A Golden Perspective on the Current Devaluation of the Dollar

A host of dour economic news has caused the dollar to lose a significant portion of its value relative to other world currencies. An interested reader sent me and article he saw which tries to explain the reason why the US dollar is important for world trade and that relationship to the former gold standard which was ended in 1971 by Richard Nixon.

It is an interesting excerpt and I encourage you to read it in order to gain a certain historical perspective on current events.

The Daily Reckoning PRESENTS: 1944's Bretton Woods Agreement had the original intention of smoothing out economic conflict after World War II. Howver, the actual outcome - replacing of the gold standard with the dollar standard - ended up causing far more problems throughout the years, as today's falling dollar will show. Addison Wiggin explores...

BRETTON WOODS
by Addison Wiggin

The year was 1944. For the first time in modern history, an international agreement was reached to govern monetary policy among nations. It was, significantly, a chance to create a stabilizing international currency and ensure monetary stability once and for all. In total, 730 delegates from 44 nations met for three weeks in July that year at a hotel resort in Bretton Woods, New Hampshire.

It was a significant opportunity. But it fell short of what could have been achieved. It was a turning point in monetary history, however.

The result of this international meeting, the Bretton Woods Agreement, had the original purpose of rebuilding after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations. By 1946, the system was in full operation through the newly established International Bank for Reconstruction and Development (IBRD, the World Bank) and the International Monetary Fund (IMF).

What makes the Bretton Woods accords so interesting to us today is the fact that the whole plan for international monetary policy was based on nations agreeing to adhere to a global gold standard. Each country signing the agreement promised to maintain its currency at values within a narrow margin to the value of gold. The IMF was established to facilitate payment imbalances on a temporary basis.

This system worked for 25 years. But it was flawed in its underlying assumptions. By pegging international currency to gold at $35 an ounce, it failed to take into effect the change in gold's actual value since 1934, when the $35 level had been set. The dollar had lost substantial purchasing power during and after World War II, and as European economies built back up, the ever-growing drain on U.S. gold reserves doomed the Bretton Woods Agreement as a permanent, working system.

This problem was described by a former senior vice president of the Federal Reserve Bank of New York:

"From the very beginning, gold was the vulnerable point of the Bretton Woods system. Yet the open-ended gold commitment assumed by the United States government under the Bretton Woods legislation is readily understandable in view of the extraordinary circumstances of the time. At the end of the war, our gold stock amounted to $20 billion, roughly 60 percent of the total of official gold reserves. As late as 1957, United States gold reserves exceeded by a ratio of three to one the total dollar reserves of all the foreign central banks. The dollar bestrode the exchange markets like a colossus."

In 1971, experiencing accelerating depletion of its gold reserves, the United States removed its currency from the gold standard, and Bretton Woods was no longer workable.

In some respects, the ideas behind Bretton Woods were much like an economic United Nations. The combination of the worldwide depression of the 1930s and the Second World War were key in leading so many nations to an economic summit of such magnitude. The opinion of the day was that trade barriers and high costs had caused the worldwide depression, at least in part. Also, during that time it was common practice to use currency devaluation as a means for affecting neighboring countries' imports and reducing payment deficits. Unfortunately, the practice led to
chronic deflation, unemployment, and a reduction in international trade. The lessons learned in the 1930s (but subsequently forgotten by many nations) included a realization that the use of currency as a tactical economic tool invariably causes more problems than it solves.

The situation was summed up well by Cordell Hull, U.S. secretary of state from 1933 through 1944, who wrote:

"Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war... If we could get a freer flow of trade ... so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace."

Hull's suggestion that war often has an economic root is reasonable given the position of both Germany and Japan in the 1930s. The trade embargo imposed by the United States against Japan, specifically intended to curtail Japanese expansion, may have been a leading cause for Japan's militaristic stance.

Another observer agreed, saying that poor economic relations among nations "inevitably result in economic warfare that will be but a prelude and instigator of military warfare on an even vaster scale."

Bretton Woods had the original intention of smoothing out economic conflict, in recognition of the problems that economic disparity causes. The nations at the meeting knew that these economic problems were at least partly to blame for the war itself, and that economic reform would help to prevent future wars. At that time, the United States was without any doubt the most powerful nation in the world, both militarily and economically. Because the fighting did not take place on U.S. soil, the country built up its industrial might during the war, selling weapons to its allies while
developing its own economic strength. Manufacturing by 1945 was twice the annual rate of 1935-1939.

Due to its economic dominance, the United States held the leadership role at Bretton Woods. It is also important to note that the United States owned 80 percent of the world's gold reserves at the time. So the United States had every motive to agree to the use of the gold standard to organize world currencies and to create and encourage free trade. The gold standard evolved over a period of hundreds of years, planned by a central bank, government, or committee of business leaders.

Throughout most of the nineteenth century, the gold standard dominated currency exchange. Gold created a fixed exchange rate between nations. Money supply was limited to gold reserves, so nations lacking gold were required to borrow money to finance their production and investment.

When the gold standard was in force, it was true that the net sum of trade surplus and deficit came out to zero overall, because accounts were eventually settled in gold - and credit was limited as well. In comparison, in today's fiat money system, it is not gold but credit that determines how much money a country can spend. So instead of economic might being dictated by gold reserves, it is dictated by a country's borrowing power. The trade deficit and the trade surplus are only "in balance" in theory, because the disparity between the two sides is funded with debt.

The pegged rates - the value of currency to the value of gold - maintained sensible economic policy based on a nation's productivity and gold reserves. Following Bretton Woods, the pegged rate was formalized by agreement among the leading economic powers of the world.

The concept was a good one. However, in practice the international currency naturally became the U.S. dollar and other nations pegged their currencies to the dollar rather than to the value of gold. The actual outcome of Bretton Woods was to replace the gold standard with the dollar standard. Once the United States linked the dollar to gold at a value of $35 per ounce, the whole system fell into place, at least for a while. Since the dollar was convertible to gold and other nations pegged their
currencies to the dollar, it created a pseudo-gold standard.

The British economist John Maynard Keynes represented Great Britain at Bretton Woods. Keynes preferred establishing a system that would have encouraged economic growth rather than a gold-pegged system. He favored creation of an international central bank and possibly even a world currency. He proposed that the goal of the conference was "to find a common measure, a common standard, a common rule acceptable to each and not irksome to any."

Keynes' ideas were not accepted. The United States, in its leading economic position, preferred the plan offered by its representative, Harry Dexter White. The U.S. position was intended to create and maintain price stability rather than outright economic growth. As a consequence, Third World progress would be achieved through lending and infrastructure investment through the IMF, which was charged with managing trade deficits to avoid currency devaluation.

In joining the IMF, each country was assigned a trade quota to fund the international effort, budgeted originally at $8.8 billion. Disparity among countries was to be managed through a series of borrowings. A country could borrow from the IMF, which would be acting in fact like a central bank.

The Bretton Woods agreement did not include any provisions for creation of reserves. The presumption was that gold production would be sufficient to continue funding growth and that any short term problems could be resolved through the borrowing regimens.

