Sunday, July 31, 2011

Putting your money to work

In the second post of a series on getting your money to make its own money, we'll chat about making the most of the options in your 401(k). In the last part of the series, we discussed the various tax-sheltered accounts the government has provided to allow us to more efficiently save for retirement. These accounts basically consist of the 401(k) and the IRA. With most decent jobs an employee is offered a 401(k) and (hopefully) a company match to contributions by the employee. While the tax benefits of investing in a 401(k) can be huge, the next most important thing (and perhaps just as important) is what exactly your money is invested in inside the account.

Most of these accounts provide mutual funds that allow one to invest in stocks, bonds, and real estate. A mutual fund is a vehicle by which people can contribute a small amount of money and still be involved in a number of investments (i.e., be diversified), since the people in the fund are essentially pooling their money. The important part to remember when evaluating the funds in your 401(k) is that the companies providing (and managing) the funds to your employer often charge them exorbitant fees to do so. The trick is to find those funds with the least onerous fees. Rather than past returns, manager tenure, or trading strategy, the number one determinant as to future fund performance is the amount of fees it charges. In contrast to just about everything else in life, when investing, you get what you don't pay for. To explain it simply, no one knows where the market will be one month from now, so we should invest accordingly. The type of mutual fund that lives according to this mantra is what's called the index fund. What it does is, instead of employing a hot shot manager to pick stocks and beat the market, it humbly buys every stock in a certain index (such as the S&P 500) and holds them. As you might imagine, this strategy is quite inexpensive to implement, and thus it results in mutual fund fees that are much lower than those that try to beat the market (i.e., actively managed funds).

A mutual fund's fees are noted in the fund's expense ratio, and this is what one should focus on, as it will likely be one of the easiest and most important wealth building steps you can take. If you can obtain the packet your company provides regarding benefits, check what your 401(k) is currently invested in (or what options there are). Google the name of the fund(s) and try to find its ticker symbol; this is the 5 letter short name for the fund. Then go to and type the ticker in the "quote" box at the top. For example, google "vanguard target retirement 2045." You'll see the VTIVX symbol in the first couple of google entries. Now, typing that into morningstar's quote box, we'll see the mutual fund's profile. In the second set of tabs, click on expenses and you'll notice that this fund has a 0.19% expense ratio. This is very good; compare this with what you find for your funds.

To keep your investing simple, diversified, and appropriately risky, it's a wise move to select the "target retirement" or "lifecycle" fund in your 401(k). These funds automatically grow more conservative as one approaches retirement. Choose the one closest to your estimated year of retirement (such as 2045). If your fund is nowhere near as low as the Vanguard fund mentioned above, you may have an shoddy 401(k). This is, sadly, more common that it should be, and it costs you big money in the long run. See the adjacent figure, which shows the impact of a high expense ratio over the long run. In this example, a fund in my girlfriend's 401(k), the American 2045 fund (with an expense ratio of closer to 1%), is compared to the Vanguard fund mentioned above. We imagine you start with $50,000, and you're investing for 30 years, say, till you're 65 (and the market returns 10% per year). You'll notice on
the right of the figure that the Vanguard fund, because of its low expenses, provides you with over $200k more at the end of the time period (that's ~32% more!). All for no extra effort on your part. And this doesn't even consider any extra additions over those 30 years. If the fees in your 401(k) are nowhere close to those of Vanguard, lobby your HR person (or boss) for some better options. They'll likely thank you in the long run, as they're probably investors too.

To check the impact of your particular fund's fees, check out the Vanguard cost compare tool, with which the above figure was made.

Saturday, July 30, 2011

Recent research on rent vs buy

Not to rehash tired arguments, but when there's a new contribution to the literature on a relevant topic, it seems worthwhile to provide an update. A recent paper looks at whether renting or buying a house would have been a better bet over the last 30 years. At right is the main figure from the paper; I'll let Felix Salmon summarize it:

This needs a little bit of explanation. Basically, you consider two people, one of whom rents and the other of whom buys. If it costs more to buy than to rent, the renter takes the difference and invests it in the market — a mixture of stocks and bonds which has the same amount of risk as home equity. After eight years, the buyer sells. Then you see who’s worth more money.

