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Should Corporations be Taxed to Avoid Speculation?
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In the last chapter of his new book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan says new technology innovations sometimes slow down so much that new machinery and equipment is not worth the investment for corporations.
For example, the fall off in investments after 2000.
"The slow down in innovation is particularly evident in the dramatic swing in corporations' use of their internal cash flow from fixed investment to buybacks of company common stock and cash disbursed to shareholders in the process of implementing mergers and acquisitions."
After citing some investment data, he concludes, "A corporation returns equity capital to shareholders when it cannot find opportunities for prospective risk-adjusted rates of return superior to the rate of return that the corporation returns from existing assets. Large cash disbursements to shareholders are usually a signal of lowered prospective rates of return on fixed investments available to the corporation, the likely result of a slowed pace of profitable new application of innovation."
Wow! Chairman Greenspan tells us corporations sometimes have profits but few capital investment opportunities, so they turn to speculative buying and selling of stocks for implementing mergers and acquisitions. Buying and selling in mergers and acquisitions creates work for lawyers and securities dealers along with speculative opportunities, but it creates nothing new for Americans.
The federal government could sell bonds to finance public projects like the construction of levees for New Orleans and the Mississippi river. Some of the loanable funds that keep going into assorted mergers, acquisitions and other speculations could be redirected to an important public project.
However, public projects mean new taxes to pay interest and principal. Taxes are already high for millions of Americans who oppose new taxes.
If Mr. Greenspan is correct and corporations have profits for speculation while public projects like New Orleans' levees go unfunded, then higher taxes on corporations and lower income and payroll taxes for individuals would decrease America's savings available for speculation and increase America's savings available for public projects.
Notice I did not say it is fair or unfair to change taxes, only that the distribution of income and taxes will change how America saves and invests. Remember savers, the value of your savings depends on the quality of America's investments.
What should we do about taxes? You decide.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Alan Greenspan on the Turbulence of Savings
In his recent book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan discusses savings.
"The shift of shares of world Gross Domestic Product since 2001 from low saving developed countries to higher saving developing countries has increased world saving so much that aggregate growth of savings world wide has greatly exceeded planned investments," he writes. "Or to put it another way, the supply of funds looking for a return on investment has grown faster than investment demand."
His tenure as Federal Reserve Chair began in 1987, so there is also some saving and lending history that he writes about. Speaking of banks in 1987, he says "[they] were in serious trouble."
And what was their problem? "… [Too] much speculative lending; in the early eighties, the major banks had gambled on Latin American debt, and then, as those loans went bad, like amateur gamblers trying to get square they'd bet even more by leading the whole industry into a binge of commercial real estate lending."
Amateur gamblers? Too much real estate lending? Isn't that what we have just been having?
When we save and earn an interest return, we entrust banks and financial intermediaries to use our savings wisely. The best loans for an economy create long lived physical assets.
On the news, I often hear that America's infra-structure needs improving. The levees in New Orleans and now on the Mississippi river need expensive capital improvements.
If banks use loanable funds as amateur gamblers when America needs levees, then it's not just banks that are in serious trouble as Mr. Greenspan mentions.
Remember savers, the more our savings are used to produce new products and new technologies, the more valuable your savings in the future.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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WTDirect Ups Savings Account to 3.26% APY
Just over a month since dropping their rates to 3.16% APY, WTDirect is increasing their savings account to 3.26% APY.
From the email I got:
As of June 19th (today), WTDirect's Savings Account rate is officially INCREASING to 3.26% APY - This marks the first rate increase in 9 months!! The rate continues to be in the top 5% of all banks.
As far as we can tell, this is not a temporary adjustment like HSBC's 3.50% APY until August 15, so it's great to see more upward motion.
Minimum balance to get into WTDirect is $10,000, so it's not for savers starting out. But once you open it, there's no minimum to avoid fees.
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Savers Beware: What Are Your Underlying Assets?
There was a time when it was common for corporations to create long lived assets with borrowing. It may take several years to build a steel mill or a power plant before there is something to sell, but loan or bond payments will come from revenues and the economy will have more steel, more electricity and more assets.
Banks, or financial intermediaries as they are called now, are still happy to make loans for plant and equipment. Trouble is there are more loanable funds to loan than borrowers willing and able to borrow for long lived assets.
As a result, banks make more consumer loans that support consumption spending like credit card debt. Loans that support consumption helps support jobs and the economy and provide an outlet for savers looking to earn interest income. However, credit card purchases like vacations, housewares and clothing have little value as security for credit card balances.
The home mortgage should be a secure loan because a home is a long lived asset. It used to be that Savings and Loans would make mortgage loans at 6 or 7 or 8 percent interest and the home would be the asset in case of default.
Lenders with home mortgages on their books could sell their mortgages if they needed to raise cash but they would tend to hold them to maturity, earning a steady income. In case of selling a mortgage it would usually be sold to another financial institution such as the Federal National Mortgage Association.
That changed when adventurous money managers started to buy thousands of mortgages and bundle them for resale into something like to a bond that pays interest on invested principal. They call them collateralized mortgage obligations (CMO) or collateralized debt obligations (CDO). In that way, mortgages could be resold to smaller investors who would not normally be willing or able to buy individual mortgages.
What is important to notice though is that repackaging and reselling mortgages does not create new assets. Reselling mortgage credit means more transactions that allow money managers to charge management fees and potentially make money with price fluctuations in CDO prices.
Bear Stearns held collateralized debt obligations in their hedge fund, but apparently so many of the underlying mortgages were to people who were sub prime borrowers that defaults set off a chain reaction. Since Bear Stearns borrowed money to buy collateralized debt obligations for their investors, they defaulted on their loans and threatened the solvency of major banks.
With so many new ways for money managers to attract savers, it is more important than ever to notice the underlying assets and ability to pay.
Did Bear Stearns investors know so many of the underlying assets were sub prime loans? Savers beware!
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Money Saving Links: 6/13/2008
This week's Carnival of Personal Finance was hosted by Prime Time Money, and it included Savings Onion: Where Our Money Goes.
Here are a few of the highlights from the carnival:
Is your savings account costing you? - OneChanceToLive
It is not only possible that your savings account is costing you money, but it is highly likely!
How to Stop Living Paycheck to Paycheck: 7 Steps - Discover Debt Freedom
If you're tired of living paycheck to paycheck and never having any extra money around to save or take a holiday, there are a few things you may be overlooking that could help you stretch the money you make while reducing the amount you have to pay each month.
Reminders from Omaha - Goal of Financial Freedom
Everyone wants to invest like Warren Buffett and Charlie Munger. I was able to find this article talking about the 6 timeless advice offered by Warren Buffett that we should all think about.
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Should You Sell Your Gas Guzzler to Save Cash?
I just heard a story on the TV about a guy who wants to sell his gas guzzler and get a high mileage car to cut his gas bill. Trouble is he owes $8,500 on his car loan and all he can get for his guzzler is $3,000.
He loses $5,500.
As all good savers know, he should only sell if he can save a minimum of $5,500 plus interest. According to the United States Department of Transportation, the average passenger car travels 12,400 miles a year and gets 22.4 miles per gallon for gas. That works out to 46 gallons of gas a month with a monthly fuel bill of $184 if we use $4.00 a gallon for the gas.
I regret to say that is probably low, but we will go with it.
Double his gas mileage and he saves $92 a month. Figure a savings of $92 a month for 5 years at 4 percent interest, and the savings is $6,119.84. Sad to say, but the $5,500 he loses would also accumulate interest. If we use the same 4 percent interest over the same 5 years, the total he loses is $6,715.48.
He loses $6,715.48 to save $6,119.84; a net loss.
This particular comparison does not account for the price of the new car, only the loss on the trade. If we assume he is going to own a car, either an old one or a new one, the premature trade represents the loss from not using the remaining life of the old car, which I hypothetically set at 5 years.
Different interest rates or time remaining for the life of the car will affect the result.
However, the most important comparison is the price of gas. Using $5.00 a gallon with the same mileage and interest rate, savings will hit $115 a month with a total of $7,649.80. At $5 a gallon, he can save doubling his mileage. He should trade the car. For those with mileage over the average of 12,400, saving gas money also will be more likely to pay.
I did the calculations on MS Excel using the FV, future value, function. It has a help file. Try it yourself for your exact situation.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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How Much Money Do I Need to Retire? ING Your Number
ING Direct is rolling out a new advertising campaign and Web site focused on determining how much money you need to retire.
ING Your Number (http://www.ingyournumber.com) is a financial calculator for figuring out "your number" — meaning, the amount of money you need to live at a level you'd like in retirement.
On the Web site, you're given a Flash presentation where you insert six fundamentals for determining your number:
- Current Age
- Marriage Status
- Household Income
- Expected Retirement Age
- Desired Income at Retirement
- Age until you'll need the incomeAfter your number is determined, ING points you to financial professionals whether you have one or you don't.
At first use, it seems helpful — you've got to know where you're going before you can get there. But at the same time, how are you supposed to know how much you'll need to live on in retirement? (It may not be the 80% often quoted.)
And, more importantly, how can I figure out when I'm going to die? (Death clocks not withstanding)
Now that ING owns ShareBuilder, it makes sense for them to be making a bigger deal out of investing for the future. We'll see how long the "your number" campaign plays out.
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U.S. Households See Net Worth Drop $1.7 Trillion
Americans $1.7 trillion poorer — CNNMoney.com
Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.
Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level ever.
The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report, which was released Thursday.
Wowzas, right?
Some of this is obviously inflated, since falling housing prices (which were off the scale during the bubble) made up $305 billion of the decline. But the news isn't that encouraging.
At the same time, there are now more than 1 million homes in foreclosure.
Are you a part of the net worth decline? Even if your home value has dropped, is your net worth (outside of real estate) doing the same?
Leave a comment and tell us.
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