internet marketing course The most important factor of growing up is learning how to manage our money. Chilton (1998) claims that most of us learn money management from our parents along with their values, beliefs, spending habits, and how much they share and teach us about money. Even though most of us listen to and follow the fundamentals our parents instilled in us, we still develop our own values, beliefs, and habits. As we gain our own ideas, and learn an understanding of personal finance we can develop a plan to benefit from proper financial planning.
Financial planning is an essential element to personal finance by setting up goals and a path to meet your goals creating that personal freedom for those who strive for it. Financial planning consists of budgeting, savings and investing in your future. A strong budget allows managing your money to include savings and investing. The key step in knowing how important savings is in a financial plan is you can go far with out it. Without savings you can't accumulate enough capital to invest, or if something were to happen you may have to cash in valuable investment with a huge loss due to unexpected emergencies.
A financial plan specifies your financial goals and sets a path to achieve those goals. With a good understanding of personal finance you have the ability to make your own financial decisions. A good understanding allows you to judge and give yourself sound financial advice. The whole idea of Chilton's novel, "The Wealthy Barber", is to save money now and live better in the future. By making sound financial decisions you can create wealth for the present and well into your retirement and after.
A few benefits of understanding personal finance are being able to protect your assets and income. If something terrible were to happen to yourself or your spouse, the right planning and the knowledge of having the proper insurance is all you need to protect yourself and your family. Knowing how to invest in stocks, bonds, mutual funds, and real estate can produce a substantial return to benefit you in the future. The right understanding allows you to minimize risk and maximize returns. The proper understanding of how to save and invest can lead to accumulate sufficient money to support yourself after you retire.
A true understanding of personal finance allows us to buy the best house for our family, put our children through college, and retire young enough to enjoy the remainder of lives with our loved ones. Getting a financial advisor without the proper understanding where your money is going can be very dangerous. Your ignorance can lead to someone taking advantage of you and your money, which could cause you to lose your entire nest egg. An understanding of how to manage our money, assets, and investments is our responsibility and we can reap the benefits in the long run. When it comes to personal finances "people are reluctant to discuss personal finances outside the family circle, except with financial advisors-bank managers, solicitors, accountants - whose professional standing provides an assurance of confidentiality." (Aldridge, 1998: pg.8)
Usually one does not talk about savings with their financial advisor, because it's always about what are the best funds or stocks to increase their net present value. It is essential to know how much to save and how to make it work for you. Savings can be viewed as short-term goals or long-term goals. A short-term goal is saving extra money for a short period of time for a major purchase, like a down payment on a house or car, possibly a household renovation. These types of items that you would normally save for minimize your payments or avoid an interest bearing loan. Long-term savings goals are plans to have readily available cash at hand, with no plans on spending it unless of an emergency. It's a long-term savings because you can maintain it until you retire and it continually builds dividends. A common long-term savings goals is an emergency fund that should consist of a minimum six months worth of salaries and if able up to a full years salaries. In addition to an emergency fund a sound financial plan should have money allocated to another savings account on a monthly basis.
Credit management is important because you can't survive without it. It's important to consider you can't buy a house, a car, or get a credit card without some kind of credit history. Credit management begins with your first bank account and doesn't end until you die and in some cases it can out live you. You start to establish history with every dollar you save and spend. Starting off right is the first step to establishing a good credit history. You have to manage your credit by paying your debts on time. The better your credit gets the more creditors want to give you and this can be trouble. Your one credit card turns into five cards, as a result you then have a new car loan, and you're using your credit cards to pay other cards and your car payment.
This is a typical situation with inexperienced people who do not know anything about credit. It's very common for a family to go out for a night on the town and take a credit card. A credit card may carry a fee, and also a risk of theft and forgery, but it is very convenient and the free credit period allows money to be held temporarily in a form earning more than a bank account. (Robinson/McGoun 1998).The convenience and safety of credit cards offer you just can't get with cash. Credit cards are the most used form of credit and have the potential to be misused. If you misuse credit it usually will takes years to recover and you have established a bad credit history. Tyson (2006) recommends that you "get all three of your credit card reports, and be sure each is accurate".
In addition to credit cards you have various types of loans. You have personal loans, car loans, house loans and school loans which all build your credit history. Credit management affects what kind of loan you have available and the terms of the loan. With bad credit, loans have a higher interest rate and they can take longer to pay off. Once you learn good credit management you can use it to your advantage in financial planning. Wisely choosing the best loans and terms of your choice vise the creditors is an advantage. When doing your financial planning, the amount of credit you can afford to have is very important because it can lay the framework to a successful financial future.
Buying a home may be the single biggest investment you will ever make, so the decision should be taken very seriously. As claimed by Chilton (1998) it is said that about ninety percent of the world's millionaires have become millionaires through real estate. (pg. 60) With that said not everyone is ready to buy a house. When it comes down to it the decision is it better to buy a home or rent? In addition Barnes/Jaret (2003) states achieving the "American Dream" has often been associated with living in a thrifty manner, accumulating savings, and subsequently purchasing a home of one's own, which then appreciates in value and becomes a large component of one's personal wealth. When it comes to purchasing a home there are a lot of factors to be considered.
