no intent of changing. I suggest people should avoid "buying into" the populist stuff out there and consider that their ability to reach savings and retirement targets is a correlate to their ability to reach annual savings, spending, and return targets last year, the year before, and so on. 


In other words, if you couldn't do it in 2011, or 2010, etc. then what makes you think you'll get the job done in 2012? 

How does that look in reality? Back in 2006 when the popular view was 8% market returns, I was basing my retirement projections on 4% annual returns. Don't misunderstand me, I wasn't and I don't, use a conservative approach which at that time would "project" 4% returns. I was and continue to be "defensive." I don't pay too much attention to "anticipated" returns. If you want to see what I mean, you will notice that most of the services have turned down their returns on current portfolios. That means, the experts have cranked in what we know about the current economy and decided that "8%" from nowhere isn't possible. Of course, it wasn't in 2006, either. But it wasn't popular to project 4-5% returns, so the pros didn't. 

I continue to use a mental partitioning in which "my" investment plans look at risk tolerance, and company profiles, etc. and attempt to get the best return on my investment. That means comparing commercial real estate to residential to bonds to stocks to funds to my own business returns, and then distributing my eggs to avoid the pigs. 

However, when I assess my future financial health I am very conservative and use lower than popular returns. Why is that? Well, perhaps you can predict the future. However, the indicators are that isn't possible. I did predict the 2008 melt down and I did position myself to prosper when it happened and I did invest in the down turn. However, that wasn't "prediction;" that was reaction to short term events, and some discipline. I did not buy into the populist junk out there. And I don't now. And I never, and I mean NEVER believe anything a politician says. 


So I don't buy into the populist BS that our President puts out there each and every day, nor do I invest based upon his or "Michelle's" optimistic appraisals of the situation. Enough said on that!

My retirement philosophy is: Save more than you need, spend less, have a plan with a horizon that extends to my age 100, plan for difficult times (surprise, they arrived!) and remain well diversified. Live within my means and avoid "discretionary spending creep". 

So if one is 45 then they had better have and be able to discuss a 55 year plan (100-45 = 55). If one is 25, then a 75 year plan is a necessity. 

As for retiring "early," or choosing to work in retirement, as my doctor is fond of saying "When you stop you drop." I have no intention of dropping, and after 49 years of working, I have to say, it isn't as bad as so many make it out to be. Besides, I don't think I'd fit in with the "Occupy" crowd. 

At present, my spouse and I attempt to take a few vacations a year, and set firm boundaries. The latter is for our mental health and well being. 

As for investments and income in retirement, I am keeping about 25% liquid and safe. So I have more cash, and am less concerned about the latest stock market gyration. I'm using a modified bucket approach and will not be selling stock so as to buy food to eat. 

As for the economy and the health of the market, well, as far as I am concerned, we are a nation of gamblers, and as with the lottery, there are millions of losers and very, very few winners. If you think the odds are great at Las Vegas, then by all means, go there and gamble your IRA away. But don't come to my door looking for dinner. 

I will attempt to keep well below 3% annual withdrawal rates after income from work drops to zero. I intend to only spend a part of government mandated "minimum distributions" from my IRAs, unless I choose otherwise. That is the important part; have the flexibility to spend or to save the excess from those RMDs. 

Why we have a deficit problem

This wasn't posted in July of 2011. It's an interesting perspective, so I hit the "Publish" button today and it marks a return to my posts at this blog:

Here's a link to an article by Robert Samuelson in the Washington Post on July 28, 2011:
Click to go to "Why We Are in This Debt Fix"

Here's an interesting quote from the article. This is about the issues and some of the mythology framing the recent political debate.

 "What sustains these contradictions is a mythology holding that, once people hit 65, most become poor. This justifies political dogma among Democrats that resists Social Security or Medicare cuts of even one dollar. But the premise is wrong. True, some elderly live hand-to-mouth; many more are comfortable, and some are wealthy. The Kaiser Family Foundation reports the following for Medicare beneficiaries in 2010: 25 percent had savings and retirement accounts averaging $207,000 or more; among homeowners (four-fifths of those 65 and older), three-quarters had equity in their houses averaging $132,000; about 25 percent had incomes exceeding $47,000 (that’s for individuals, and couples would be higher)."