The lines on the chart above are what you get when you take the amount of money that the renter has and subtract the amount of money that the buyer has. When the number is positive, the renter wins, when the number falls below zero, you would have been better off buying.The chart looks at rolling eight-year periods, starting with people who bought in 1978 and ending with people who bought in 2001; while there are significant regional variations in the northeast, which had a nasty property slump in the 1990s, the big picture is that there are a hell of a lot more datapoints above zero than below it. And The only negative datapoints are the ones which involved selling during the bubble. Here’s how the paper describes the chart in English:

When the U.S. as a whole is considered, renting was preferred to buying 75% of the time. On average, the annual required appreciation return was 2.04% higher than the actual appreciation. In retrospect, the period spanning the mid 1990s to the early 2000s was the only time frame in which buying was preferred to renting. This narrow time period is associated with homeowners that purchased a home just before the recent boom and sold it shortly before its sequential bust. However, because most homeowners never transfer back to be renters, it seems unlikely that most homeowners, who benefitted from home appreciation during the boom period, avoided the subsequent housing collapse.

The authors go to great pains to make this as accurate a comparison as possible. Specifically, they do a lot of things which weight the scales toward owning rather than renting:

· They assume a standard 30-year mortgage with 20% down and no nasty tricks.

· They give the owner the option to refinance every year.

· They give the owner the benefit of the mortgage-interest tax deduction.

· They don’t allow homeowners to lose money on an underwater mortgage: the authors assume that you’re buying in a non-recourse state, and that the rational homeowner will strategically default rather than lose money on a sale if that’s the most lucrative option

Felix goes on to explain that even considering all of this, renting comes out ahead. He, and the folks at e21 explain that this is because, whether one is renting a home or buying it, they will both actually be renting. Whereas one is renting the house, the other is simply renting the capital. The paper:

Two major findings evolve from the analysis. First, individuals, on average, were better off in economic terms to have rented for most of the years in the study period. This first result is strongly dependent upon fiscally disciplined individuals that, without fail, reinvest any residual savings from renting. Second, fundamental drivers now appear to be in place that favor homeownership over renting in the near term future.

While the first finding might seem to fly in the face of the homeownership paradigm (specifically wealth creation), it is reasonable to find that most individuals still preferred homeownership during the sample period because ownership is in essence a self-imposed savings vehicle. Periodic mortgage payments (most typically monthly and amortizing) reducedany debt affixed to the residence and property appreciation, which occurred almost universally during this time period, allowed owners to take advantage of a levered appreciating asset in lieu non-wealth enhancing consumption spending. Said another way, while renting may have been wise, any extra savings from renting might be spent on non-wealth enhancing goods resulting in any benefits from renting versus owning disappearing in a cloud of consumption spending rather than savings.

As we've said before, it appears that some of the benefit of owning a house is the forced savings that are associated with having a mortgage. It makes you stretch. Felix puts it terms our readers are familiar with: "People get real value out of consumption, and so when you buy rather than rent you’re essentially denying yourself all that extra fun and pleasure. And if you both rent and deny yourself the extra fun and pleasure, then you’ll end up with more money than the buyer."

The paper concludes with a balanced synopsis of past and current conditions, saying that there have been "significant periods during the recent past over which renting was the actual superior financial decision. This result is conditional on an individual taking any residual money from renting and reinvesting at a rate equal to, or greater than, the risk free rate. Additionally, and perhaps surprisingly, conditions (historically low mortgage rates and relatively low rent-to-price ratios) now seem in place to favor future purchases." As always, check your local conditions using reasonable metrics and caveat emptor.

