Yes, We Have The Means To Pay The Interest On Our National Debt

pragmatic-capitalismThe rhetoric on the national debt is again starting to heat up and it’s only going to get worse the closer we get to the Presidential election. So I thought I’d post an article from Cullen Roche over at The Pragmatic Capitalist blog (www.pragcap.com) as a review why we always have the means to pay the interest on the national debt.

If you haven’t read Cullen’s book, you should.

Let’s Talk About the US Government’s Interest Burden

By Cullen Roche (www.pragcap.com)

Greg Ip had a piece in the Wall Street Journal yesterday discussing the debt burden in the USA and how low interest rates have “moved back” the “hands on the doomsday debt clock”.  The article touches on the important topic of entitlement spending and whether it’s sustainable, but does so in a manner that misleads readers about why this might be a problem.

For instance, Ip says that “higher federal borrowing puts upward pressure on interest rates”.  This is classic “crowding out”, an argument that has been thoroughly debunked in the last 20 years as interest rates have fallen despite soaring government debts around the globe.

debt-480x217

But the interest rate burden is a more common misconception.  In “The Biggest Myths in Economics” I elaborate on this:

“The interest burden in the USA is actually declining as a % of GDP and is entirely controllable if the government desires.  We pay about $250B in debt service every year. The Federal govt could actually reduce this substantially by reducing the maturity on their debt by issuing short-term debt instead of higher interest bearing long-term debt. They have complete control over their interest costs if they so desire.

There is no ironclad law that forces the US govt to raise interest rates if it doesn’t want to. Just look at Japan where interest rates have been zero for two decades. A government that is sovereign in its currency, has no foreign denominated debt and a central bank that can issue its own currency does not have to worry about someone else telling them that they need to raise their interest costs. This interest cost is not controlled by “the market”.  It is controlled by the monopoly supplier of reserves to the banking system (the central bank) and the Treasury which dictates the average outstanding maturity of the liabilities it issues. So this too is not a realistic concern.”

Of course, the burden of inflation is a whole different problem for a government (and a very real worry). It’s highly unlikely that interest rates would remain low in the face of rising inflation, but rising inflation is certainly not an issue that appears worrisome now or any time in the immediate future. Unfortunately, we still discuss government finances as if they are precisely similar to a household.  As James Montier discussed in his latest GMO piece, this just isn’t true.  And putting this discussion in the proper context is crucial to understanding the cause, effect and potential risks we encounter when implementing certain policies.

See the following pieces for more detail:

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Kindle

The Drama on Wall Street

images-32

Have your long-term financial goals changed in the last three days?

Are American companies less valuable because investors in China are panicking?

Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?

These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed.  In each of the first four trading days of the year, China closed its markets due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value.  It’s unclear exactly how or why, but the panic spread to global markets, with U.S. stocks falling 4.9% to mark the worst first-of-the-year drop in history.

For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board.  At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week.  One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.

Will they?  The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future.  Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean.  The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn.  The best, sanest investors will once again watch the markets for entertainment purposes—or just turn the channel.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Global assets shaken by China market turmoil – FT.com

Global markets were in tumult on Thursday after attempts by Chinese authorities to support share prices and the currency raised fresh questions about their ability to manage a slowdown in the world’s second-largest economy. The Shanghai stock market

US bond yields sound warning on economy – FT.com

The US government bond market is blowing raspberries at the Federal Reserve. This could indicate trouble ahead for the American economy. Last month, the Fed lifted interest rates for the first time in nine years, and short-term bond yields have duly

Kindle

Global Financial Literacy: The Haves and Have-Nots

A new survey by the S&P organization—the S&P Global FinLit Survey—measured financial literacy across a wide spectrum of countries around the world.  More than 150,000 randomly selected individuals in 140 countries were asked to answer five multiple-choice questions regarding investment diversification, the ability of income to stay on par with spending (or vice versa), interest payments and compounding investment returns.  If individuals could correctly answer three out of the five questions, they were deemed to be financially literate.

So how did we do?  Only 57% of the Americans surveyed were able to correctly answer three out of the five questions.  But as you’ll see from the accompanying chart, that put the U.S. in the upper echelon of nations overall, ranking number 14 behind Finland (#10), Australia (#9), Germany (#8), the Netherlands (#7), the UK (#6), Canada (#5), Israel (#4) and the three top-scoring countries: Sweden, Denmark and Norway—all Scandinavian, which probably means they cheat by actually including financial literacy in their regulator educational curriculum.

Not surprisingly, poorer countries tended to be less financially literate, and the survey found wide discrepancies between adults living in the richest 60% of households in each country vs. those in the poorest 40%.  For instance, the U.S. saw a disparity of 64% literate (wealthiest households) vs. 47% (poorest).  The conclusion: financial ignorance can carry an invisible lifetime cost.