The next time someone tells me that they "are living on fixed income" I'll remember that quote.

US Budget Dilemma, Downgrade and Consequences

I took a one year long hiatus for this blog. Partially because there was really nothing new or significant to post. However, we've entered a new phase in America.

I recently sent an email to an associate. We had been having a conversation about the budget deficit, the leadership deficit at Washington, Federal taxes and entitlements. Here is part of that email:

"Here’s the current numbers, as a percent of spending of the federal budget. This illuminates some of my recent statements:
Social Security  20%
Miscellaneous Security (Food Stamps, Unemployment Comp)  16%

Medicare 13%

Medicaid  10%

All of the above = 59%


Highlights of a few others:

Defense, including two ongoing wars 20%

All Science, Space and Technology 1%

Servicing the debt 5%

Education 3%

The above is why a credit downgrade of the US is a probable reality. The “social programs” are growing as a percentage of the budget and there is no reduction in sight. As I recall, in 1960 the US spent 20% on social programs and about 50% on defense."

Well, here we are and S&P did, in fact downgrade the US. Moody's has stated the US outlook is "negative." So What's Next????

The fact is, it’s going to take some political will to solve this. That requires tax increases and entitlement spending freezes or cuts. The sooner the better.

The S&P downgrade was fueled by the realization that this will not happen in the near future. According to S&P, even France has a better outlook than the U.S. at this point. Moody’s has said the outlook is “negative” for the U.S. The ratings agencies do not price U.S. debt; the markets do this. So in some respects I think this is a “non-event.” It is also a moment when U.S. debt was changed from “risk free” to “having some risk.” That is a big deal. Stepping outside the box, I think it’s useful to remember that S&P once downgraded BRK. However, what is significant is the way the politicians handled this, the continuing lack of leadership from the White House, and the post downgrade rhetoric coming out of Washington.

Hmmm, I do have to wonder if President Obama will take to the airwaves and tell us about how this is another "Sputnik Moment" in American history?

What no one in government wants to talk about is the consequence of a protracted 10% unemployment. That has created an incredible government revenue decrease and contributed to the budget shortfall. It’s the #1 reason for the rapidly rising debt. The projections usually include a reduction in unemployment and unemployment benefits payments coupled to rising government revenue. That has not happened, and won’t unless there is a tax increase. Things were bad because of the out of control entitlement spending. Now, with income shortfalls, the financial health of the U.S. is much worse. When politicians pretend the current deficit issue can be dealt with by increasing taxes, they are showing their lack of financial acumen. How do you deal with an economy in which the entitlements are 59% percent and increasing at an alarming rate? Raise total revenue from 25% to 40%? So to be realistic Washington must make significant cuts to entitlements. Certainly more substantial than the amount to be gained by raising taxes.

As is true of other bubbles created by the politicians, the "entitlement bubble" will not go away and can't be taxed away. Not when an increasing percentage of those living in America are moved from the rolls of wage earners to entitlement earners each and every year.

The politicians always pretend the latest stimulus program or whatever will solve the problem, and that “everything will be back to normal” by next year. That of course, allows them to maintain the status quo, and their voter base. They tell us what we want to hear. Now it is to be expected that Democrats will argue that political sabotage by Republicans forced the S&P downgrade, and Republicans will argue that it is because of irresponsible government spending by the Democrats. Individual Americans will pick the argument that best supports their personal financial position, supports their personal lifestyle, and inflicts the pain on others.

Obviously, as far as I am concerned this is all about money, and greed. This pretending also allows Americans to continue on their profligate ways with the assumption that “someone else” (our descendants) can pay the piper.

Politicians made note of what recently happened in New York. As I recall, the AARP reported the May 24 win with a headline about “Medicare Attack Beaten Back;” the article began as follows:

"Jubilant supporters chanted, "Medicare! Medicare!" after Democrat Kathy Hochul shocked the political world with her upset win in a special election in New York's conservative 26th Congressional District, for a seat held by Republicans for all but 16 of the past 154 years."