Friday, July 29, 2011

How politicians are acting like they're insane

So, we're back. And just in time. Next Tuesday it appears that the federal government will officially run out of money, and won't (sans an act of congress) have the ability to borrow more. This is problematic, to say the least. To quickly demonstrate the insanity of politicians in Washington these days, let us quickly check in on the yield curve (see right and this post). This is the rate at which the government can borrow money for various lengths of time. You'll notice that rates have been trending down recently (going down the chart); the y axis is the date on which the data was gathered.

Let's focus on the column for 5 yr borrowing. The last entry says 1.45%. Now, let's consider inflation. Looking at a chart for that here (top chart), we'll notice that the market is predicting inflation of 1.75% per year over the next 5 years. Now, subtracting the latter number from the former, the result is negative. This means that it would be a wiser financial bet to borrow money now, and pay it back later. Yet... politicians in Washington are currently wrangling about how to reduce our current borrowing, instead of focusing on the miserable economy and jobs situation. If they had any idea what this chart meant, they'd be spending loads of money on infrastructure and thus stimulating the economy. Remember, kids, when one can borrow at a rate that is lower than inflation, and that person (or entity) has a bunch of spending they'll have to do eventually (ie, infrastructure), they're a moron not to borrow now and pay it back later.

See here, here, here, and here for more on why the government should be focused on jobs and not on debt reduction.

Tuesday, July 26, 2011

Why financial planners tout high deductibles, and why that may not be in your best interest…

A lot of financial planners out there like to tout high deductibles as a way of helping you save money on your insurance premiums so you can invest that extra money towards retirement. This is sometimes a business tactic by them to free up some extra money for you to invest in their proposed plan. While this is a good idea for some, it’s probably not a great idea for the average consumer.

In my experience, most people who have a $1,000 deductible or higher haven’t really given it much thought. They want to get the cheapest possible price on insurance, and they don’t really think about the possibility that they might have to file a claim. Next thing you know, they are in a car accident resulting in $1,200 damage to their car, and they are responsible for $1,000 of that bill. If they had purchased a $500 deductible, or even $250 or $100, they would have much less to pay out-of-pocket for the damages. Their insurance premium would have been higher, but probably not by a huge amount.

Most of the time, comprehensive coverage is very inexpensive. The price difference between a $500 and $100 comprehensive deductible is often only a few dollars per month. Having a $100 comprehensive deductible means, among other things, that if you need a new windshield, the insurance company will pick up most of the cost. Some companies offer ‘full glass coverage,’ which means that even if you have a $500 or $1,000 comprehensive deductible, they will waive it for glass claims. This is typically an endorsement that you have to add to the policy that costs extra.

Collision coverage is more expensive then comprehensive coverage, which is why people often purchase a low comprehensive deductible, with a higher collision deductible. This is very common and not a bad idea, but again, it’s important to look at all the price options, and then think about what makes the most sense for you.

On homeowners policies, people very often purchase a $1,000 deductible. Their thinking is that if their house ever burns down, they can afford to pay $1,000 of the damage if the insurance company is covering the other $200,000. However, they don’t think about the small claims that arise, such as theft, a flooded basement due to sewer backup or broken pipes, and vandalism. These claims can be anywhere from $800 on up.

The most important thing is to think about possible scenarios when purchasing your insurance policy, and ask yourself: “would I file a $1,200 claim, or pay it myself?” If you think you might file smaller claims, then a $1,000 deductible is probably not right for you. It would be worth it to pay a little bit extra for a lower deductible. However, if you are handy around the house, know how to repair cars yourself, or simply don’t mind paying the smaller claims out-of-pocket, then consider a higher deductible.

Make sure to talk to your agent about all the different deductible options on your insurance policies so you can make an informed decision on your deductible.