Anticipating a high volume of demand for such lending in reconstruction efforts after World War II, the Bretton Woods attendees formed the IBRD, providing an additional $10 billion to be paid by member nations. As well-intended an idea as it was, the agreements and institutions that grew from Bretton Woods were not adequate for the economic problems of postwar Europe. The United States was experiencing huge trade surplus years while carrying European war debt. U.S. reserves were huge and growing each year.

By 1947, it became clear that the IMF and IBRD were not going to fix the problems of European postwar economic woes. To help address the issue, the United States set up a system to help finance recovery among European countries. The European Recovery Program (better known as the Marshall Plan) was organized to give grants to countries to rebuild. The problems of European nations, according to Secretary of State George Marshall, "are so much greater than her present ability to pay that she must have substantial help or face economic, social, and political deterioration of
a very grave character."

Between 1948 and 1954, the United States gave 16 Western European nations $17 billion in grants. Believing that former enemies Japan and Germany would provide markets for future U.S. exports, policies were enacted to encourage economic growth. During this period, the Cold War became increasingly worse as the arms race continued. The USSR had signed the Bretton Woods agreement, but it refused to join or participate in the IMF.

Thus, the proposed economic reforms turned into part of the struggle between capitalism and Communism on the world stage.

It became increasingly difficult to maintain the peg of the U.S. dollar to $35-per-ounce gold. An open market in gold continued in London, and crises affected the going value of gold. The conflict between the fixed price of gold between central banks at $35 per ounce and open market value depended on the moment. During the Cuban missile crisis, for example, the open market value of gold was $40 per ounce. The mood among U.S. leaders began moving away from belief in the gold standard.

President Lyndon B. Johnson argued in 1967 that:

"The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."

By 1968, Johnson had enacted a series of measures designed to curtail the outflow of U.S. gold. Even so, on March 17, 1968, a run on gold closed the London Gold Pool permanently. By this time, it had become clear that maintaining the gold standard under the Bretton Woods configuration was no longer practical. Either the monetary system had to change or the gold standard itself would need to be revised.

During this period, the IMF set up Special Drawing Rights (SDRs) for use as trade between countries. The intention was to create a type of paper gold system, while taking pressure off the United States to continue serving as central banker to the world. However, this did not solve the problem; the depletion of U.S. gold reserves continued until 1971. By that time, the U.S. dollar was overvalued in relation to gold reserves. The United States held only 22 percent gold coverage of foreign reserves by that year. SDRs acted as a basket of key national currencies to facilitate the inevitable trade imbalances.

However, Bretton Woods lacked any effective mechanism for checking reserve growth. Only gold and the U.S. asset were considered seriously as reserves, but gold production was lagging. Accordingly, dollar reserves had to expand to make up the difference in lagging gold availability, causing a growing U.S. current account deficit. The solution, it was hoped, would be the SDR.

While these instruments continue to exist, this long-term effectiveness can only be the subject of speculation. Today SDRs make up about 1 percent of IMF members' nongold reserves, and when in 1971 the United States went off the gold standard, Bretton Woods ceased to function as an effective centralized monetary body. In theory, SDRs - used today on a very limited scale of transactions between the IMF and its members - could function as the beginnings of an international currency. But given the widespread use of the U.S. dollar as the peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make it the only choice.

The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse.

Addison Wiggin
The Daily Reckoning

Editor's Note: Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and the upcoming thriller Empire of Debt. Mr. Wiggin is frequent guest on national radio and television programs.

The above essay was taken from Mr. Wiggin's newly-released book, The Demise of the Dollar...and Why It's Great for Your Investments. To order your copy, please see here:

The Most Important $11 You Will Ever Spend...
http://www.amazon.com/exec/obidos/ASIN/0471746010/dailyreckonin-20/

I can't speak to whether it will be the best $11 dollars you will ever spend, but it might be worth looking into, if these types of historical economic issues have interest for you.

More Keeping Up with the Joneses

This is a great opinion article written about a recent book that has come out called, "Green with Envy: Why Keeping Up with the Joneses is Keeping Us in Debt". The book examines many different Americans across different walks of life and discovers how they spend money and what motivates them. It appears that for the most part, envy is the culprit. I'm going to have to see if they have this book at the library.

Remodelling to Sell Your Home (Anytime)

My parents have convinced me to remodel two of my bathrooms and they are willing to assist me with the manual labor when they visit for Christmas. This article points out that whenever you remodel a home, you should plan for the future, whenever that may be and the time you will sell your home (or just re-appraise it to remove the extra equity). The article offers many great suggestions on ways to improve your house, or if you are going to buy a house in the future, things to look for, that won't hurt you when you try and sell the house later.

Some of the great suggestions were to have a well-lit front area. Plant a lot of trees, which will save you money, too. Don't cover up your yard with a deck, but make sure you can see your yard with large windows. Use natural materials like stone when doing landscaping, instead of trendy material, which might not be appealing in the future.

Read the article and let me know what you think!

Top 25 Suburbs According To Businessweek

Businessweek has an article rating 25 suburbs as being affordable, safe, have great education and are within easy driving distance of the perks a major metropolitan area can offer. If you are thinking of moving or are currently looking for a job, consider these sites illustrated by a great slide show!

I should probably mention, of course, that Iowa City and Coralville made the list!

Holiday Shopping Tips

Doing Christmas shopping can be stressful and expensive. Compound these with overspending and Christmas often loses some of its traditional cheer. An article at Bankrate.com has 10 tips to try and keep spending under control and yet still have a traditional Christmas filled with pleasant memories rather than two aspirin or two Tums.

Prepare for the Winter with an Energy Audit

This is a great article at Bankrate.com that goes into some detail on ways to make your home energy efficient and enable you spend less on heating. I think I need to take them up on the idea of the heating blanket for the water heater. I have already used plastic weather sealing for my windows, which makes the house feel warmer already.

If you live in an area where it gets cold in the winter, check out the article to save a few bucks!

New Cashtalk Forum

Cashtalk is launching a discussion forum today. It can be found at the top of the "Links" section. It can be used to start conversations with other users and will be a useful way of searching for topics that are relevant to money, finance, and business. If you would like to post in the forums, the password is "Cashtalk."

Response to "Young People and Debt"; Some Ideas

Hi Kevin,

It's good to hear from you! I'm glad you are taking this seriously and appreciate your interest in debt. From the article you found, you can see that millions of people in the U.S. are in debt.

But let me say this and get it out of the way: all debt is not bad. There. It's out there. It would be hard for most people to buy a house without the use of debt and it is hard for some to attend college without taking student loans. However, the bad debt is that which does not help you earn income or provide shelter over your head, i.e credit cards or other types of soft loans.

When you take out a loan for a house, one of the benefits (besides having a place to live) is that the government helps you by giving you a tax deduction for the interest. This can be beneficial and if you look at specific numbers for yourself, you might find that you actually come out ahead.
Going to college is important, because the average income of a college graduate over a high school graduate is significantly higher. Try $1,100 a week compared to $620 a week; almost double! Going into some debt to obtain this higher degree and thus higher future earnings makes sense.