According to AARP last May, “Democrats see Medicare as winning issue for 2012 election.”

So should I be surprised by the recent shenanigans in Washington? The Democrats telegraphed their position in May. It’s all about votes. As for the AARP statements about SS, I suppose their position that “Social Security doesn't contribute to the deficit, and shouldn't be cut to fix it.” is literally true, but those special federal IOUs aren’t backed by anything but the government’s ability to print money (debase the currency or raise taxes). Recently, the income collected for SS benefits did not match payouts. I suppose these are inconvenient details.

Of course, when revenue falls, spending is supposed to also fall. But not here in the U.S. Not for many families and certainly not for government. Up until recently, home equity and credit cards were personal money printing presses for many people. Unlike the U.S. government, we can’t default on our personal debts unless we find some way to declare bankruptcy. Many have. More will as this economic malaise continues.

The current government solution seems to be to allow inflation to occur and debase the dollar, thereby reducing the consequences of the U.S. debt for the government, and inflating our way out of this dilemma.  In fact, at present, the U.S. is only paying interest on the debt equivelant to about 1.5% of GDP, the lowest since 1973. For nearly TWO decades it was above 2.0% and was generally above 3.0% from 1985 to 1997!

Here’s an excerpt of what S&P said in their downgrade. I’m sure you read this, but it’s worth repeating to every American and politician in Washington. S&P is emphasing spending discipline, as in “containment of entitlement spending.” I read their entire statement at the S&P website. Emphasis is mine:


"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade……Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability…………The outlook on the long-term rating is negative.”

I am absolutely certain this will be resolved, one way or another. First, foreign governments will continue to press to have our debt downgraded. This is one way to increase the yield. So the tug of war is the U.S. debasing the dollar and foreigners including governments and banks, pressing for a change that increases their return. As I recall, 45% of all U.S. debt is held by foreigners.

Of course, the U.S. consumer and savers of U.S. dollars will all suffer.

There is no doubt that the free ride in entitlements will end. Benefit cuts and means testing are inevitable. What is uncertain is how long the politicians can hold out. Holding COLA and other benefit increases at 0% is the other preferred tactic.   It has to be this way because of that incredible 59% of the budget for “entitlements” and related social programs. We can end the wars, but that will only buy the U.S at most 5 years, at the rate of medical and cost benefit increases. Ultimately the entire U.S. budget will be consumed. But nearly everyone is in denial about this, just as they were about the housing market, the debt bubble, etc.

Meanwhile, here is what the AARP says on their website about the current battle:

“AARP CEO A. Barry Rand offered the following statement after the House and Senate passed the Budget Control Act of 2011 to raise the debt ceiling. Throughout the past several months, AARP has been focused on preventing cuts to Social Security and Medicare benefits for the millions of beneficiaries who have paid into the systems over their working lives…..”

As I stated in my “Reality Check” article, the only option is for individuals to save more for their future. This is a very unpopular choice. In view of the current situation, I have to admit that saving in dollars doesn’t seem to make much sense.

Looking ahead, I can’t see the 20 and 30 year olds of this country paying increased amounts in taxes to fuel my retirement party or to pay for my protracted health care. That party is over. We may resist and the politicians will attempt to avoid but they cannot. The pool of payers is shrinking. We are beyond the tipping point.

The next tax revolt will be age based. So far the talk has been disguised as “rich” versus “poor” but I do think it will get ugly. So far (since about 2005), I’ve been pretty accurate in my assessment of the situation. I think this too will be accurate.

No one will like it. That’s what happens when a really deep financial hole is dug. There are no easy solutions. And no one, except the very rich or politicians can escape the pain. There will be higher taxes, there will be smaller COLA increases for retirees, there will be means testing, medical co-payments will increase, and the costs of everything for everyone will go up. As I said, no one will like this.

How ugly will it really get? I would prefer not to say; besides, I don't have a crystal ball. However, I can say I've been pretty accurate for the past decade. More accurate the the economists, the Fed, and the politicians in Washington. Or perhaps I've simply been more honest.