First the larger the down payment the better chance you have of getting the home you want. You need a house to meet your needs and a house you can afford. A house provides security and it represents your own little piece of that "American Dream". Every month that you pay into that a house you can say you own just a little bit more of that dream. With a little luck as the years go by, your house appreciates in value. Once you pay it off or sell you can feel like you made a difference in someone's life, to include your own. A down side of owning a home is you can tie yourself to a location and into a deal that you can't get out of easily. "Patience is always one of the most valuable attributes in investing, and nowhere is that more true then in real estate. It may go down, but it seldom stays there indefinitely." (Chilton pg. 62)
Determining the amount of life insurance is the most important in financial planning because the amount can focus the way you chose insurance. There are two methods of determining how much life insurance is needed. The first income method is a general formula for determining how much insurance based off your income. The income method suggests you multiply your annual income by ten. This is a straight line method that doesn't take into account a single person salary vise a family of four which will require more life insurance. The second method is a budgeting method, which determines your life insurance needs by considering your future budget based on your household's future expected expenses and your current financial situation.
The budgeting method takes into account your annual living expenses, special future expenses, debt, the job marketability of your spouse, and the value of your savings. Robinson (1998) highlights, in budgeting, we treat all sources of income identically and add them up. However, a formal model based on some theory of smoothing lifetime income and consumption would allocate a large part of any windfall into savings rather than expenditures. Once you have established the amount you need for life insurance, you have to consider what kind of life insurance that best suits your needs. When it comes to your financial plan, investing is an intricate part in securing your future. Money management is about short-term and long-term planning, and having a nice size nest egg, as you get closer to retirement.
Chilton (1998) recommends to not throwing all your eggs in one basket. To avoid living pay check-to-pay check, we have to plan and learn to invest in our future. In today's market you have so many choices that you can invest in. Depending on your willingness to take risks and where you want your money will set the basis for you individual investment portfolio. Some of the most common types of investments are IRA's, Stocks, and Bonds; each type of investment has its advantages and disadvantages.
Chilton (1998) recommends indulging in the stock market. Stocks are very popular and can be a risky investment and can produce a larger return or break you over night. A stock is a certificate of partial ownership of a firm. With the Internet, the option of buying stocks is easier than ever and has introduced new opportunities to an individual investor. It uses to be that you had to look for professional help but now it a few clicks away. Stocks are riskier investments but yield higher returns. Common stock is basic stock sometimes giving you rights to vote and elect board members who will run the company. Preferred stock guarantees you to receive dividends over the common stockholders. The downsides to stocks are the price of stocks can drop and you can lose an entire investment.
Another way to make yourself more financial set is to watch your spending as sated by Tyson (2006). Tyson recommends reducing spending in order to become more financially set. Simple ways to avoid spending money are as simple as using public transportation, using regular unleaded gas and servicing your car. Also it is important to avoid buying clothes that require dry cleaning, not indulging in the latest season's fashions and to keep accessories to a bare minimum.
No matter how you decide to save money and invest money, it should be made to fit as part as your financial plan. Both Chilton and Tyson make very good points about spending and saving, what to invest your money into and what not to. I have learned a lot about my personal finances through reading these two books. I found that Chilton's book was more of a story and more personal, then Tyson's to-the-point facts about finance. Out of the two books I think that I learned more from Tyson's, but both were enjoyed. Also both books made me realize that really I am investing in myself and my future.
References:
-Aldridge, Alan (1998) "Habitus and cultural capital in the field of personal finance." University of Nottingham
-Barnes, S & Jaret, C. (2003) Sociological focus The "American Dream" in poor urban neighborhoods: An analysis of home ownership attitudes and behaviors and financial saving behavior. Purdue University and Georgia State University
-Chilton, David. (1998) The Wealthy Barber. Roseville, CA: Prima Publishing.
-Gill, Suveera (2005) An Analysis of defaults of Long-term Rated Debts, Vikalpa volume 30
-Robinson, Chris and McGoun, Elton (1998) The sociology of personal finance. Financial Services Review 7
-Sandlin, Jennifer (2005) Culture, Consumption and Adult Education: Education for adults as a political site using a cultural studies framework. Texas A&M University
-Tyson, Eric. (2006) Personal Finance for Dummies 5th Ed. Hoboken, NJ. Wiley Publishing, Inc.
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(April 21) -- Thanks in part to an injection of government stimulus money, the ailing US economy is rebounding from the financial crisis more strongly than Europe and Japan, according to the International Monetary Fund, ...
Welcome to another week. Your Kansas City Chiefs news waits below. Not too much today. Enjoy.
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Barry Ritholtz Says:
July 12th, 2010 at 6:16 am
Thank you Invictus — thought provoking stuff .
Sonic Charmer Says:
July 12th, 2010 at 6:38 am
Is it possible that you’re setting up a distinction without a difference?
Business leaders say they’re not spending due to economic/political uncertainty. You’re saying No, it’s the lack of aggregate demand!