Credit cards, cars, and other "toys" that people don't really need are where most of the problems lie. The thing that helped me the most was creating a monthly budget. Literally sit down at the beginning of the month and estimate how much each of the categories like food, utilities, rent/mortgage, clothing, gas, etc. will cost you. Use your past experience to guide you. Then create "soft" categories like gift money, entertainment, "having fun", etc. These are the categories that can be pared back if money is tight. Finally, figure out how much you have left over and either invest the difference at a reasonable interest rate or pay off high interest debt.

I used to only use debit cards, because I didn't want the temptation of credit to lure me into using it. Every day I would get offers with "0% interest for 12 months!" and so on. It is easy with these cards to buy things you don't really need. Only the discipline of a monthly budget helped reign in my spending. After about a year, I started using credit cards again, within the constraints of a budget. I made this change because with a lot of credit cards, you can get points that apply to bonuses. Mine in particular is points toward Amazon.com gift cards. Anyway, because I have a budget, I only spend within it and pay off the card at the end of every month.

I can't begin to describe how much freedom this gives you. Most people in my family laugh at my wife and I, because they think we are so restricted, but knowing where every dollar is going before the month even begins is quite liberating and helps you gain a better understanding on ways you can cut corners and save more.

But something tells me you already know most of this, Kevin. You want to take the next step and tell others in an organized fashion and in a way that really helps them make a change in their lives.

Searching the internet for the words "Debt management," "Financial Planning Organizations," "Finance Clubs," etc. does not yield much relevant to your question. It seems to me that there are probably two options at this point. The first, is that you create your own organization with the goals to manage money wisely. You become accountable to each other and read articles on ways to save money and pay off debt. I would be more than willing to lend you a hand by doing research or forwarding articles to you. If you wanted, you would also be welcome to use Ca$htalk, which would also help others who aren't geographically near Calvin College.

The second option stems from the first and specifically relates to the question, "Why do you want to get out of debt?"

People will have different answers to the question. Some don't want the monthly payments, others will want to start investing, others want to buy that boat they've had their eye on and will begin to save for it. Your personal answer to that question will create a goal for yourself. For me, it might be to be able to invest more. So, in order to learn more about that goal and get closer to achieving it, I would look for a club at Calvin where investment is the goal. Bringing up topics like, "How do I invest when I'm xx amount in debt?" would be a good start.

Of course, investment isn't everyone's goal and while Calvin does have an investment club, I'm not sure they have a boating club, especially one that focuses on getting the boat, rather than becoming a better boater. In this case, creating your own club is probably the better option. Please let me know if that is the direction you are heading and I will support you wholeheartedly.

In a way, Ca$htalk was created with the goal of learning more about money and business in order to not fall into traps such as high consumer debt. Posting questions here and even articles that you find interesting that relate specifically to financial management are another way to stay accountable, help others do the same and learn more about the complex world of finance, personal money management, and economics. I try my best to scour the internet and read books on the topics and present those for your information here. I'd also like to try and recruit more experts who have far more experience and knowledge than me to post articles on their own specialties. If you know of anyone who might be interested, let me know and I'll drop them a line.

I hope this long answer helps and thank you again for reading.

Young people and debt

I read this interesting article in USA Today about Twenty and Thirty somethings and how they are becoming more and more burdened with debt. I wonder if there is some type of program or club that I could start on Calvin's campus to promote awareness about falling into debt. Suggestions?

What Benefits Some, Hurts Many

I keep getting the feeling that I'm a "shill" for Walter Williams. It's just that the more I read him, the more he makes sense, and the more I want to let people know. His ideas of trade and economics are spot on and should be understood by more, so that the next time tariffs or trade restrictions are discussed, you will know how they impact you and the rest of the United States.

His latest article is about having the United States become totally self-sufficient with regards to spices, cocoa and coffee. His reasoning correctly points out that this is preposterous, but then gives real examples where United States trade policy and protectionism is doing just that. His real life examples include sugar, luggage, and textiles.

I appreciate that he recognizes that these protectionist policies do help some, but then he calculates the overall cost to the U.S. for those few people. An excellent article, that I'm sure will have you thinking twice about free trade.

How Mortgage Rates are Set

I just finished reading an article about how fixed-rate mortgages are set. They are based on the 10 year Treasury bonds that are traded in Chicago. The people that fund mortgages (hedge funds, institutional investors and even regular individual investors) use the Treasury rate as a guide and the mortgage interest rates adjust accordingly.

So, as many people believe, the Federal Reserve does not, in fact, have much influence on mortgage rates. They control the supply of cash through fixing an overnight rate that banks use to loan money to other banks.

The most useful take away from the article is how to spot a deal on either a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage based on where they are trading today.

New York Real Estate Negotiation

I came across this article about real estate negotiation (primarily with examples from Manhattan). It has some interesting points, of which I find the most intriguing the idea that you shouldn't (as a buyer) tell your broker what your upper limit is. The article points out that both the buyer's and seller's realtor have a vested interest in a higher selling price.

There are a lot of anecdotes in the article which give it an interesting perspective. Check it out and let me know what you think.

(The article requires free registration with The New York Times)

More Money Saving Tips

Another great article from Bankrate that has 10 tips for saving money, each worth $500 or more a year for a total of $5,000 savings a year if you follow them all. This article had a lot of great ideas and that's why I'm posting it here, so I'll have access to it in the future.

So which one do I like best, but am not currently using? Buying more generic household products like toilet paper, paper towels, plastic cups, etc. The hard part about implementing this one will be trying to convince my wife that the generic toilet paper is the same as the name brand (or at least more economical). Wish me luck!

Saving Money on Energy and Groceries

If you've read Cashtalk for some time, you know that I'm always on the lookout for good deals. I came across two different articles from different sources today about ways to save money. The first is how to get the most for your dollar at the grocery store. I like the introduction because it says that the very fact that you're buying your dinners at the store, rather than eating out results in financial savings. The article goes further with tips on maximizing your dollars at the store by interviewing different chefs, caterers and cookbook authors on ways they save money when picking up supplies.

The second article was at CNET.com and focuses on ways to eliminate wasteful uses of energy and hopefully decrease your monthly energy bill. According to the article, 10 percent of our energy bills are made up of electronics "invisibly" sucking up energy in standby mode or when we think they aren't "on." However, the bulk of our energy bill is to keep our house at a certain temperature. Going through the audit on this site might help you identify ways to cut that bill a little.

Does More Money Make You Happier?

I've been spending a lot of time at the Bankrate site because of the possibility of me buying a house. I want to stay on top of interest rates to know what they will most likely be when I decide on a house to purchase.

Anyway, I came across this article about whether or not more money can make you happy. One observation from the article says that going from shear poverty to the middle class can significantly increase happiness, but if you are increasing your yearly income from $100,000 to $100 million a year, the benefits concerning happiness are negligible.

More telling as to whether you are happy with your income or not, is how your neighbors live. The amount of happiness tied to the amount you make is relative to how much the people around you make. If you make more than the people you know, then you will probably be happy, even if you're poor by definition. If you live in Beverly Hills and you are the one making the least, you will most likely be unhappy, even if your income is in the millions.

So when is enough enough? When you reach a point where you realize that making more won't make you happier. If you already the highest earner in your peer group, nothing more will make you happy.