Of course, the real question is what to do to prepare for this politically inspired future. The truth is, there are no easy answers for individual families. 1) Save more and spend less. 2) Prepare for reduced entitlement payments. 3) Prepare for increased taxes. 4) Prepare for inflation. 5) Prepare for protracted high unemployment; I was expecting another 5-7 years. Now, I think the current situation could span another decade or more. Just as individual investors are leaving the U.S. markets to buy gold or whatever, companies (which are headed by human beings) will make their investments as in building factories, elsewhere. Our work force is no longer the most educated and motivated on the planet. For companies, this shift away from America took a turn when they quietly stored their $Billions in cash overseas (MSFT, AAPL, CSCO, etc. ). Now the move will accelerate.

Note: GE gets the bad press about "low taxes" because it's an old line industrial company. The tech darlings get away with their shenanigans by both politicians and the popular media. I suspect that for the media, it's because of personal bias; a lot of these "journalists" own stock in publicly traded companies. Who is going to be honest enough to hit the companies in which they own stock? Certainly not the popular press.

The wild card in all of this? Europe, which is actually in worse shape than the U.S., overall. That’s why people continue to buy dollars even with all of the shenanigans by the politicians in the U.S. However, should the EU get its act together, or should individuals decide that will happen, then the change for the U.S. will be swift and devastating. I think that's something for Americans to think about.

Don't Bail Out Bob

A Reality Check

I sent this to family members, and I share it here:


This is prompted by two emails I recently received, and by two conversations including one with a dear relative, and by the realization that I have to pack for another business trip. It is also prompted by the fact that I returned to Chicago only a few days ago and my spouse has now returned from Dallas, and I will soon be “on the road” again. I am becoming more and more aware that “Life is short” as the saying goes. Perhaps teenagers can afford to pretend that they will live forever. I will not, cannot, and I still have a lot to accomplish on my “to-do list of life”.

As for the relative referenced above, he is struggling, has continuing difficulties, has made a series of bad decisions spanning 6 years and has also had some misfortune, including timing issues related to the economy. As a result, he has spent more than a few nights in a PADs shelter this year. He has been optimistic throughout and insists that his “modi operandi” is viable and that he will turn things around. That may occur in 2013, but for the immediate future I beg to differ with him, have repeatedly told him so, and have made suggestions. He persists in his path. This is an individual who is educated, very smart and for many years made well into 6 figures a year, each and every year. It is difficult to watch him struggle, persist in his path and to resist change.

We are now about 4 years into a very nasty recession. I use June 2006 as the start date because that is the date that real estate prices began to fall and the economy began to contract. That is also the time at which I first experienced significant change in the business climate.

My spouse and I now know of 7 families of immediate acquaintance who are experiencing acute financial difficulties. By “acute” I mean forced short sale of a home or condo, unemployment for a period exceeding 12 months, etc. We also know of 6 additional families who are experiencing financial difficulties which are also severe, but not quite as distressed. Those families have acknowledged that they are in a “negative cash flow” situation. Which bluntly means, they are living beyond their means and headed for a financial cliff, and a day of reckoning.

To some extent our lives and our life styles are a personal decision on the part of us all. But not entirely. My relative felt he could “beat the odds.” He had a strategy and a plan. It was flawed but possibly capable of success. We discussed this and I told of him of what I perceived were shortcomings. He persisted and he has failed.

I am unwilling to fail. To that extent I will do whatever it takes, and will make and have made, great sacrifices. My spouse will possibly be on this planet for another 40 years. It is essential that we have a financial plan in place to accommodate that life span. To do otherwise is irresponsible on my part, on her part, and dishonors the relationship.  

My spouse and I have made a conscious decision to attempt to live within our means. By that, I mean not to spend any more in a calendar year than our net incomes (wages after taxes, rental income, dividends and interest, etc.), and to also save a reasonable amount for retirement and to make concrete plans for that retirement. This requires some sacrifice on both of our parts and also some trade-offs in life style. It also requires decisions that are not popular. We will not and cannot attend every family event or function.

To be blunt, we have not the financial means to do so. Perhaps you do and if so, all I can say is “good for you.”