Could not the latter be related to, indeed go hand in hand with, the former?
dougc Says:
July 12th, 2010 at 7:06 am
I agree 100%, to paraphrase someone “don’t waste a crisis, they should be used to promote your agenda”, obviously CEO’ s want their taxes to remain low. Corporations don’t expand their business based upon the marginal rates or capital gain taxes on employees. they expand to meet needs. Rich people have a habit of claiming all problems can be solved by lower tax rates, Rational people look at the results of Boy Bush and Clinton on employment gains and deficits and see the results of lowering tax rates.
KentWillard Says:
July 12th, 2010 at 7:20 am
Factory utilization is still low. House vacancies are high. Commercial real estate vacancies are high. Consumer debt to income is high. And the high dollar will slow US exports. Why on earth would most US businesses want to invest in labor, real estate, or capital equipment I’m such an environment? It has nothing to do with political perception and everything to do with economic reality.
It is also frighteningly like Japan of the past two decades. Low interest rates. Private debt replaced by public debt. A series of plunges in equity and real estate prices. Firms saving massive amounts of money and hiring temp rather than full time permanent employees. And years of deflation.
Mike in Nola Says:
July 12th, 2010 at 7:35 am
The fact that consumer spending is 70% of GDP is one of out biggest problems. That was being propped up by unproductive activity in the housing bubble and by the big spenders who make money trading pieces of paper.
R&D and plant improvements are neglected to please CNBC readers who are trained to react to a one cent surprise in earnings even when it comes at the cost of five cents next year because the company laid off key people to make those earnings.
An example of the opposite thinking I heard about yesterday was MSFT’s xbox. It gets no respect because it spends huge amounts on R&D, with not everything making money, but some making long term big money. MS spent several billion developing and marketing the xbox for the past five years, always losing money on it. Many, including me, thought they were crazy. Well, it appears that the income stream for that one product has risen to over $1B this year and will likely grow more and have a fairly long tail, resulting in substantial future profits that would not have occured without the initial investment.
We have no long-term way out of this trap without starting to actually make things again instead of trading goods and services around, with the goods coming from outside the US.
rktbrkr Says:
July 12th, 2010 at 7:44 am
Maybe because US is so weighted towards services and it’s the Chinese who make the capital investments to build stuff to fill Walmart. Maybe US corps are keeping their powder dry because they anticipate more hard times ahead – not profligate like individuals and governments.
Is there any breakdown of the corporate hoarding by business type? I’m thinking big oil and the big tech cos are sitting on a lot of this money
antisthenes Says:
July 12th, 2010 at 7:48 am
For a man so proud of his ability to rationalise, you certainly do fall for some terrible old tautologies and fallacies when you get all macroeconomic on us.
Sure, PCE is ~70% of GDP – -but only because GDP is largely defined to capture end consumption in the first place! That’s like saying 50% of the clothing I put on my feet are socks, so the rest of my wardrobe is irrelevant!
If you compare the $10 trillion or so personal expenditure number (actually a meaningful amount lower if we throw out fantasy-land ‘imputations’ and stick to cold, hard cash components) with ALL the other spending that goes on in the economy you’ll find it comes to less than 30% of the sum, the difference being all those highly critical – and highly DISCRETIONARY – business outlays that get cancelled out of the GDP but which are responsible for moving all the goods and services up and down a multi-layered, divided-labour, specialized-function, ADVANCED economy – and generating all the non-government out-of-thin-air revenues and incomes which will be used to buy them.
Not only is Biz spending not just the NET inventory adds and NET investment which the BLS & BEA fixate upon, but all the other cost-of-sales and SG&A stuff (which a business analayst, above all people, should be aware exists!).
In here is where you find the real variability in the economy, with most of the rest being no more than its distant – and often muted – echo.
Come on, BR, use that penetrating intellect of yours and stop parroting Mainstream Macro 101 to your readers, they deserve better.
HEHEHE Says:
July 12th, 2010 at 7:49 am
The more realistic presumption is that corp insiders know we are headed for another downturn and they will need that cash to operate. Nobody with a half a brain believes in this “recovery”. Why do you think they’ve been dumping shares into the stock market rally like fishermen bailing water out of a boat with a hole in it? They aren’t stupid. In the next year look for another collapse like in 2008. The cash on those balance sheets will be eaten through; you’ll have another stock market collapse or two; and Benny Bernanke will annouce QE II which will result in another stock market rally and a another round of secondary stock offerings by corps and ensuing amazement by addle brained political pundits at the amount of cash on corporation balance sheets.
Did I miss anything?
HEHEHE Says:
July 12th, 2010 at 7:55 am
And you wonder why they never caught Madoff:)
“Hundreds of Federal Agents Fall Victim to Ponzi Scheme”
http://www.aolnews.com/crime/article/hundreds-of-fbi-dea-and-ice-agents-fall-victim-to-ponzi-scheme/19547371
dead hobo Says:
July 12th, 2010 at 8:07 am
Invictus,
You nailed it. I can’t improve or criticize this piece.
The next logical step would be to write about why demand is low, especially in spite of numerous gimmicks to inflate demand using public money, due to costs for commodities being likely overstated due to excess speculative demand and inept regulation, due to an utter lack of credibility that our financial markets have even a shred oh honesty and thus are safe to put personal savings into, or due to incompetent Fed management that prefers to ostensibly ignore credit availability for small business so that large banks can manage prop desks instead.
stonedwino Says:
July 12th, 2010 at 8:09 am
Doesn’t anyone see the connection here?