Other interesting observations cited in the article (actually from a Pew Research study) are: Republicans are happier than Democrats, Married people are happier than Unmarried, Churchgoers are happier than non-Churchgoers, and "Sunbelt" residents are happier than people living elsewhere. Contrary findings: Retirees are no happier than workers, and pet owners are no happier than non-pet owners.

So what does "happy" mean? In the Pew study, the respondents could define it however they saw fit. An interesting technique and one that allows a more accurate reading. It recognizes that happiness can be relative, but our own perception of that happiness (and whether we achieve it) is what is compared in the study.

So what is more important than money? According to Bruce Weinstein, after basic needs are met, money and material goods are not what make us happy. Being loved and having meaningful friends and having someone to love are what make people have happy lives.

One important point recognized in the article, too, is that it is not important to be happy all the time. We strive for that, but actually happiness is guided by emotions more than anything. People who try and suppress certain emotions might find it unhealthy. Emotions can guide us and give us appropriate reactions to our environment. If we were happy all the time, then we may miss something that our brain is trying to tell us.

Enough rambling. Check out the article and let me know if you're happy!

Buying a Home

It has been more than a month since my last post to Cashtalk. I've started a new job in marketing and have begun looking for a new home. I've never bought a home before and have had to learn what most of you probably already know. What type of mortgage to get? Which bank can give me the best deal? What to look for in a house? Will it be easy to "fix up"? Will there be any problems when I try to resell (in which case, I probably shouldn't buy it in the first place)?

I've looked at probably about 20 houses in this area and before that, I pre-established a limit that I do not (or cannot) want to spend more than. It is certainly a buyer's market. Homes that have been on the market for a few months have reduced their price. Almost every realtor I talk to at open houses always ends the conversation with, "The sellers are motivated. They might be willing to talk about the price or closing costs."

I guess that's great for us, but I don't want to just buy a house because it's a good price. I want to live in a neighborhood that's quiet and has easy access to the amenities that I've grown accustomed to (going downtown, close to a grocery store, being able to go to a park, and close to the local pool for swimming). I don't want a house that is right next to the freeway. I'm not excited about houses that are mirror images of those around them (even though inside they are really, really nice). These tend to be newer houses, which don't often hold their value really well.

So, how did you buy your house? What was important to you when deciding to make an offer? Did you know it was the one when you did buy it? Were you happy with your decision, or did you discover something wrong after you'd already closed? I'd love to hear your stories and learn from them.

New Tax Changes: Some Good, Some Bad

Bankrate.com has an article about new tax laws that will mostly take effect in 2007.

I'm most impressed with extending the contribution limits to Roth IRAs. Previously, these limits would have expired in 2010. Now, in 2008, if you qualify, you'll be able to contribute up to $5,000 a year to a Roth IRA. After that, the limits will be adjusted for inflation. That's great news for savers who want to build up a retirement fund from which they won't have to pay taxes when they withdraw (after 59 1/2 of course).

Another provision extended the tax-free distributions from 529 savings accounts (you know, the education funds). This tool was expected to expire in 2010, too, but Congress made them permanent. So if you have children and expect them to attend college, this would be a great way to invest some money and try to keep on top of tuition inflation (currently around 7% a year).

There are 10 distinct changes to the tax code that the bill from Congress addressed. Read the article to see how these could effect you.

Company Social Events: Don't Get Drunk!

I came across this article at Monster.com about how to act during a company social event (you know, parties, Christmas celebrations, dinner at the boss' house, etc.).

One of the most important is: Socialize Outside your Group. Get to know others. Put yourself out there, don't just hang out with the people you work with or feel comfortable with. Who knows, in the future when you apply for a job, they might just remember you being friendly and that could help!

Housing Sales Decline in 28 States

It looks like the real estate market is beginning to be saturated with homes. This article identifies a number of states where housing sales have declined over a previous period. That doesn't mean houses aren't being sold, however. Alaska, Vermont, North Carolina and Texas have all had sales increases.

The writer speculates that booming areas a year ago are slowing, while previously stagnant areas are doing well.

While it most certainly is a buyers market now, some people are estimating the slowdown is through the worst already. What do you think?

Home Appraising Inflation

It has been awhile since I've posted. I've been enjoying the summer and dealing with some personal events. But during this time, I have not stopped thinking about how to educate people about dealing with money in an intelligent manner.

I've also begun to consider whether I should by a home here in Iowa. I've come across a lot of information and I'd like to share it with you over the next few days.

The first thing I'd like to post here is this article from the Arizona Central. The article covers a problem occurring around the nation with inflated home appraisals. It points out a conflict of interest between the buyer and the mortgage lender. The lender wants to have a high home value, so that they can have you approved for the loan. This, of course, allows the borrower to borrow more. When the house is re-appraised, it can be disastrous to find that your home is worth less than you thought.

How do you remedy something like this? I would suggest having a different appraisal in addition to the bank's appraisal. If the values are close, then there probably isn't a problem. If there is a wide discrepancy, then something is wrong.

Quote of the Month

“A tax cut is really one of the anecdotes [sic] to coming out of an economic illness.”

--George W. Bush

Government Repeals Tax on Long Distance Telephone Usage

My mom sent me this article about the IRS rescinding a more than 100-year old tax on "telegraphs and telephones." People will no longer have to pay a long distance tax and they can apply for a refund of all taxes paid since February 2003.

I'm guessing if you use Turbo Tax or Taxcut, this will be built in. The article can be found in the comments section.

More Millionaires Now than Ever

According to this article, there are now close to 9 million millionaires in the world. More interesting (but not surprising if you know about millionaires) is that they are investing aggressively in emerging markets around the world.

The ultra-rich (more than $30 million net worth) topped 85,700 around the world and grew at a faster pace than the overall number. The article points out that the fastest growing area is the Middle East and the leader is Dubai. Why? Low barriers to entry, no unions, cheap startup costs and no taxes.

Jim Cramer Crazy?

Interesting article here about how Jim Cramer, of CNBC, may have lost his mind.

Economy Update

5.3% (Q1) annual growth for the United States economy. The fastest growth in more than 2 years. Inflation holds steady at under 3%. Exports are also rising and have grown at 14.7% (annual). Housing spending is also up (3.1% instead of the estimated 2.4%). Looks like things are going good!

Quote of the Day

"You never get a second chance to make a first impression."

--Anonymous

Don't Put Much Faith in the "Experts"

John Stossel wrote an article about his Princeton economics teacher, Burton Malkiel. I have been reading, Mr. Malkiel's book and am almost finished. I'm quite impressed with his numbers concerning stock investment and his index-fund based investment strategy. I'll post more about the book when I'm finished with it.

Stossel talks about things I've already learned in the course of earning my MBA. Most experts cannot consistently pick stocks for a portfolio that beats the S&P 500. Sure every year there are lucky ones, but too many factors over the long run reduce even the most highly educated and savvy fund manager to scampering to beat the almighty S&P.

If you've been reading Cashtalk for awhile now, you already know this. Brett has posted an article about his own foray into the market (Brett would hardly call himself a savvy investor, but at least he tried!) and his recommendations for a stock market strategy here. And our stock market simulation game also proved that because of all the brokerage fees, picking and holding a stock would do just as well as buying and selling on a daily basis (or did it?).

So when you're deciding which fund to buy or which basket of stocks to hold, remember that odds are, buying the S&P 500 index fund will get you better or equivalent returns over the long run, with the bonus of having lower commissions and fees.

Stocks; Gold Fall in India: On Suicide Alert

Wow. The Mumbai exchange in India has lost almost 22% of its more than $600 billion value last week and beginning today. The Indian police are watching canals and rivers for brokers wishing to commit suicide.

No matter how bad you do in life with money, it certainly is never worth more than your life. Getting your priorities straight should prevent people from jumping out of buildings or tying a boulder to their leg and jumping off a bridge. Your family and values are way more important in life than money. Your dreams may be put on hold, but a short delay isn't worth the price of death.

Gold and other commodities are falling, too. Very strange. Some are recalling similarities to this crash and the 1987 "Black Monday" Wall-Street crash, citing fears about inflation and a sharp run-up of stock prices and weakness of bonds.

I'll keep you posted.

Time Value of Money: Buying a Car

I thought I would review the Time Value of Money after a friend of mine sent me a problem to solve.

Let's say you want to buy a new car valued at $25,000. Wait a minute! What are you doing? A new car loses almost a fifth of its value as soon as you drive it off the lot! Never buy a new car!

Okay...Let's say two guys with trench coats kidnap you at gunpoint and bring you to a new car dealership. They bring you to the smirking salesman and he says, "You have two deals: You can buy the $25,000 car for no interest and payments for 60 months or you can get a $4000 rebate today and pay 7% (yearly) interest on the balance for 48 months." Which is the better deal?

Your eyes dart across the street to the used car lot. You glance down at the "used car" section in the classifieds. Then you hear a "click" as the thug pulls back the hammer of his revolver. "Enough stalling! What's your decision!?"

First, let's figure out the payments. The first option (no interest 100% financing) would have a payment of $416.67 for 60 months. What's $416.67 x 60? $25,000.20.

The second option has payments of $502.87 for 48 months. That comes to $24,137.76. Seems a little cheaper, but remember that this includes a $4,000 rebate, so the number should be $21,000. The 3,137.76 is interest on the financing of the $21,000.

My friend suggested that I use the Present Value of money to solve the problem. Is this the correct approach? On the first option, the future value of his payments would be $25,000.20 after 60 months. The Present Value could be discounted at an alternative use of the money, say a CD at 5%. We can set up an algebra equation that looks like this:

PV(1st Option) = ($-416.67/0.004167)*[1 - 1/(1.004167)^60]

Notice how I've divided the 5% interest by 12 to get the monthly interest of 0.004167? This will give us a more accurate number.

If we solve for the first option's Present Value, we get $22,079.42.

PV(2nd Option) = ($-502.87/0.004167)*[1-1/(1.004167)^48]
PV(2nd Option) = $21,835.93

What does this tell us? Do we really care what an alternative investment would make? We want a car, darn it! Especially to appease these goons and their revolver pointed at your head. The answer is yes. This tells us that for 7%, 48 month financing option, plus rebate , if I invested $21,835.93 at 5%, I'd have the equivalent future value. If I invested $22,079.42 today at 5%, I'd have the future value of the 1st option.

So which one is better? The lower PV gets me the same car at "less"money. And since these guys are pointing a gun at your head, you should just take the 2nd option: the $4,000 rebate and 7% interest. You'll save $243.54.

There you have it. Easy peasy!

The Smell of Money

When I was in China, I would often try to stay current with world news by either reading the Economist or Newsweek (International Edition). In one issue of Newsweek, there was a "perpective" article written by a former resident of a town in Iowa with a lot of pig farms around. The person recalls how her father and her would drive into town and the locals would sniff the air and smell the horrible odor of pig manure. Her father would take a particularly big whiff and then say, "Do you smell that? That's the smell of money."

Not all jobs are highly desirable, but after beginning the "Millionaire Mind" by Thomas J. Stanley, it seems that many millionaires tend to gravitate toward low competition, undesirable businesses with high profit margins. That's something you should keep in mind when choosing your own career path. Pigs, while stinky, often pay well.

But I digress. I was reminded of that article when I read this article today. Apparently scientists at the University of Illinois have found a way to convert pig manure into crude oil. That's right. Millions of tons of pig manure could potentially be transformed into oil and used in vehicles or other applications. Ain't technology great? I guess in the future, there will be one more way for that smell to be the "smell of money."

Investing for Education

Two guys from SmithBarney in Houston, TX (actually they're Vice Presidents) wrote this article about investing for their children's education. They are adamantly against the 529 plans and any of the state educational savings accounts. Why? They claim that recent laws in Congress open the door for states to tax other states' plans. Not good.

They also correctly point out that in 2010, the 401(k), Roth IRA, and 529 plans tax laws will expire. They may or may not be renewed by Congress. I can't imagine any Congress would remove the tax sheltered properties of the 401(k) or other savings devices, but it is a risk, I suppose.

Their strategy is composed of putting half of an investment into a municipal bond and the other half into a few, dividend-paying, high return stocks (if only they had pointed out a few examples!). Their ideas intrigue me, but I'm a bit skeptical. I'd like to hear your thoughts.

Happy Birthmonth Cashtalk!

Cashtalk has been around for about a year now! We just wanted to thank everybody who has had the time to contribute an article or post a comment. And we also wanted to thank the people that read this site, too.

Our mission to help people learn more about money and business is going strong. We'll continue posting interesting information about business and economic life in the United States and ways to save and be smart with money. If you would like to contribute to Cashtalk, just send me an email or post a comment and I'll get in touch with you.

What Percentage of the Gas Price is Tax?

It seems like everywhere you turn, you're taxed for something. I'm sure if you added up all the taxes you paid throughout the year, it would come close to 50% of your income (unless you're lucky enough to be in the higher tax brackets, in which case it would be higher, too). One of the taxes consumers pay is the gasoline tax; both the federal and state (and sometimes even local or city).

This site shows how much you in your state are paying for the gasoline tax. Every state has a different system for taxing gasoline. Some have extremely high flat rates. Others have deceptively lower flat rates but then tack on a percentage sales tax. Check out the chart and find out how much you're paying in your location.

You can also compare the amount of tax you're paying with the amount of profit a gasoline company makes per gallon sold. ConocoPhillips makes $0.07 a gallon of profit. This site explains how much the companies pay for the crude oil and how much it costs to refine it. Most of this accounts for the rest of the price of gasoline.

So next time you're at the pump and thinking you're being bilked, remember who is doing the work to get you your gasoline, and remember who's taxing you to fill that car of yours. And don't forget that either when you hear your local politician want to punish the refined oil industry, too.

Average Gas Prices by County

This is a great site that takes the average gas prices per county and then shades them a certain color on a map of the United States. You can also click on individual counties to get further analysis.

With the increasing price of gasoline, it is important to watch those pennies! I think it's hillarious (and a bit sad) that the most expensive places in the U.S. are California and New York, two states with tough restrictions on gas quality and excessive taxes on gasoline. Yet another casue of government crowding out.