Monday, July 18, 2011

Auto Insurance Basics: Part Two

Winning the loser's game

Getting back to our roots here, we'll delve into some common personal finance topics and try to sort out the way the common man and woman can get a fair shake from the financial markets. I think it's fairly clear that, in general, people know they should be saving money. What's less clear is what people should do with it once they have it. Essentially, how do we get that whole compound interest thing going? First, investing is not as hard as it seems. Charlie Ellis once aptly called it a "loser's game," and with good reason. He compared it to amateur tennis, in that one wins largely by not making mistakes. Get the ball back to the other side and in bounds; do this enough against amateurs and you'll frequently win. Investing is similar in that it's not about making a big score, but simply avoiding mistakes. In this first of a series of posts, we'll explain how to get your money to make its own money.

One of the most basic facets of investing is making sure you avoid the tax man. Rather than beginning with a bunch of stock market jargon, we'll simply explain how it is that the common person can take advantage of everyday investment tax shelters (and you'll recognize all of them), fat cats and swiss bank accounts be damned.

The first and most important is the common 401(k) plan. Yes, that's right, that unsexy thingy you may have heard about while getting your paperwork on the first day of your new job. Well, ladies and gentlemen, a good 401(k) plan can be very sexy indeed. And here's why: it allows you to shelter up to $16500 from Uncle Sam's tentacles each and every year. You may have heard of another sexy feature: your company may be giving you free money by providing a match. If you're lucky, and, say, your company matches up to 6% (of your contribution), then on a pretax $35000 yearly salary they'll be giving you $2100 a year. With your contribution you'll be socking away $4200 per year and you're only missing 6% of your income. One of the best parts about it also helps with investor psychology; since the money is taken out our check before we see it, we usually don't miss it as we would otherwise.

There are two overall options with 401(k) plans. There's a regular (used in the calculation above) and a Roth option. With the regular plan, you get an immediate tax deduction of the amount you contribute (to the 401(k)), and then you don't pay taxes on the investment earnings until you pull it out. With the Roth option you pay taxes on the $5k in income now (so there's no deduction), and then you never pay taxes on your investment returns. So, no matter how high the balance when you retire, you won't pay the government a cent. Sexy indeed. The regular 401(k) is usually better if you're currently making a lot of money (and could use the tax breaks now), but for those who think they'll be making more money when they're 60 the Roth 401(k) would likely be the better bet. After you pay off your high interest debt, paying into your 401(k) up to the company match is the first step toward having your money make its own money. So, check with your human resources department, find out what the match is, and fill out the paperwork to make sure you're taking full advantage. The default option (likely a target retirement or life cycle fund), in terms of investment choices in your plan, is probably your best bet, but that'll be addressed here later in the week.

The second big tax shelter available to the humblest among us is the individual retirement account (IRA). Essentially, the government lets you put $5000 in an account each year (with the money invested in whatever you want, essentially, so it's more flexible than a 401(k)) and gives you tax breaks on that account. The tax benefits are almost the same with the 401(k). The regular IRA gives you a tax break now, but will tax you when you pull your money out in retirement. The Roth IRA makes you forgo the tax deduction now, but you will never pay taxes on the investment earnings. Think of it. You could be in the stock market for 40 years, and never owe the government a cent. IRA accounts (Roth and traditional) can be opened at virtually any financial institution you can think of. Since these types of accounts are for investing, I wouldn't recommend opening one at a bank (unless you like the amount of interest paid on your checking account). The place to do it is at a mutual fund company, and the best one is Vanguard. The reason? They let you invest "at cost." In other words, there isn't an owner (or shareholders) who collect the profits on the fees charged; the fees just cover the costs to run the funds. The investors are the owners. Sound too good to be true? The man who started Vanguard, Jack Bogle, has appropriately been dubbed Saint Jack by his loyal group of investor acolytes, the Bogleheads. Vanguard lets you invest, on the cheap, in anything worth your time.

While we'll delve into investment choices soon, to recap today's post, remember that investing is a loser's game. Just avoid the big mistakes. So...

1. Pay down your high interest debt
2. Invest in your 401(k) up to the company match.
3. Open an IRA and try to contribute to the $5000 max each year.
4. Try to top of your 401(k) to its $16500 yearly limit.

That's $21500 a year of tax protection. And you don't even have deal with anyone in Bermuda.

Thursday, July 14, 2011

Wait, the government buys its own bonds!?!

A last quick post before the weekend... on a much more mundane topic. BUT, you'll hear about it from the candidates, so we should discuss (use the comment section below). With talk of the national debt in the air, you'll often hear people chatting about the Federal Reserve and how it's debasing the currency. We've already chatted about the currency itself, so we'll talk about a related fact people mention: the fact that the Fed is buying the bonds that the US treasury is issuing.

So, a basic primer here. The US government currently spends more than it earns. It borrows the money to make up the difference by issuing treasury bonds. What happens is people (or countries) wanting to invest in a safe asset will loan the US govt money by buying these bonds when the treasury has an auction. China buys 'em, and so do your rich relatives... and so do some of the mutual funds in your 401(k). The federal government borrows this money in terms of anywhere from 30 years to just a few weeks. The problem lately is that people have been screaming about the fact that the Federal Reserve (the US's central bank) has been buying the bonds that the treasury issues. It's true and, so, in effect, the government is loaning itself money.

What people don't realize is that the government does this quite often. Have you heard sometime on the news that the Fed has raised or lowered interest rates (actually called the Federal Funds rate)? What the Fed is doing is actually buying bonds in the open market (when it lowers rates) and selling bonds (when it raises rates). The interesting thing is that the Fed can just increase the money in its own account electronically. When it wants to buy some bonds, it increases the funds it has on hand (with a keystroke) and places bids in the open market. New money suddenly enters the economy, and, since the interest rate is essentially the price of money, when there's more of it, interest rates decrease (it's supply and demand, just like everything else).

Lately, however, the Fed has been doing something a little unusual. It's called quantitative easing. Whereas the Fed is usually targeting the short term interest rate by buying short term bonds (remember, they go from a few weeks to 30 years), with quantitative easing the Fed is trying to lower long term interest rates (buying buying longer term bonds). This would affect things like mortgage rates, as those are usually tied to the 10 year treasury bond interest rate. The Fed reasons, rightly, that lower borrowing costs will entice people to spend more money. It's a tool from the nether regions of the tool bag, but with the Federal Funds rate at 0-0.25%, they couldn't take that any lower and had to change tactics. So, that's what quantitative easing is and how it's supposed to help the economy. Economists are actually split on how big an effect it has had, so it's anyone's guess, really. While some people (politicians included) are concerned with runaway inflation (THE GOVT IS BUYING ITS OWN BONDS!!!), the markets' outlook for inflation over the next 1-30 years has remained quite anchored. This is largely because the new money is just sitting there, instead of moving through the economy. Everyone is too scared to spend.

Argentina, and the world, mourns Facundo Cabral

An old friend recently took to facebook to mourn the loss of a beloved singer: "Inconmensurable verguenza para Guatemala, inconmensurable verguenza para Centro América! Facundo Cabral asesinato en Guatemala," or “Immeasureable shame for Guatemala, immeasurable shame for Central America! Facundo Cabral murdered in Guatemala.” Reading up on the day's events, the tale indeed turned out to be immensely tragic. Cabral was an 74 year old Argentine singer songwriter, who arose from humble beginnings, wrote music (see here) that inspired millions, survived cancer, and last Saturday was ambushed on his way to the airport. From Wikipedia:

He had left a hotel in the west of Guatemala City, after giving a concert the previous evening in Quetzaltenango, and was headed to the airport when gunmen attacked his vehicle, a white Range Rover, hitting him with at least eight bullets. He died in the car. The incident occurred at around 05.20 (local time) and took place on Liberation Boulevard, a busy road that connects with the airport, but at the time of the attack was practically empty.