Consumers are supposed to be 70% of the economy and spending, but the consumer can’t make ends meet; meanwhile corporate America with its lowest effective corporate tax rate at levels not seen since the 1950’s is hoarding $1.8 trillion dollars? Like I’ve mentioned before, we cannot have an economic recovery when the consumer is being squeezed on all sides while corporate America sits on hoards of cash that is not being used to re-invigorate the economy. We are not Japan, we are much worse….This does not look good for the country, capitalism or business….we have come to a point where the imbalances must be corrected and if the need be through higher taxation of those sitting on all those piles of cash…
Mike in Nola Says:
July 12th, 2010 at 8:09 am
Hussman has a good rant about the misallocation of resources and the earnings games in the second half of today’s comment:
http://www.hussmanfunds.com/wmc/wmc100712.htm
Mike in Nola Says:
July 12th, 2010 at 8:12 am
Can’t even listen to Bloomberg radio. Feldstein is on telling us how we need to keep tax cuts for “everyone, ” i.e. the rich. It’s a “big cloud” hanging over “us.” Funny that taxes on the rich are always described as being on small businesses.
jaywalker Says:
July 12th, 2010 at 8:30 am
Thank God someone is still able to think. While whispered sentiments make good headlines, they don’t make good analysis; thank you for swimming above the toxic political pool that seems to infect so much of today’s “analysis”.
Jay Walker
The Confused Capitalist
Mark Down Says:
July 12th, 2010 at 8:38 am
Sitting on piles of cash..The new Preparation C.
dead hobo Says:
July 12th, 2010 at 8:39 am
BTW, it’s not only corporations that are sitting on piles of cash. My stash might not be as large as the ones you are writing about above, but it is certainly significant to me.
My personal goal is to live as comfortably as possible without excessive spending, even when I can afford to buy something new or fun. It really takes a full mental reorientation to think on these terms. I don’t deny myself the things I regard as necessities, which would probably look like luxuries to some others. Rather, I constantly look at my life and try to identify where to save a few bucks. In other words, I have replaced a fine hobby of recreational spending and shopping with being frugal. My house is paid for. I don’t owe anyone a dime outside of current balances that are cleared monthly.
Hunkering down is the only logical course of action. The government is incompetent at regulating financial markets and has created a place where the laws favor the crooks. I’m not putting any savings there unless we have another millennial dip. All it takes is a whining banker to scare Uncle Stupid into making the financial markets a better and safer place for fraudsters to operate without fear. Incompetent economists and business media that often performs as free public relations for commissioned wall street touts assist by being ignorant, stupid, complicit, corrupt, and useless in uncountable ways. In spite of all who complain, this will never change.
I have no faith in government to do what it should be doing … making the markets safe for investors. They have degenerated into a crook’s and scammer’s paradise and will likely remain as such for many years to come.
dead hobo Says:
July 12th, 2010 at 8:40 am
Mark Down Says:
July 12th, 2010 at 8:38 am
Sitting on piles of cash..The new Preparation C.
reply:
————-
Cute, Things I wish I said.
Minderbender Says:
July 12th, 2010 at 8:40 am
Two points to complete the picture:
1) Why is demand low? Uncertainty also on demand side (both consumers and businesses)
2) Creative Destruction – much of the capacity will never be utilized, as the products that can be produced today will no longer be in demand tomorrow – the new capex spending ought to be the kind of investment for new, different, innovative products
JusTryinTaMakeIt Says:
July 12th, 2010 at 8:41 am
Excellent analysis. Meanwhile Judd(R), Cantor(R), and Bayh(D) are all on CNBC this morning, spouting the Republican talking points that business is not growing, because of all the “harsh” measures the Obama admin is imposing on business. Oh, I think Sarah is also part of that chorus!
The Curmudgeon Says:
July 12th, 2010 at 8:57 am
The political screeching on both sides is just white noise, even if Obama pretty clearly believes that government provides better solutions than markets. And so do his GOP opponents, no matter what bull they try to sell otherwise.
The reason corps are sitting on piles of cash is because a) collapse of consumer demand; b) there’s nothing else to do with it; c) deflationary environment means cash is king.
Is there a political solution to the problem? I doubt it, short of a major war to suck up/destroy excess product. Of course, you could just start bulldozing houses.
tenaciousd Says:
July 12th, 2010 at 8:59 am
“… take with a grain of salt what anonymous CEOs whisper into the ear of one of their stenographers.”
Ouch!
Greg0658 Says:
July 12th, 2010 at 8:59 am
a 20 year plan to buy at pennies on the dollar .. or is it .. the 50 year plan – 1.5T dollar man reconstruction – we can build it better than it was before – no insurance dollars spent * – start from near scratch – a 22nd century infrastructure
* na – it’s monday
constantnormal Says:
July 12th, 2010 at 9:10 am
I’m thinking about the charts in the recent Comstock Partners chartfest that show corporate debt rising to huge levels, and just beginning to fall back …
So on the one hand, we have a huge corporate indebtedness, while at the same time we see companies raising record amounts of cash … does it seem to you that there is a certain lack of balance, a certain excess of individuality, a prevalence of “every company is an island” sort of thinking?