Both California and New York have had predictions or indications of slowing economic growth. New York's method of taxing gasoline (by the dollar instead of by the gallon) makes it the highest gas tax in the U.S. Hurting consumers in this way is certainly no way to boost or even maintain a strong economy. It is my own prediction that both of these states with already high costs in other things, like housing and commodities, will continue to see a slow down in their own economies as people try and find solace in other states.

Balanced Budget and Federal Deficit

Walter Williams discusses, very briefly, two worrisome aspects of the U.S. economy in an article last week. He talks about the federal deficit. He claims that people say the deficit is a way to borrow against the future, but he says different. Really, the government potion of spending ($2.4 trillion) is "crowding-out" private investment and spending. He cites some interesting examples.

He also doesn't like the idea of a balanced budget. If the government spent $6 trillion and taxed us $6 trillion to pay for it, would that be better than a $2.4 trillion spending paid for by $2 trillion in taxes (leaving a $0.4 trillion deficit, of course)? His solution (and mine because I agree with him) is to cut spending overall, but we all know that isn't likely to happen.

Outsourcing the Drive-Thru

I can see it now: a mob of McDonald's employees protesting outside of a suburban McDonald's. Protest signs reading "Don't Eliminate Jobs" or "Super-size me but don't Outsource me!"

McDonald's and CKE Restaurants (owners of Hardee's and Carl's Jr.) are experimenting with national call centers of highly trained customer service specialists that would take your drive-thru order the next time you visit their restaurant. They are banking on the fact that someone in Santa Maria, CA can do a better job than the person standing only 100 ft from you the last time you pulled up for a Happy Meal. And not only better, but faster. And in the fast food business speed translates into better service and more profit.

This may or may not work. The article from the New York Times mentions some problems with transmission quality between the pilot restaurants in Hawaii and the call center in California. Often the operators have to ask the customer to repeat themselves. I'm not sure how this is much different from the current setup but it may irk customers and cause bad will.

I have to say that I'm excited about the idea, though. I love the idea of companies becoming more efficient and therefore passing the cost savings on to the customer. But what if they don't pass them on? How could they not? In a competitive environment (like fast food) if you can get a cost edge on a competitor, you are most likely going to want to increase customers by decreasing prices. If your competitor can't match your efficiencies and therefore prices, they will go out of business. That leaves more customers for the innovative restaurant. And that means more profit. We'll just have to see how this turns out.

The Economy Continues to Grow Stronger

Two good pieces of news the other day: 211,000 jobs were added to the economy in March and consumer confidence is up.

Who Pays the Highest Taxes?

The internet is a wonderful thing. So much information is available, if only you can find it. I stumbled across this website the other day and thought I should share it with you. It is quite relevant at this time due to the impending tax deadline of April 17th.

The U.S. Census Bureau posted the receipts of taxes of the United States and the amounts taken in by all of the 50 states. It then divided the amounts received by the population of those states to give us the amount that each person in the state paid. Which state has the highest per capita taxes? Vermont. Followed closely by Hawaii and Wyoming. California is actually below Alaska, which I found surprising.

Of course this begs the question, "Which state has the lowest per capita taxes?" The answer proabably isn't as startling: South Dakota, followed by Texas.

My state, Iowa, paid $1,938.85 per person. This is $253.42 less than the average in the U.S. of $2,192.27.

Check out the site here and find out if you are in a high-tax state or not.

Economics of Illegal Immigration

There is always something about the way Thomas Sowell describes issues that makes them easy to understand. He always gives clear, real-world examples to illuminate more complicated theory or just plain common sense.

With the current broil over immigration, and the fact that it effects most people in the United States in some way or another (and their money), two articles by Dr. Sowell attempt to put to rest common myths associated with illegal immigrants.

I was most surprised by his logical argument against the myth that we "need" immigrants to do jobs no one else will. His rationale against this is that everything should be based on price. And when people are illegally working for less money, than others lose out. He gives the example of news reporters:

If Mexican journalists were flooding into the United States and taking jobs as reporters and editors at half the pay being earned by American reporters and editors, maybe people in the media would understand why the argument about "taking jobs that Americans don't want" is such nonsense.

His second article covers the absurd idea that we need the immigrants for our farms. I had always believed that, having grown up in California, that it was because of the immigrants that we had access to the large variety of pickings from the field. But Dr. Sowell puts this into perspective by calling attention to the fact that most crops grown in the United States are un-needed! Their farms are being subsidized by the government to grow more vegetables and fruit than we need or can sell. What this leads to is the subsidizing of illegal immigrants by the government (let alone the worthless fruit that we, as consumers, are paying more for, because the market is restricted).

Read the articles and let me know what you think about this whole brouhaha.

Money and Inflation: A Macro-Economic Perspective

I have a test tonight in my Economics class and while I'm reviewing I thought I would share one of the topics covered in the examination: Money and Inflation. I want to thank Curt Wyse for looking up the information for me and N. Gregory Mankiw for writing it down in his book.

What are the three functions of money?
1. Store of value - money is a way to transfer purchasing value from the present to the future.
2. Unit of account - a yardstick with which we measure economic transactions.
3. Medium of exchange - money is what we use to buy goods and services.

Explain Milton Friedman's famous claim: "Inflation is always and everywhere a monetary phenomenon."
The quantity theory states that the central bank (the Federal Reserve for all you Americans out there), which controls the supply of money, has ultimate control over the rate of inflation. If the central bank keeps the money supply stable, the price level will be stable. If the central bank increases the money supply rapidly, the price level will rise rapidly. Thus, as Friedman says, inflation is a monetary policy. It is dependent upon how much money the central bank keeps in circulation, not the strength or weakness of the economy.

Use the concept of "seigniorage" to explain the "inflation tax."
Seigniorage is the ability of the government to print money. When the government prints money (and puts it into circulation), it increases the money supply. An increase in the money supply, in turn, causes inflation. Thus, when the government prints money to raise revenue, everyone's existing money becomes worth less through the inflationary increase in prices. While not a physical tax, the effect of this inflation tax is the same in that the government increases its revenue at the expense of the citizens.

What are the three notable costs of expected inflation? What is the major cost of unexpected inflation?
Notable costs of expected inflation:
"Shoe Leather Costs" - Since an increase in inflation causes people to hold less money, they will make more trips to the bank to withdraw smaller amounts. (Leaving money in the bank allows them to partially offset the inflation through the higher levels of interest rates they earn on their bank deposits). The "Shoe Leather cost" is so named since people will wear out their shoes more rapidly due to the increased trips to the bank.
Menu Costs - This is the cost of reprinting and distributing catalogues and menus due to the higher frequency of price changes during high inflationary times.
Price Variability Costs - These costs are related to menu costs and account for the decrease in margin between printing of menus/catalogues. During times of high inflation, the purchasing power of a currency declines, but it is impossible to keep all catalogs/menus current. Thus, a firm's relative prices will fall as inflation changes purchasing power between printing of prices.