The LA Times reports that it was an “organized-crime hit intended for his promoter Henry Farina, a Nicaraguan,” and that “as of Tuesday, police in Guatemala have arrested two men in connection to the attack.” No matter the target, the attack is heinous, and apparently symptomatic of the state of Guatemala (and other parts of Central America) in general. In a recent special report on the region, The Economist recently offered this sobering analysis:

Whatever the weaknesses of the Mexican state, it is a Leviathan compared with the likes of Guatemala or Honduras. Large areas of Guatemala—including some of its prisons—are out of the government’s control; and, despite the efforts of its president, the government is infiltrated by the mafia. The countries of Central America’s northern triangle (Guatemala, Honduras and El Salvador) are now among the most violent places on earth, deadlier even than most conventional war zones. So weak are their judicial systems that in Guatemala, for example, only one murder in 20 is punished.

They go on to explain what’s behind the deteriorating situation:

Demand for cocaine in the United States (which, unlike that in Europe, is fed through Central America), combined with the ultimately futile war on drugs, has led to the upsurge in violence. It is American consumers who are financing the drug gangs and, to a large extent, American gun merchants who are arming them. So failing American policies help beget failed states in the neighbourhood.

Just for comparison, the most recent murder rate for Honduras is 77, Guatemala is 52, United States is 5, and Austria is 0.56 people per year per 100,000 habitants.

What do you think folks? Wouldn't it make more sense to just legalize it?

Monday, July 11, 2011

Ben & Levi - Episode IV - A New Hope

In part one of our latest video offering, we go over the auto insurance policy, covering everything you need to know when you purchase auto insurance. Liability limits, deductibles, uninsured/underinsured motorist coverage, comprehensive, collision, etc... are all vital elements of a policy, and it's important for you to understand what you do, and don't, have covered on your auto insurance policy. Enjoy!

Saturday, July 9, 2011

Should the govt tighten its belt just like uncle Carl??

One of the main headlines in the news continues to be the debt ceiling negotiations and the fact that the government needs to get its spending in line. While, yes, in the long term, the government needs to get its spending under control, it's not wise to do it while the economy is in a funk. Despite the fact that the recession officially ended about two years ago, things still aren't functioning normally. See here, here, and here for recent, grim news.

First, a chart from Paul Krugman on the difference in importance between the issues actually facing the country, and the issues being tackled by politicians. It's sort of nuts. While the economy hasn't actually been able to start digging its way out of the hole it's in, this isn't being addressed (see the red line above). What is being addressed is the country's debt issue. Getting back to our roots here as a personal finance blog, one of the general tenets of credit is that the lower risk of default you pose, the lower interest you'll pay on your debt. This works the same whether you're a sovereign nation or an office clerk. This makes sense. If one has a suspicion that, after loaning their money, they're not going to get all of it back, they'll charge a higher rate to make up for that risk. As you can see above, the interest the government is paying on its debt is at an all time low.

Recently, Obama in a radio address did the exact opposite of what the above chart would indicate one should do:
Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.
Okay, so there's the crux of the congressional priority misalignment, and it's disappointing that the president doesn't understand it, cause he's a smart guy. While it's wise for people to tighten their belts during uncertainty, when everyone does it it causes economic problems; obviously, if everyone avoids the mall, the stores won't sell stuff. This hurts the economy. It seems basic, but I repeat it because people don't seem to understand it. Now, the one entity that can spend money freely right now is the government (remember the 3% interest rates and the fact that there's a ton of infrastructure to upgrade). Upgrading infrastructure would create demand, as stuff would have to be purchased to build rail/roads/ports; people would be employed to build stuff, and they would spend their money on more stuff; and this is how a virtuous cycle brings us out of malaise. Jared Bernstein cites other reasons why Obama is wrong to make the govt/citizen comparison:
Here’s the gist: “The federal budget is just like a family budget, and we in government must tight our belts and live within our means just like families do.”... [I]t’s almost always used as an argument for cutting everything to the bone right away, and... it’s wrong.