Does that mean that U.S. policymakers will add a financial literacy curriculum to our nation’s high schools, as a way to increase the prosperity of our overall society?  Let’s not hold our breath.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

A Global Financial Literacy Test Finds That Just 57% Of Adults In U.S. Are Financially Literate

The first ever Global FinLit Survey finds that just 57% of adults in the U.S. are financially literate — a figure that’s good enough to rank America 14th in the world.

McGraw Hill Financial | Global Financial Literacy Survey

Financial literacy is a critical barrier to financial and economic participation. Because of a lack of knowledge about finance and financial products, many people – especially the poor and women – are not able to access banking and financial services, and are therefore kept out of financial markets.

Kindle

Sleep Like a Superstar

images-2

Have you ever wondered how successful people get it all done?  Apparently, they don’t stint on their sleep in order to find extra hours in the day.  But they do seem to get up earlier than the rest of us, giving some credence to Ben Franklin’s saying: Early to bed and early to rise makes a man healthy, wealthy and wise.

Forbes magazine looked at the sleep habits of 21 people that most of us would consider successful—including Franklin himself, who routinely went to bed at 10:00 PM and awoke promptly at 5:00 AM.  The word “routinely” is important; virtually everyone on the list was consistent about bedtime and awakening time.  Some sleep seven hours like Franklin, including Winston Churchill (3:00 AM to 8:00 AM), Bill Gates (midnight to 7:00 AM), Apple CEO Tim Cook (9:30 PM to 4:30 AM), Huffington Post founder Arianna Huffington (10:00 PM to 5:00 AM), Twitter co-founder Jack Dorsey (10:30 PM to 5:30 AM), and Amazon.com founder Jeff Bezos (10:00 PM to 5:00 AM).

People who sleep six hours a night include U.S. President Barack Obama (1:00 AM to 7:00 AM), Yahoo! President Marissa Mayer (midnight to 6:00 AM, but sometimes up by 4:00 AM), AOL CEO Tim Armstrong (11:00 PM to 5:00 AM), Newton Investment Management CEO Helena Morrissey (11:00 PM to 5:00 AM), and Tesla Motors CEO Elon Musk (1:00 AM to 7:00 AM).

Others sleep or slept only five hours, among them Richard Branson (midnight to 5:00 AM), PepsiCo CEO Indra Nooyi (11:00 PM to 4:00 AM), and inventor Thomas Edison (11:00 PM to 4:00 AM).

If you sleep eight hours a night, you’re still in good company.  That list includes Virgin Money CEO Jayne-Anne Gadhia (10:30 PM to 6:30 AM), MediaCom UK CEO Karen Blacklett (11:30 PM to 7:30 AM), software-as-a-service company Mor founder Rand Fishkin (1:00 AM to 9:00 AM), digital networking guru Neil Patel (11:00 PM to 7:00 AM); Ellen DeGeneres (11:00 PM to 7:00 AM) and Buffer Software co-founder Leo Widrich (1:00 AM to 9:00 AM).

With a handful of exceptions, few of these successful people are staying up late to catch the Late Show, Saturday Night Live or the end of the NFL Monday Night Football game on the East Coast.  And few are sleeping past the delivery of the morning paper—which means they’re getting a jump on the rest of the world.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

The Sleep Habits Of Highly Successful People

Research shows it’s better to sleep briefly than to sleep badly. Here’s how 21 entrepreneurs do it.

Kindle

The Great Panic of 2016

images-34

Wow!  There’s no diplomatic way to say this: the global stock markets are in panic mode right now.  In two weeks of trading, the U.S. S&P 500 index is down 8% on the year, which brings us close to correction territory (a 10% decline), and has some predicting a bear market (a 20% decline).

On top of that, we’ve been hearing a widely-publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets “look similar to 2008.”  Mr. Roberts is also predicting that technology and automation are set to wipe out half of all jobs in the developed world.  If you listen closely out the window, you can almost hear traders shouting “Sell!  Head for the exits!”

When you’re in the middle of so much panic, when people are stampeding in all directions, it’s hard to realize that there is no actual fire in the theater.  Yes, oil prices are down around $30 a barrel, and could go lower, which is not exactly terrific news for oil companies and oil services concerns—particularly those who have invested in fracking production.  But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts.  Chinese stocks and the Chinese economy are showing more signs of weakness, and there are legitimate concerns about the status of junk bonds—that is, high-yield bonds issued by riskier companies with high debt levels, and many developing nations.  These bonds have stabilized in the past few weeks, but another Fed rate hike could destabilize them all over again, leading to forced selling and investors taking losses in the dicier corners of the bond market.

If you can think above the shouting and jostling toward the exists, you might take a moment to wonder about some of these panic triggers.  Are oil prices going to continue going down forever, or are they near a logical bottom?  Is this a time to be selling stocks, or, with prices this low, a better time to be buying?  Are China’s recent struggles relevant to the health of your portfolio and the value of the stocks you own?