The Cost of Unanticipated Inflation:
The major cost of unanticipated inflation is the redistribution of wealth among individuals. This happens because people take anticipated inflation into account in their decision making, but cannot do the same for the unanticipated. For instance, when taking out a long term loan, both parties agree on an interest rate based on the anticipated inflation. If inflation ends up being much higher, the borrower pays back the amount with less valuable dollars. This causes the borrower to end up with some value/money the lender was supposed to have had, but was unable to collect due to inflation. Similarly, individuals on fixed pensions are often planning on a certain level of inflation. If inflation is higher or lower than the estimate, they either end up with more or less purchasing power.

The Effects of a Higher Minimum Wage

Thomas Sowell continues his series "Something for Nothing" by writing about the effects of higher minimum wages on an economy. He cites this article from the Economist, reviewing an economic quandry that is occuring in South Africa: The economy is booming, but investment is stagnant. Sowell uses this as an example and cites a rising unemployment rate as a key symptom of inflated minimum wages, as the article suggests. Why? Because wages should be set at what someone's productivity warrants, not what the government thinks is "fair."

If I pay you $10.00 an hour because I have to, but your work is only worth $8.00 an hour to me, then why should I hire you at all? Why not just make the workers I already have work longer? Or better yet, why not get a machine to do the same job? Or even better still, why not out source the job to an economy that believes in paying workers by what their productivity demands you pay?

As if an inflated minimum wage wasn't bad enough for South Africa's economy (and others), Sowell cites job protection laws as having an even worse effect on the economy when compounded with the wage. The employers of SA can't fire their workers easily. So why should they hire more? There is too much risk of hiring somebody you can't fire. Also, when the economy picks up in a boom, why hire more workers if the employer can't fire them when the economy slows down again?

Sometimes, when campaigning for higher minimum wage laws or job protection laws, people think about themselves or somebody they know who may have lost their job, or can barely live off the $5.50 an hour they receive at some fast food joint. While this may be good anecdotal evidence, it fails to take into consideration the effects of the macro economy and thus when these types of laws are passed, it turns out to hurt them more than if things had remained the same.

South Africa's economy is very productive and growing at a respectible 5% a year. They are one of the most productive economies in the world, but because of the greediness of politicians and the short-sightedness of the constituents of South Africa, they are not reaping the benefits they should be.

You Can't Get Something For Nothing

It has been a month since the last post and for that I apologize. I have been taking two very demanding classes in my program. I hope to continue posting regularly in the future, but it may be sporadic until I graduate in May. Thank you for stopping by anyway.

Thomas Sowell posted a good article here stating the obvious in a very eloquent way, "You Can't Get Something for Nothing." In this multi-part series he uses real world examples, such as the auto workers union, teachers unions, and other monopolistic groups and explains their effects on those they seek to gain more from.

The specific example in the article deals mainly with GM and Toyota and sheds some light on a major factor in GM's rapidly decaying position and Toyota's steadily increasing position in the automobile market of the United States.

Tippie MBA Ranked Best Value in the World

Chiara sent me an article posted on my school's website citing the increase in salary after graduation and the relative cost of the MBA at the University of Iowa, as being reasons why the Financial Times have ranked the University of Iowa higher than last year.

I have posted the article in the comments section if you are interested.

Inflation Rises Slightly Not Significantly

A brief article published by the Free Market Project, describes a news report a few weeks ago about an over excited reporter claiming that inflation is at its highest in 15 years! He cites a 5.4% increase in wholesale prices, but Mr. Shepherd points out that core prices (what you and I pay for most things) only rose 1.7% during the same period.

Businesses chose not to pass on their increased costs to the consumers. I have to ask why not? My guess is because of competition. It is hard for a business to raise their prices subtly. They can't meet with their competitors to agree on a date when everybody will raise their prices, so any increase in the sales price runs the risk of driving their customers right into their competitor's hands.

This especially rings true if there is no or little cost to the customer for switching. This often results in the good sold being a commodity or near-commodity.

Be careful what you read and make sure you examine the numbers before jumping to conclusions.

Starting a Roth IRA

From the same site (The Motley Fool) comes an article about setting up a Roth IRA. The site compares three vendors, but there are countless other vendors that will help you set up a Roth IRA.

What are the benefits of the Roth IRA? If you qualify, you can invest a relatively small sum every year ($4000 until 2007 and then $5000 in 2008 and then small increases afterward) in a tax-sheltered tool. You don't pay taxes on the money you gain from the Roth IRA. The reasoning being of course, because you already paid taxes on the money you put into it. In order to qualify you have to have an income of below $95,000 a year if you are single or $150,000 a year if you are married.

I haven't set up my own Roth IRA yet, but there is still time to place some money in a 2005 Roth IRA for tax purposes and the benefit of being able to place more money into it in 2006. April 15, 2006 is the deadline, so you still have time. What are you waiting for?

Retirement Investing Tools

I came across this relatively simple survey of the different tools available to you if you are planning to invest for retirement (that should be everybody!). The article describes each of the tools including 401(k)'s, IRA's, annuities, or tax-deferred investments. It goes on to give a brief strategy on how to distribute your money to the various investment tools depending on what situation you are in.

This isn't the first article like this, but it helps to refresh understanding of these important tools to help you plan for your future.

Don't Limit CEO Compensation

I came across a controversial perspective on compensating CEO's. The article argues that by limiting the amount a CEO makes, and pegging it at a "realistic" number, it will create more "CEO envy" and potentially cause companies to pay their CEO's more.

I like the last paragraph of the article because it puts full faith into a free market. In this case, the market for CEO's:

At the end of the day, what is the true market value of a CEO? Every MBA knows that the market value of anything (or anyone) is whatever the market is willing to bear. That’s how Howard Stern walked away with a $600 million deal from Sirius before he had ever spoken a single word on satellite radio. Maybe he’s worth it, maybe he’s not. However, in the time period since he signed the mammoth contract with Sirius, the company’s stock price has doubled, creating $5 billion in new shareholder value. All too appropriately, a recent Wall Street Journal article about Stern was titled “Shock-Jock Stern Has New Fan Base: Well-Paid Executives.”

I've posted on this topic recently and you can catch up on the discussion here.

"The Wal-Mart Effect"

This article by Kathleen Parker reviews the book by Charles Fishman called "The Wal-mart Effect." I often find myself defending Wal-mart on this site and even in general, but some excerpts from the review were striking to me. I'll share them below:

Wal-Mart isn't just a company. It's a global market force - a nation unto itself. Americans spend $35 million every hour at Wal-Mart, 24 hours a day, every day of the year. Wal-Mart is so huge and so powerful, you'll wonder how you failed to notice that the company affects not just how we shop, but how we think and live - even if we never set foot in a Wal-Mart store.

When you stand back and examine Wal-mart as Mr. Fishman has, it is quite shocking how the above statement could escape your attention. They control markets. They set the prices. They have power.

They aren't necessarily an evil corporation like some have argued (including myself), but some aspects of their business model should be brought to public attention.

On the home front, Fishman argues that critics are wrong when they say that Wal-Mart puts little people out of business. We (consumers) put little people out of business, he says. We vote with our wallets, and we're the ones who choose Wal-Mart over local stores. Wal-Mart, in that sense, is the ultimate model of democracy.