If an “economy” is an assortment of people and companies working individually toward better futures for all, what happens when that dissolves into “me first, devil take the hindmost”?
JustinTheSkeptic Says:
July 12th, 2010 at 9:19 am
Tell them dam chinese making 90 cents an hour to come off their doe and spend it on American ingenuity! lol
constantnormal Says:
July 12th, 2010 at 9:55 am
Restore FASB 157, value worthless debts as worthless, and all this will unravel. The bankrupt will be wiped out, and the solvent companies will remain, and begin deploying their cash hoard in acquiring shards of bankrupt monsters for less than the cost to create similar functionality. The financial sector will shrink from its cancerous size and the economy will be in remission from financial cancer.
Yes, it will be painful, and there is the chance that the patient may not survive the cure. But OTOH, there is a certainty that the patient will not survive the disease.
DeDude Says:
July 12th, 2010 at 10:26 am
Amazing how many people fail to understand the simple logic of business investment. If there are costumers to purchase the products then the business will invest and expand and if there are no costumers to purchase the product then they will not expand. The few companies that were run by “if we make it they (costumers) will come” idiots have long ago failed. The reason companies are not deploying their cash into expanding is that the consumer is not doing so well (unemployment, pay cuts, no overtime, etc.). But they may as well take a stab at the only president in recent times that was not a complete slave to the corporations.
Bokolis Says:
July 12th, 2010 at 10:38 am
“The demand problem we have on our hands is what is keeping companies’ spigots closed.”
How, then, does demand get stimulated without putting money in the hands of consumers?
Right…the problem does not lie in a cyclical slowdown of corporate spending/cash hoarding. The larger issue is that, for ages, it seems as if the corporate infrastructure spending is focused on decreasing headcount costs and squeezing more out of the remaining headcount.
I don’t see technology improving to (my) satisfaction. But, no one with the talent to push technology would be caught dead working for (from BR’s follow-up) “Exxon Mobil, GE, Microsoft, Apple, Google, Cisco, Johnson & Johnson, Verizon, Altria, EMC, Disney, Oracle,” would they?
Though, I wish one of them would go to work for Oracle…if only to build a product that isn’t shyte so I can get work done more quickly (giving me more time to fcuk off on here…I don’t want to show my hand regarding the upper limits of my productivity capability).
Tony61 Says:
July 12th, 2010 at 10:44 am
Yeoman’s work, BR. I heard Zakaria prattling on and on… and turned it off in disgust. When our thought leaders cannot think, it’s no wonder tea partiers cannot understand. Thank you for scrounging up all the charts and tables.
BTW, just finished Bailout Nation– excellent. I had to wait several months for my own mental health to read all the nightmarish details, but it is well worth it.
Invictus Says:
July 12th, 2010 at 10:50 am
@Tony61
Credit where it’s due, my friend. Check the byline, please. I’d like to think I bring something to the party…
Invictus
TDL Says:
July 12th, 2010 at 11:07 am
DeDude,
I’m pretty sure customers weren’t demanding electricity in their home before Edison effectively harnessed it. Sure, they would look for better ways to heat and light their homes, but at the end of the day if something is not built (created, innovated, invented, etc.) it will not be demanded. Your point is awfully simplistic.
Invictus,
You missed a critical point. Consumers are slowing the spending because debt loads are too high. Debt has to be extinguished before spending picks up. Then again, if you take the Krugman approach, the most effective way to deal with debt is accumulate more debt (at least at the national level;) then a recovery will kick in and you will be able to deal with the debt because the economy will be growing again! At least that’s what the neo-Keynsians say.
Regards,
TDL
plantseeds Says:
July 12th, 2010 at 11:11 am
constantnormal said..
“Restore FASB 157, value worthless debts as worthless, and all this will unravel. The bankrupt will be wiped out, and the solvent companies will remain, and begin deploying their cash hoard in acquiring shards of bankrupt monsters for less than the cost to create similar functionality. The financial sector will shrink from its cancerous size and the economy will be in remission from financial cancer.”
so true….and that would put an end to the double dip argument for sure and maybe give literal meaning to S&P 500.
If there was demand, supply and thus investment would soon follow however if CEOs say they’re not investing because of uncertainty coming out of Washington then I suppose it’s possible.
OTOH if there was a perceived “business friendly” administration and business then started investing as a result, despite lack of demand, would that create demand in the aggregate? Wasn’t that the whole idea of the economic stimulus effort? I’m not sure that works either.
Bottom line…
To quote Kevin Spacey in It’s a Bug’s Life, “The first rule of management: Everything is your fault.”
Deborah Says:
July 12th, 2010 at 11:44 am
Good post. I can’t stand the garbage conclusions that some people make. When I read the introduction I was going to debate the idiot conclusions of Fareed Zakaria’s with the exact points you raised.
Invictus Says:
July 12th, 2010 at 11:46 am
@antisthenes
With all due respect, how am I to take seriously someone who can’t even read a byline?
gman Says:
July 12th, 2010 at 12:11 pm
Great work! Everything in the media is “someone powerful (or the pr agent of a powerful person) whispering in a reporters ear”…think of how people were duped in the lead up to the Iraq war!
wngoju Says:
July 12th, 2010 at 12:21 pm
finally read this. agree with, eg, gman. Great!
TDL Says:
July 12th, 2010 at 12:22 pm
Invictus,
antisthenes still has an interesting argument. If I re-post, will you make a counter argument then?
Regards,
TDL
steve from virginia Says:
July 12th, 2010 at 1:00 pm
In the Potemkin Economy the outlook for financials is bleak due to off- balance sheet ‘difficulties’. Why should non- financials be any different?
Financials can hold cash @ the Fed and earn some interest (and divert some to executives who hold cash in Antigua- Barbuda, Curacao and Singapore.) Commercials earn almost as much as deflation increases cash value relative to borrowing without the risk. (Cash is diverted to executives who hold cash in Antigua, etc.)
The fact of the cash holdings is more eloquent than any other aspect. Neither financials or companies expect to produce anything. Financials cannot by nature and companies cannot see any opportunities that cost less than what the market prices can support.
Money (cash) is now a stock not a flow. The outcome is (self- fulfilling) deflation which is the result/cause of the cash hoarding. Why deflation? Because the ‘tax burden’ to commerce is real energy price which has risen along with consumption. The cash curve tracks the GDP curve which also tracks the oil production curve. All have expanded exponentially since 1980 and Reaganomics and the massive expansion of US credit. Corporate cash represents the capture of some of that credit and its laundering into currency. The currency is a hedge against either the company’s own risk or the systemic risk that depletion- amplified deflation represents to all business.
The only economic ‘activity’ is acquiring and holding money. With dollars being freely exchangeable on demand for petroleum, there is no alternative to gaining dollars as the primary cost of doing business.
Of course, at some (deflationary) point holding dollars becomes the sole purpose of the business itself.
With energy at the basis of all modern economic activity there is only one way for the various curves to bend as oil production declines. You can figure out the rest of this story by yourselves!
pater tenebrarum Says:
July 12th, 2010 at 1:20 pm
Unfortunately the so-called ‘regime uncertainty’ is a very real problem, no matter how ‘tired’ Barry is of hearing it. After all, ‘poor sales’ and ‘low capacity utilization’ do not just drop from the sky unbidden, as if they were a natural calamity like a hurricane. The bust is the result of an artificial credit boom imploding, but nonetheless the administration’s massive fiscal deficit spending policy – which makes future equally massive increases in taxation an inevitability – clearly contributes to worsening the bust.
For more details read:
Regime Uncertainty http://www.acting-man.com/?p=3820
Monday links: better burgers Abnormal Returns Says:
July 12th, 2010 at 1:23 pm
America’s big “pile of cash” is not the source of our economic problems. (Big Picture,
Brett Tibbitts Says:
July 12th, 2010 at 1:54 pm
Don’t you think it’s a little simplistic and naive to state that the reason corporations aren’t opening their wallets is completely due to the demand side?
Why is it so hard for so many on this site to see that Obama’s initiatives are not conducive to increasing employment in this country? A stimulous bill that is more concerned with keeping state government union jobs than truly benefitting the entire country. A health care bill that is so convoluted that no one will ever figure it out. A finance bill that is the same. All you can really know is that your costs are going up as a business owner.
Obama is more concerned about suing Arizona than creating jobs. This is his comfort zone.
And to top it all off, Obama, Pelosi and Reid won’t even tell us what the tax structure will be next year – and ya think this has absolutely nothing to do with corporations’ refusing to open their wallets? Please.
Corporate American’s $2 Tn Cash Pile–Let’s Kill Some Corporate Ass « Phil's Favorites – By Ilene Says:
July 12th, 2010 at 2:17 pm
about how much America’s 500 largest NON-FINANCIAL companies have on their books. This is up about $500,000,000,000 from last year as 2010 has been very, very good for corporate
beaufou Says:
July 12th, 2010 at 2:19 pm
Isn’t the notion of a jobless recovery anti-business for those fearless CEOs.
You would think that decently paid and employed people would boost sales, but by the time we get to any kind of normalcy, they’ll already have learned a lot about “productivity and efficiency” or how to profit a little more from human misery.
And regulations and taxes are a bunch of cheap bullshit excuses they throw around to hide their disgusting behaviors; try giving more privileges to a bunch of free loading and bottom feeding aristocrats and see what happens, Louis the XVI can testify.
Politicians and business elites are morally defeated, refusing to even imagine an alternative to their fundamentally flawed ways.
Nice one Invictus.
(thanks BR)
DeDude Says:
July 12th, 2010 at 2:23 pm
TDL, yes they diverted their money from a petroleum based lights to electricity based light. Businesses can and will always try to improve their products relative to the competition. Those types of investments are still going on and they are fairly unaffected by the economic climate (with the exception of a credit freeze)– because they are essential for the survival of a company (either you or your competitors develop a better product and, therefore, increase market share). So you are making my point; because there are always (more) costumers for a better product ,investments in making a better product are still occurring. The thing that has failed is investment in making more of the current products (new factories to increase production). That will only pick up when consumers start spending more.
impermanence Says:
July 12th, 2010 at 2:30 pm
The economy is sort of like a game of monopoly. When one player has almost all the money and all the property, the games is kind of over. The rest of the players can not continue to play until they accumulate enough $ which they can never seem to do because of all the fees, taxes, and other financials pitfalls.
You always knew when you got to that point in the game when somebody would say, “it’s over.” Well, “it’s over” for real this time.
Market Talk » Blog Archive » Links 7/12/2010 Says:
July 12th, 2010 at 5:27 pm
in America,” a recent Washington Post op-ed says. But Big Picture blogger Barry Ritholtz disagrees with that premise. “Since we know that personal consumption expenditures comprise 70% of GDP,
jyc3 Says:
July 12th, 2010 at 5:54 pm
Invictus,
I don’t necessarily disagree but a few questions come to mind:
1. On the NFIB survey, do we have a breakdown on the types of companies in the survey? For instance, how many of them are in businesses that would benefit from higher capital spending? How many of them are in industries that are related, even peripherally, to real estate? Not knowing the composition of the survey group is a major problem in trying to draw a conclusion from the response. You can’t just assume that they only benefit from consumer spending.
2. How much of the alleged spare capacity is now obsolete? We know that capacity and therefore capacity utilization is notoriously difficult to measure so I’d be careful depending on that data for anything.
3. Are you saying that expectations of future policy play no role in the reluctance to spend? If not, how much is due to lack of demand and how much is due to “regime uncertainty” as it has been called elsewhere? If some of the reluctance to spend is due to policy uncertainty (or fear of higher taxes, more regulations, uncertainty about the ultimate cost of hiring a new employee due to implementation of health care reform, etc.) wouldn’t relieving some of that uncertainty be beneficial? Isn’t it possible that relieving that uncertainty would be enough to raise demand enough to get companies to invest?
4. How much of the change in the rate of cash accumulation can be attributed to globalization and the reluctance of multinationals to repatriate profits and pay taxes? How much of this cash is sitting offshore avoiding taxes?
I didn’t see the Zakaria piece and won’t read it. I’ve not found his analysis of foreign affairs or anything else particularly compelling. On the other hand just because the CEOs have a vested interest in putting this meme out there doesn’t mean there isn’t some truth to it. Not all industries have excess capacity right now and the ones that do, we might not want to stimulate (do we really want the construction industry expanding right now?). I think we could stimulate with monetary policy but I’m not sure we wouldn’t just get more malinvestment (as the Austrians call it) as we did with real estate the last time we tried that. The economy is not homogeneous and raw demand management may not help that much right now. It takes time for roofers to figure out how to do something else for a living. Having said that, supply side stimulation may not be much help either. It might be that we just need to tough this one out until the debt is paid down. Frankly, I think it would have been quicker if we had forced more defaults and made bank bondholders eat more losses rather than having the taxpayer pick up the tab for their lousy investment decisions. We compressed the amplitude of the recession with all these loss avoidance measures at the cost of extending the wavelength. There is no such thing as a free lunch.
willid3 Says:
July 12th, 2010 at 5:57 pm
some how I don’t see that there are more than 2 real consumers. as any business (no matter what they do) either sells to government (or to some one else who does at some point) or to end consumers (or to some one who does). other wise they aren’t really a business. an example is jet engines. no consumer ever buys one do they? but if they don’t buy tickets on airlines, then a lot fewer of them would ever be made, and mostly they would be for military aircraft (bought by government). and air express mail would never have happened with out the airlines, or the post office (aka the government).
so the real reason for the demand drought is that consumers have been so over whelmed by debt, caused by shrinking incomes, because their pay hasn’t kept up with inflation in a decade, and only easy credit papers over this, in the last decade
mathman Says:
July 12th, 2010 at 6:21 pm
This is complete bullshit. The entire global economy is crashing and we all pretend it’s just fine. Anyone who thinks wealth comes from spinning the Wall Street lottery wheel while the Fed backs it up with round the clock printing (to cover the whole fraudulent system up) is delusional. It’s over. Those paper notes you and i have are glorified scrip and will become ever more worthless as time goes on. The entire economic system on which all this supposed wealth derives has a fatal flaw – that the environment from which is obtained all the raw materials for everything we do – has never been factored in to the costs and all too soon we’re going to pay the real price.
beaufou Says:
July 12th, 2010 at 6:37 pm
There Invictus, there are more anti-business people in Brussels.
http://www.eact.eu/
European Association of Corporate Treasurers
This fine group of gentlemen are threatening to outsource jobs if derivatives regulations are voted in Europe.
Apparently regulations would cause the next crisis, just like no regulations didn’t cause the last one.
Invictus Says:
July 12th, 2010 at 6:56 pm
@jyc3
You ask many good, thoughtful questions, and I do not pretend to have all the answers. Not by a longshot (except perhaps to #1, which I could probably get from the NFIB).
:-)
My point here was to suggest that the equation: Corporate Cash at Record High = Obama anti-business is a flawed one, and to exhibit as best I could why that is the case. And I hate seeing the media allowing itself to be blatantly used.
Invictus Says:
July 12th, 2010 at 7:20 pm
@antisthenes
Sure, PCE is ~70% of GDP – -but only because GDP is largely defined to capture end consumption in the first place!
Could you support or elaborate on this? As to the rest of your rebuttal I would, as always, ask for some evidence to support your claims, just as I provided some evidence to support mine.
Invictus Says:
July 12th, 2010 at 8:12 pm
@All
I appreciate the commentary here and the insight both for and against the position I’ve laid out.
This piece was picked up over at Business Insider, where some of the responses serve to highlight what’s wrong with the discourse in our country today. Herewith three examples of the fact-based, data-driven “responses” to my post:
And
My personal fave:
Sonic Charmer Says:
July 12th, 2010 at 8:23 pm
Invictus,
Far as I could see, you didn’t respond to my question in Comment #1. To rephrase: Why are the two claims ‘businesses aren’t spending due to economic/political uncertainty/instability’ and ‘consumers aren’t demanding’ deemed mutually exclusive? Why is the latter supposed to be some sort of rebuttal to the former?
To state it explicitly: Couldn’t the reason for the lack of demand among consumers be exactly the same reason business leaders are giving – namely, economic/political uncertainty/instability?
In what sense does your post and its claim about consumer demand contradict what the business leaders are reported to have said about Obama’s effect on the economic situation?
Invictus Says:
July 12th, 2010 at 8:46 pm
@Sonic Charmer
There’s no way I can see and respond to every comment put up in response to something I post. Just not gonna happen. I do the best I can, but on what Barry pays me it just won’t fly. (Note to BR: We gotta talk raise soon.)
That said, the answer to your question is, in my opinion, “no.” Consumers are hunkered down — and not “demanding” goods and services — because of the ongoing deleveraging that began several quarters ago and has some time to run. The era of frugality we’ve entered will be with us for some time to come.
Businesses have been hoarding cash for a while — see the quote in my post from Kevin Warsh from 2006. Was there economic/political uncertainty/instability then? Clearly not, yet liquid asset levels continued to rise.
Here’s another on-point comment from Richard Eskow’s column at HuffPo: “Here’s the bottom line: Any executive of a publicly-traded company who failed to spend the money needed to serve a ready-to-buy customer base would be violating her or his duty to stockholders and would probably be fired immediately.” In other words, if companies thought they could reap $1.50 by spending $1.00, the floodgates would be open. But they can’t, and that’s not Obama’s fault. The demand just isn’t there.
One of the very, very few companies that seems to have found a formula to create its own demand is Apple, which I think we’d all agree does an exceptional job at marketing its products, in addition to making products that consumers crave. Beyond that, I just don’t know right now.
philipat Says:
July 12th, 2010 at 10:08 pm
So the solution is to get Americans buying useless cr*p from China again? I was sure that this consuption-driven model had been shown to be susopect and unsustainable? Perhaps a little more thrift and better focused investments might actually represent a better way forward?
toddie.g Says:
July 12th, 2010 at 10:41 pm
@Impermanence. I think you make a great metaphor using the game of Monopoly to today’s economy. With wealth so concentrated to such a low percentage of the population, unless they invest that wealth in capital formation with abandon then everything just stagnates while all the other monopoly players have nothing.
By having designed an economy that concentrates wealth at the very top, it leaves a dearth of spending as the super wealthy can only spend so much. As Bud Fox said, “how many yachts can you waterski behind?” If much of the excess wealth isn’t invested in new business, then it just sits idle, adding nothing.
Another point. I admire Bill Gates’s and Warren Buffett’s great philanthropy, but given the changing times wouldn’t they do the world (and the United States) a whole lot of good by investing some of that money in new businesses, creating jobs and giving opportunity to others, much of it right here at home, than their present initiatives ? The Gates Foundation has very well-meaning initiatives, but they were designed before the economic collapse. I suggest that major philanthropists go back to the drawing board, and come up with some fresh ideas as to how best deploy those funds.
Sonic Charmer Says:
July 13th, 2010 at 6:26 am
Thanks for the reply. I recognize one can’t/wouldn’t reply to all comments (or even any, necessarily), yet you seemed active in this thread otherwise, so I thought I’d ask.
I’m still unclear on how what you’re is meant to be a contradiction of the claim that uncertainty is sidelining capital. You assert that consumers aren’t demanding ‘because of deleveraging’. I tend to agree. You say we are in for frugality for some time to come. I also agree. But if there is uncertainty about the future (including economic and political), this would naturally tend to lengthen the deleveraging period and keep people ‘frugal’ more than otherwise. No?
It still seems to me that the two phenomena go hand in hand, rather than contradict. So far from being alternative/mutually exclusive explanations of capital ‘hoarding’, actually they could be said to have a common cause, that cause being precisely the one claimed by the unnamed ‘business leaders’ quoted in the article you reference.
best,
Tony61 Says:
July 13th, 2010 at 11:37 am
Invictus– Whoa! Sorry for not reading the by-line. Yes, yeoman’s work on this entry; excellent graphs and charts. Please accept my apologies, but rest assured that to be mistaken for BR is no insult. Thanks again for the useful info.
Corporate Cash Has Been Piling Up Since 1982 | The Big Picture Says:
July 15th, 2010 at 5:50 am
want to add to Invictus’ commentary taking Newsweek’s International editor, Fareed Zakaria, to task. There are three facts that I