First of all, it’s bass-akwards: when families are tightening their belts, the federal government is the one institution that can actually help the economy—and these belt-tightening families—by loosening its belt and running a deficit. That deficit should be temporary and should come down when the private economy climbs up off the mat....

But there’s another fundamental way in which this family budget analogy gets misused. Families borrow to make investments and to get over rough patches. They run deficits too. I went into pretty deep debt to finance college and grad school and I’m glad I did. The whole credit system is based on the fact that if we had to pay cash-as-we-go for everything, we’d seriously underinvest. And that’s true for families and governments—and yes, you can overdo the borrowing thing. But to flip too far the other way is equally dangerous.

So... discount those who want to use it as a hammer to insist on instant cuts.

When evaluating potential candidates for president over the next year and a half, it'll be very telling whether they explain some of this, or just toe the party line.

Paul Krugman here lays out why the government can get out of debt, by (temporarily) creating more debt. Ryan Avent is playfully called a shrill hippie, as he sensibly argues for more stimulus and calls Obama's comment above "profoundly uneconomic." The sad thing is that congressional missteps will lead to us all being less well-off than we could have been.

Tuesday, July 5, 2011

Flooded basement: Are you covered by insurance? Probably Not.

I feel it’s important that I bring up this topic because in the 2+ years I’ve been in the insurance business, probably 85% of the claims I’ve seen are water backup claims. Someone leaves town, a pipe breaks and floods their basement. Or their sump pump overflows and leaves raw sewage all over the place, ruining their drywall, carpets, hardwood, etc…, sometimes resulting in thousands of dollars in damage.

We discussed this briefly in one of our videos, but because it’s so common I feel I need to bring it to your attention. If you’re a homeowner and you don’t know if you have water backup coverage, find out. If you don’t have it, call your agent immediately and ask them to add it. If your insurance company doesn’t offer it, find one that does.

Most insurance companies offer an endorsement to the policy that includes $5,000 in water backup coverage. By endorsement, I mean that it doesn’t come with the policy automatically; it has to be added by the agent. Most agents out there are trying to get the best price possible and don’t even think to add this coverage. However, as I said, this is the most common claim I see and is often quite expensive. In fact, I would recommend adding at least $10,000 of water backup coverage, as claims are often higher then $5,000.

Don’t be stuck with a huge claim without any coverage. Talk to your insurance agent and make sure you have adequate coverage.

Friday, July 1, 2011

Dollar debasement?

One quick post before the long weekend. Sticking with the topics you'll likely hear this campaign season, we'll discuss the issue of a falling dollar. Many have complained about it lately (perhaps as part of a diatribe against the Fed's expansionary policies), but few really explain what it means in a coherent fashion. Look at this figure on Paul Krugman's blog. The slide of the dollar began in earnest in 2002, near the beginning of our country's ventures abroad. SO, not that I'm an Obama or Bernanke apologist, but the dollar's slide is old news. And it's actually a good thing for the economy.

Why is a devalued dollar good? Well, it makes our economy more competitive. Our exports are suddenly cheaper for other countries, which means they'll buy more of them (and prefer us to other exporters). Another effect of a weaker dollar is that our trade deficit is reduced. The trade deficit basically means we buy more as a country than we sell; this arrangement is not sustainable without the help of the Chinese, who help finance the trade deficit.

Sure, if you travel internationally and earn dollars, this situation isn't helping any. But, for the economy as a whole, it's a bonus. If you've watched what's happening in Greece at all, you'll have heard that one of their main problems is that they can't devalue their currency (because they use the Euro, which, of course, isn't just theirs) and make their economy more competitive relative to other countries. Thus one of their only ways to become competitive is to artificially try to hold down labor costs (e.g., wages) and, from the looks of the protests lately, that doesn't seem too sustainable. America is very fortunate to issue its own currency. It's one of the big differences between us and countries with pressing debt issues like Portugal, Ireland, and, Greece.

Now that we've discussed, keep an ear out for this on the campaign trail and accost accordingly.

Postscript: more on the "hard money" fallacy here.