Consumers also have made possible the company's phenomenal growth. In 1990, Wal-Mart had just nine supercenters in the U.S. By 2000, there were 888. Wal-Mart is the No. 1 grocery retailer in the world. Between 1990 and 2000, 31 supermarket chains sought bankruptcy protection, including 27 that cited Wal-Mart as a factor.

It's true. We are the ones that give Wal-mart the power they have. We choose where to shop and as I have written previously, it is up to us to choose where to shop. If we want to buy our food or goods at a local boutique, there is nothing stopping us. I like the analogy of democracy, because it rings true.

Fishman argues that Wal-Mart's power and scale hurt capitalism by strangling competition.

"It's not free-market capitalism," he says. "Wal-Mart is running the market. Choice is an illusion."

Wal-Mart not only changes the way we buy, but the way we think, Fishman says. If Wal-Mart charges $5 per pound for salmon, then shoppers wonder why a restaurant charges $15. We expect salmon to cost only $5. Or a microwave to cost only $39. The Wal-Mart effect first changes our expectations, then changes the quality of merchandise, which is cheap, because it isn't always well- or ethically made.

This struck me as quite interesting. The article continues with the example of salmon and how it raised in Chile causing immense environmental damage. Wal-mart buys this salmon, because it wants to give us, the consumers, the cheapest price possible. We accept that price and from then on, we compare all other offerings to the lowest price. It is up to us to decide whether the price is "worth it" when looking at the example of salmon (or any other good that is not "well- or ethically made").

Next time I'm in Wal-mart or another discount store, I'm going to think twice about buying the cheap salmon.

Hedge Funds and Hollywood

I've posted an article in the comments section from Variety.com. They call to attention the decreasing willingness for movie companies to make movies. Most companies are paring back the number of movies they are making to focus on different markets or increasing their quality.

It seems that hedge funds are getting involved in underwriting the costs of movies for a share of the profits. Movies can be highly lucrative if audiences like it, but can also (and often times are) not very profitable, especially when you take into consideration the costs of production, distribution and marketing. Unfortunately, the article doesn't give many details on which funds are buying into the movie business.

Ford to Close Plants and Lay Off Thousands

Ford announced yesterday that it would be laying off up to 30,000 employees and shuttering 14 auto plants. According to this article, they are running at only 79% of capacity whereas Toyota is at full capacity.

I feel sorry for the people who will be losing their jobs. That has got to be a hard thing to go through. But in the interest of the economy as a whole and Ford in particular, this is a good thing because it looks like they are trying to change the direction the company is going and become more efficient. One particular statement of note is that Ford will no longer provide earnings guidance after 2006. Bill Ford said that the company has to stop thinking "short-term" and focus on a longer horizon.

Good luck to them. If Ford ends up becomming more efficient or producing better cars that consumers want, they'll grow and add more jobs. If they crash and burn, then smaller, more efficient comapanies will fill the gap; or even rivals who have better products to begin with. Either way the economy is better off:
Ford becomes more efficient = more quality for less cost to the consumer.
Ford goes bankrupt = one less competitor to worry about for other car manufacturers, and thus more market for them to strengthen their own positions = good news for customer.

Back during our stock market experiment, I had bought Ford and basically lost my shirt on it. I hope that they succeed because it seems to be less painful for everybody.

Kids in College Woefully Uneducated About Money

My mom sent me this article she found (thanks mom!) about students in college who have no idea how to manage money or can even do simple math. Education about money and its uses (and misuses) is the main reason why this blog exists. Learning about how money can be used and the tricks of the trade help everyone better their lives, be more efficient, and plan for their future (and not get ripped off).

Had I not decided to get an MBA at the University of Iowa, I would also fall into the group the article mentions. Fortunately, my classes, along with good discussions with my classmates, have helped me learn more about how to manage money and do so with a goal in mind. No longer will I unknowingly pay the "Foreigner Tax" within my own country. Probably the most important thing that was spelled out to me was the time value of money.

Don't be ignorant about money. Ask questions. Read books, take classes, and visit Cashtalk or other financial sites. Take the time to learn how your income can be used to make your life better and those around you (in a responsible way). Don't wind up being the subject of an article about how people don't know anything about money.

Tax Software

Just a brief post here to remind everyone that a year has gone by and soon, taxes will be due. CNET.com has an article here briefly comparing the two popular tax software products.

Of course, software might not be the way to go if you own a business or have a high number of investments. If that is your case, I'd recommend talking with a CPA or other tax professional.

Game Theory

Why game shows have economists glued to their TV sets... from today's Journal, in the comments.

Game: Set Economic Policy as the President of the US

This upcoming Spring semester I'll be taking two classes: Economics and a Summary class to fulfill the requirements for an MBA.

When browsing the website for the Economics class, I came across this game which allows you to test economic theory by setting certain macro-economic monetary indicators (such as the Congress, President or Federal Reserve would be able to do) to see what effects it has on the economy (and your popularity). Check out the game here.

I played it and cut taxes to 10% of GDP and spending to about 12% of GDP. I tweaked the money supply each year to keep inflation in check and overall I think I did pretty well. At the end of the sixteen years, I got 4th place, right behind President JFK/LBJ, Eisenhower and Clinton. Unfortunately, I left a deficit for my successor.

Play the game and let me know how you did.

The Basics of Forming a Corporation

I came across this interesting summary of forming or starting a corporation. What are the implications? What are the advantages/disadvantages? Check it out.

"Fear Can Move Markets or Even a Whole Economy"

The Free Market Project recaps the year with an article about the media's obsession with fear. Notable and relevant to our site, the article examines the impacts of fear and hysteria on stocks, companies and even economies.

It kind of makes me feel dumb about posting earlier about the bird flu. Sometimes you just get caught up in a wave of human emotion. In order to be a successful handler of money and make wise money decisions, you have to control your own fear and even anticipate the fear of others and take advantage of it (in an ethical way of course). The article mentions that when the bird flu story started spreading, Roche's stock price increased 50%.

Check it out and let me know if you think the media is out of control when it comes to "ginning" up fear.

I knew it, I knew it, I KNEW IT.

I hate to say "I told you so" (and that's not directed at anyone in particular), but I remember thinking all along that this was a baaaaad idea:

In today's Journal:

GM Official Regrets
Employee Discounting

General Motors Corp.'s top North American sales and marketing executive, Mark LaNeve, said he now regrets launching the employee-discount program that drove GM sales to record levels last summer, and doesn't plan to repeat such promotions this year.

Mr. LaNeve said the employee-discount promotion, which GM began last June, was very efficient in moving vehicles. But after the program ended three months later, sales dipped and hit a low in October, when sales fell by 26%. The employee-discount program also caused the Detroit auto maker to focus its advertising messages on the sales promotion, instead of highlighting product attributes and its effort to reduce base prices on certain models.

"Hindsight being 20/20, I probably wouldn't have done it," Mr. LaNeve said.

Google $600?

Piper Jaffray analyst Safa Rashtchy defends his price target of $600 a share for Google in today's Wall Street Journal.

Quick read, posted in the comments.