Let me also state, that that you are free to make any request. However, in any request or negotiation there are three possible responses: accept, counter-offer or decline. I am free to choose any of those responses, but I prefer to counter-offer rather than to decline.

On a personal level, this year we did not meet our financial goals, and had to dip into savings, “but we had a lot of fun and one hell of a party”. Frankly, I am concerned by the possibility of another 4 to 6 years of malaise in this economy, and the impact on those around us. I now wonder and question “are people prepared for this” and “how will people survive?” By survival, I mean can we all maintain our lifestyle, our relationships and our sanity and simultaneously meet our promises and commitments?

I made the decision last year to honor or attempt to honor, requests or invitations that are serious. I cannot honor all requests and invitations and keep my commitments Those commitments have also included an increased level of “giving” in various forms, including consistent gifting to two local churches and several other charities and food pantries, and to distressed family members.

This year, the last of three and one-half college loans that I paid for, were retired. None of these were mine, by the way! The good news: I’m no longer under that specific “financial burden.” So should I now pursue an advanced degree? I think not. I am sufficiently educated to accomplish whatever it is I intend to in this life. Don’t misunderstand. As one who has been committed and lived a life of “continuous improvement” I have no intention of atrophy at this point.

I have the benefit of having struggled for years after a very bad divorce and some very difficult economic times. Do any of you recall the recession of 1981-1984? I actually started and grew a business in the middle of that recession. Just prior to that, I went into the office each week and wondered if each Friday would be my last. That went on in 1977-1978 and prompted me to start my first business. If I was to be “fodder for the cannons” I decided I would choose my own destiny. Business worked but marriage didn’t and after my divorce, I had a maximum of $75 per month for all expenses after rent and electricity. I’ll let you think about what that “disposable” monthly amount of money would mean to your lifestyle. For me, at that time I couldn’t afford a monthly Dunkin’ Donuts, and getting a haircut was a major economic decision!

As a consequence of that experience and the fond memories it includes, the nearly 20 years of “lost life” including the nearly 10 years it took to dig out of that hole, I have vowed never, and I mean NEVER to allow myself to be in that situation ever again. As a result, I am the “hard ass” in my relationship with many people and that includes with my spouse. She knew that when we married. What you see is what you get, and I have been very transparent with her. That is, however, no excuse for any irresponsibility on my part.

I hope that each of you is taking steps to protect your way of life. I suggest you consider where this economy is today and to project that into the future for another four or more years. What would that economic reality mean to you and your loved ones? Do you have a plan in place? Is your plan and lifestyle compatible with that possible reality?

                                                 

I realize you may not agree with my prognosis. You may prefer to listen to optimists and certain politicians. I suggest that you consider the risk and risk to your family and your relationships that you are taking, should you be incorrect. This is neither about being “wrong” or being “right”. It’s about succeeding and honoring agreements and commitments.  I am not willing to take the risk, or to say it another way, there are some risks that are worth taking but this is not one of them. To anyone who thinks they can “beat the odds” I suggest you consider how well you have done in the past four years, since this economic malaise began. Then consider that things might actually get worse.

I am personally very fortunate. I have a loving, compassionate, hard working and successful spouse. We are both like the tortoises in a country of wild hares.  My business remains at levels that are adequate. That permits me to flush a certain amount of money each and every year on lifestyle choices. However, I consider certain things to be extraordinary risk taking at this time. Mortgaging ones future is certainly one of them. Five years ago, I might have thought differently, but this is “here and now”. For the Boomers, be prepared for a retirement below that of current seniors. For the GENX group, I suggest you save more as your life style will be significantly less than that of those today in retirement. For GENY, if you don’t save 10 to 15% of your wages for retirement, be prepared to starve.

To use that old Hells Angels’ quote “Life is a bitch and then you die”. Or not, but the choice is ours. If you want to be in a responsible conversation about this, let me know. However, if you want to tell me that I am too pessimistic, etc., then don’t bother. I decided, in 2006 that the economy was headed for disaster and took appropriate steps. If I hadn’t, well, I’d be in the s***hole today. So save your optimism for other gamblers.