And what about the RBS analyst who is yelling “Fire!” in the crowded theater?  A closer look at Mr. Roberts’ track record shows that he has been predicting disaster, with some regularity, for the past six years—rather incorrectly, as it turns out.  In June 2010, when the markets were about to embark on a remarkable five year boom, he wrote that “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy.  Think the unthinkable,” he added, ominously.    (“The unthinkable,” whatever that meant, never happened.)

Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.”  Wow!  Wasn’t it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year?  What Great Depression was he talking about?   Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history.  And it’s interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent drawdown is entirely normal.  One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now.  Whether this will be one of those 5-10% years or a 20% year, only time will tell.  But it’s worth noting that, in the past, every one of those drawdowns eventually ended with an even greater upturn and markets testing new record highs.

Many investors apparently believe this is going to be the first time in market history where that isn’t going to happen.  The rest of us can stay in our seats and decline to join the panic.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Why the heck are the markets tanking?

Now watching The Dow Jones Industrial Average (^DJI) fell 537 points at one point on Friday before ending the day off 390. The first 10 trading days of the year saw a loss of over 1,400 points on the Dow, marking the worst two-week start to a year ever.

RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month.

Economic crisis ‘worse than Great Depression’

By Mike Thatcher | 18 July 2012 The current economic situation in the US and the eurozone is more serious than the Great Depression of the 1930s according to a leading economist. Andrew Roberts, head of European rates strategy at RBS, said that the big issues were low or negative growth, high long-term unemployment rates and increasing debt burdens.

The author of the RBS ‘sell everything’ note has been predicting disaster for the last five years – Spectator Blogs

Should we sell everything because Andrew Roberts (not the historian but an analyst at RBS) tells us to in the expectation of crash? Before you press the ‘sell’ button, it might just be worth reflecting on the fact that there has always been a time when some analyst somewhere has been handing out the same advice.

Frequency and Magnitude of Stock Market Corrections

By Gregory Leonberger, FSA, EA, MAAA, Director of Research, Eric Przybylinski, CFA, CAIA, Senior Research Analyst This week’s chart examines the frequency and magnitude of market corrections in the U.S. equity market, as measured by the S&P 500 Index. A market correction is defined as a decrease of 10% or more within one calendar year.

Kindle

Where the Jobs Are

images

Your daughter or grandson wants to get hired right out of college, without a lot of job hunting.  So what degree should you recommend that they pursue?

Recently, the National Association of Colleges and Employers published a list of the top ten degrees for getting hired in this new year—that is, the degrees that make a young person most desirable to employers.  The NACE links college career placement offices with employers, so it’s in a unique position to measure the desirability of different types of college training.

At the top of the list were accounting and computer science degrees; 98% and 97% of large companies are interested in hiring people with those credentials.  Next came finance (91%), followed by business administration/management (86%), mechanical engineering (83%), information sciences and systems (75%), management information systems (73%), electrical engineering (71%), logistics and supply chain programs (67%), economics (64%) and marketing (64%).

Notice that social sciences and humanities are not at the top of this list.  The report showed that just 20% of the employers plan to hire communications majors, and 16% will hire economics majors and English literature. But the report also noted that these “soft science” graduates, plus psychology and law majors, tend to progress toward management levels as fast or faster than the specialized computer/engineering students.

Meanwhile, Forbes magazine recently asked companies to reveal the toughest jobs to fill in this new year—which means areas where people with these skills are virtually certain to be hired.  Top of the list: data scientists, who can take gigantic data sets and turn them into usable information.

Closely-related professions also made the list: information security analyst, electrical engineer and software engineer, followed by marketing manager and operations manager.

Also on the list were health care-related jobs: home health aide, medical services manager, physical therapist and registered nurse.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

Top Degrees For Getting Hired In 2016

We keep hearing that the way to get ahead is with an engineering or computer science degree. Studying business can also be a good idea. But which degree exactly will make you most desirable to employers? A study released this month by the National Association of Colleges and Employers (NACE), […]

The 10 Toughest Jobs To Fill In 2016

With the explosion of big data and the need to track it, employers keep on hiring data scientists. But qualified candidates are in short supply. The field is so new, the Bureau of Labor Statistics doesn’t even track it as a profession. Yet thousands of companies, from startups that analyze […]

Kindle

Noy Thrupkaew: Human trafficking is all around you. This is how it works

Behind the everyday bargains we all love — the $10 manicure, the unlimited shrimp buffet — is a hidden world of forced labor to keep those prices at rock bottom. Noy Thrupkaew investigates human trafficking – which flourishes in the US and Europe, as well as developing countries – and shows us the human faces behind the exploited labor that feeds global consumers.

Noy Thrupkaew: Human trafficking is all around you. This is how it works

Behind the everyday bargains we all love -- the $10 manicure, the unlimited shrimp buffet -- is a hidden world of forced labor to keep those prices at rock bottom. Noy Thrupkaew investigates human trafficking - which flourishes in the US and Europe, as well as developing countries - and shows us the human faces behind the exploited labor that feeds global consumers.

We are not doing enough here.

Kindle

An Independent Fiduciary

%d bloggers like this: