Consulting by RPM || Free Advice Blog

Potpourri

* While you were asleep, banks’ excess reserves smashed through $1 trillion. They’re around $1,100 billion at this point.

* “Six Files the US Government Keeps On You, and How to Obtain a Copy.” (Here.)

* I’m guessing Dick Clark’s law school prof doesn’t get too many papers like this.

* Darren C. said this debate between Peter Schiff and David Epstein was the best thing he’d seen all year. He obviously doesn’t watch 30 Rock.

* Steve Horwitz lectures on the subject, “Do we really need a central bank?” I haven’t watched the video yet but I’m really hoping he says no.

* MercedesRules passes along this interesting blast from the past: Ron Paul trying to hinder Fed and Treasury gold manipulation back in 2002. C’mon Dr. Paul, do you really want Congress manipulating the gold price instead?

* Some interesting fun with emissions targets in the WSJ op ed pages. I checked RealClimate and Joe Romm’s sites, but so far no pushback on this one. I am not vouching for the analysis but his projections looked plausible to me.

* Tyler Cowen stoops to grabbing for the legendary “Murphy bump” in Tweeting.

Personal Financial Advice

You know how every once in a while MTV actually plays a music video? Well I thought it appropriate that I dispense some free financial advice to guide you through these choppy waters, which is what I originally started the blog for.

A reader asks:

I’m curious what flavor of personal finance advice you give about debt management/elimination/control, and savings accumulation? I’ve been a listener of Dave Ramsey, who I think provides an excellent service for the completely ignorant and completely buried-in-debt folks who don’t have discipline in their lives. He even offers decent advice for those of us who are disciplined but don’t always see things from “all the angles.”

But he doesn’t believe in investing in gold. He only believes in term life insurance. And I’m coming across investment advisors (I work in a retail store and meet many customers who come in for training, and so I get to know them a bit more personally) who don’t recommend using extra money to “throw at the house” and pay the mortgage down early.

Anyway, I’m curious where you fall on some of these things. Personally, I’m debt-free but the house, school is paid for (and being paid for in cash), and all our cars are paid for. No gold yet. Still on the fence about that.

Here are my quick thoughts:

(1) You should SAVE more than you used to. I don’t have a magic number but I think it’s safe to say that however much you have been saving in the last few months, is too low. Save more. That means, out of your disposable income each month, devote a little less of it to going out to eat, gas (i.e. drive your car less), and other things that leave you with nothing to show for. Instead devote more of your monthly income to investments, which can include paying down debt. The rest of the items discuss how best to allocate your (larger) savings each month.

(2) If you are currently carrying credit card balances that are based on the prime rate (i.e. you don’t have a locked-in balance transfer deal), then I think your objective should be to knock it out ASAP. The credit card companies have been dropping the hammer lately, even on their customers in good standing. For example I have never missed a payment (except a year ago because of traveling and it just slipped) but a few months ago they jacked up the minimum payment. The same happened to my friend, who is paying down law school debt and so he is fine financially. He had moved a bunch of his student loans onto credit cards because it was a better rate, but recently they upped his repayment schedule and it’s chafing him.

Why are the credit cards doing this? I’m not sure. I think part of it is due to “helpful” government regulations that force you to pay back your loans more quickly, but I think it also might be as simple as the credit card companies needing to call in the loans from their good customers because they’re getting killed on delinquencies from their bad customers. In any event, the good times are over. If you’re queasy about a balance rolling over at 15% but you’re hoping any day now a new 0%-through-October-2010 offer will show up in your mailbox, I suggest you stop hoping and start paying.

To motivate yourself, think of it like this: If you have a balance rolling over at 15%, that’s a guaranteed 15% return you make for every dollar you “invest” in knocking down your principal.

NOTE: If you are seriously awash in credit card debt, at some point you might decide it makes more sense to give up and declare bankruptcy. I personally would hate if that happened, because not only would it ruin my credit but, to the extent it was a conscious decision, I would feel somewhat unethical about it. But I mention it because some people may be seriously deep in credit card debt, and perhaps trying to pay it down before serious inflation kicks in would be pointless.

(3) As long as your mortgage, car loans, and other debts are fixed-rate, then I would NOT do anything except the minimum payments. (And if they are variable rate, I think on Monday you should call the bank and find out what you need to do to get into a fixed rate loan.) The one thing that keeps me fairly calm in the face of Bernanke’s money madness is that he will basically give me my house. Right now I think I’m probably underwater, but a few more cranks of the printing press and my monthly mortgage payments might be equal to how much I get for writing an op ed.

(4) If you still have a few decades working years ahead of you, I would plan on dealing with the threat of hyperinflation by stockpiling in your physical possession enough gold and silver coins to tide your household over the hump when it hits. For example, if the dollar crashes 80% in January, and prices at Wal-Mart end up rising by 50% within the next few months, while gas shoots up to $9 $15, your salary is probably not going to instantly accommodate you. So that’s what the stockpile of coins is for, that you start drawing it down (through ebay or something) until the point at which your paycheck has adjusted to the depreciated dollar. I personally cleaned out the local coin shop of his “junk silver” collection, meaning actual US coins (quarters, dimes, nickels) before 1962 when they had silver in them. So this way other Americans know what they are, and they can google to find out how much they’re worth, given that day’s spot price of silver. I also have some gold coins, but if it ever came to actual “barter” (in quotes because it’s not really barter if you’re using silver!) I feel more comfortable with old-school US coins that everybody recognizes, as opposed to American eagles or something.

(5) In terms of just hyperinflation, the only long-term assets that would truly be awful are dollar-denominated ones. So that obviously means bonds, but also life insurance policies. (However, if you have a whole life, dividend paying policy with a mutual company–as Carlos and I will recommend in our forthcoming book–there’s still a lot you can do to position yourself. In particular, you can pump your extra cash flow into your policy, then borrow it right back to invest in gold coins or real estate or whatever.) If it were just the fall in the dollar per se, then your retirement would be OK if it consisted of stocks because share prices would rise with prices in general.

(6) However, I think overlaid on the dollar’s collapse will be an awful “real” US economy. So once you’ve built up a cushion of gold and silver, if you are looking for long-term investments that will protect you from a dollar collapse, you might consider things like an ETF that exposes you to global stock markets, or Asian markets if you think they’re the wave of the future.

(7) Last point, you should try to develop more than one source of income. If and when things get bad, you don’t want to lose your job and then wonder where your next check will come from. Ideally you’d want two or three things in motion at 10% strength, say, that you could ramp up if you really had to. For some people, that might mean buying a small rental unit right now, and learning the ropes of how to find a tenant, how to replace a toilet, etc. Then after a layoff, with enough savings that person could buy eight more units and be a landlord full time.

Or I know a former student who, on the side, used to go to garage sales and find stuff to resell on ebay. If you’re racking your brain trying to figure out ways to make money, you could try doing that a few Saturdays to see how much you can make per hour.

Obviously I can’t give everyone a magic answer; the way you earn money in a market economy is by spotting an unfulfilled consumer need and then satisfying it. What I’m saying is that you should START LOOKING NOW so that you can experiment with a few things, or at least do a bunch of research, while you still have your regular job. If and when things get awful, regular companies are going to lock up. Nobody is going to be hiring at that point, so you will need to be able to be an entrepreneur at least for a few months.

I’m Guessing Gary North Won’t Give Us a Blurb…

…on Carlos Lara and my forthcoming book marrying Austrian economics and Nelson Nash’s infinite banking concept. North exploded on the topic:

Whole life insurance is bought by economically ignorant people. The industry profits from buyers’ ignorance. It charges huge commissions, which are paid to salesmen. This is why corrupt salesmen over time cease to listen to their consciences about deceiving the ignorant….

A whole life policy is not indexed for price inflation. Your savings portion gets destroyed by inflation.

I call it a sucker’s product. You may want to call it something else.

Families need term life insurance. But insurance companies like the fat profits on whole life, so the salesmen are rewarded well for selling whole life policies.
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If you don’t want to spend money, read this article by Dave Ramsey. He gets to the heart of the matter.

Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible.

His conclusion is my conclusion: “Don’t do cash value insurance! Buy term and invest the difference.”

I regard anyone who sells whole life policies as morally corrupt. He knows they are losing propositions, but he will not sell term policies that would adequately protect widows and thier children in their time of terrible loss. The whole life policies are so very profitable. “Let other men’s widows do without. My widow will do just fine.”

The reason whole life policies have such high commissions (“loads”) is that companies know that the salesman’s time is very valuable. If he can get in the door to make a sales pitch, the company wants him to sell whole life policies. The company pays accordingly.
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A WOLF IN SHEEP’S CLOTHING

A month ago, one of these self-deluded sellers of deception joined this site. He wrote to me two days ago.

I just subscribed to your website to learn about your views on money. A close friend and client of mine recommended you to me. So I went by faith and paid the $14.95 for the first month. My main reason to join was to find out what you felt about life insurance. Once I read your thoughts and advice I instantly got offended. I am very familiar with Ludwig von Mises and Murry Rothbard’s works. I have studied “Human Action” intensely. I’m not an economist nor do I want to be. My profession is providing life insurance to clients. About 95% of the type of insurance I provide is whole life. What you said about whole life insurance is true, but it’s not all like that. I suggest that you do some research about what whole life can actually do for a person in their living years…called a living benefit.

He then referred me to websites of some really big-time deceivers. They re-package the lousy product in order to sell to ignorant people with even more money to waste.

The concept is called “infinite banking.” It’s also called “become your own banker.” It is really “Whole Life for Dummies With More Dollars Than Sense.”

Here’s the deal. You buy a high-commission policy. Then, after six years, the company lets you borrow against it. You pay the company interest — to “yourself,” the ads claim.

If you know what whole life insurance is, there is nothing new here. Any whole life policy lets you do this. Then what’s new? Packaging. They sell the same miserable policy to people with more money.

Go to a CPA. Ask him if you can borrow against any tax-deferred retirement plan. You can if you follow IRS guidelines. You can put in the money and borrow when you want it. You pay interest to your plan — not to an insurance company. You are your own banker.

Do you want to start your IRA with a super-high-commission mutual fund or a no-load fund? A no-load fund. Why? Because you can borrow more money from it. You don’t give up a lot of front-end money to a salesman.

This preposterously poor investment plan has been around for 30 years. A critique is provided by two sellers of universal life policies, who complain that the whole life salesmen tell people that the deal is available only to whole life buyers. This cuts the universal life salesmen out of the territory. They deeply resent it. Read their critique here. It’s aimed at insurance salesmen, not buyers. They are furious that the whole life agents are raking in the commission money from rich people berfore universal life salesmen get to them.
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This re-packaged hustle is what my subscriber wanted to show me, so that I would understand that whole life can be a very good deal for buyers. He wrote:

The reason I took the time to write you is not to argue about insurance. I want individuals like you who have a following to be speaking the truth about how people can use life insurance effectively. The Lord requires us to seek knowledge and understanding. I pray you take the time to look up the websites. It will benefit you and your life more than you thought possible. Also, give me a call if you would like to speak further about this subject. I’m always wanting to learn about the truth. I have found some great articles written by you. I think you’re doing a great job. Thanks for your time.

I do not like being lectured to by someone I regard as an immoral deceiver of the naive and trusting. When they invoke God’s name, this enrages me as few other things do. That this man thinks I want to hear his self-serving views on this high-commission product is simply astounding.

I have studied this subject for 35 years. Yet he wanted to straighten me out. The product is inherently deceptive. It offers high-priced death insurance under cover of savings — a savings product as poor as the death insurance portion.

I encouraged him to either quit selling the product or quit my site. I called him what I think he is: immoral.

He sent a letter back saying I was mean and that he would pray for me.

This is the second time I have gotten this response from a Christian seller of whole life policies. The first time was about 25 years ago at a Christian conference. Someone knew of my views on whole life insurance. He said I should talk with an insurance salesman in the room. I did. I told him exactly what I thought of his career choice. He said he would pray for me. As I walked away, I said to my companion: “He spells that p-r-e-y.”

Carlos and I are actually visiting with some life insurance executives next week, as part of the research for our book. Although we are not necessarily going to get bogged down in the technical details, I told Carlos that I wouldn’t be comfortable writing the book unless I understood exactly what happens when an owner borrows against his policy, etc.

A lot of people have been peppering me with questions about “becoming your own banker” through a whole life insurance policy, but I have had to defer my answers until I sit down and really try to write the relevant chapters. If it turns out that I can’t “make the numbers work,” then I told Carlos we are going to have to either abandon the project or be frank with the readers that we are discussing a strategy that is poor in some respects but advantageous in others. (In Nash’s book, he has several numerical examples where it looks like a no-brainer that you do great by investing your cash flow into a whole life policy, but it’s not always clear where his numbers are coming from, and what alternative options could have been available.)

At this point let me say three things:

(1) If you follow the link, you will see the gentle tone of North’s correspondent versus the smackdown North administered. I can’t speak for all proponents of whole life, of course, but Carlos and some of the people I have met through him are certainly sincere in their beliefs that they are freeing people from financial bondage by teaching them the ways of infinite banking. They could be idiots, of course, but the people I have in mind aren’t crooks.

(2) The people who are implementing Nash’s idea aren’t simply gullible folk with middle incomes. As North’s article reveals, the very wealthy are some of the prime demographic for the technique. And it’s not even heirs who don’t know finance; there are plenty of doctors and other professionals who (for example) set up third-party leasing companies to finance their office equipment with cash flowing through whole life policies. Say what you will, but when people take Nash’s idea this far, that should be a hint that maybe it’s not self-evidently stupid as Dave Ramsey suggests. You need to think about it more than just glancing at a table of internal rates of return.

(3) North mentions the ability of borrowing against other assets. For example, if Nash thinks it’s such a great idea to, say, borrow out of your whole life plan in order to buy your next car, and then “pay yourself back” with interest, then why not do the same thing borrowing against your IRA? I asked one of Nash’s devotees this very question, but in the context of paying cash for a car if you had the money in your savings account. He answered (paraphrasing), “Because with a savings account it’s a sinking fund. With whole life, the money you borrow is still in the policy, rolling over at interest.”

I didn’t understand how this could be possible, so he elaborated (again paraphrasing): “When you borrow from a whole life policy, there is a lien against the death benefit. So if you die before paying it back, they subtract what you still owe before giving you the payout. If you withdraw money from your savings account to buy the car with cash, then that money is simply gone.”

Now I am still undecided on whether there really is something significant here, or whether it is a “distinction without a difference” as they loved to say in debate. My point is that it is just possible that the quick rat-tat-tat disposal of the notion of whole life banking is wrong, and that Nelson Nash really did discover something amazing.

But I won’t know for sure until I start writing the chapters to convince the reader–because that’s when I will see if I can convince myself. In other words, I have heard the arguments from both sides, and I am going to have to sit down with Excel and do it myself, but only after we meet with the life insurance guys and I really understand what’s going on when they calculate the policy owner’s cash value, death benefit, and so on.

Stay tuned. And if we end up going forward with the book, don’t send it to Gary North!

Obama’s Blatant Contradiction?

We’ve all read considered the irony of a guy getting the Nobel Peace Prize as he escalates the occupation of Afghanistan. OK fine, but someone could argue plausibly that sometimes you need to fight a small war now to avoid a bigger war down the road. I disagree, but fair enough.

Yet I don’t think you can say, “And my view is consistent with Dr. Martin Luther King, who said violence cures no social ills but only causes greater ones” (paraphrasing). Really, is Obama literally contradicting himself in the below, are am I too jaded at this point to read political speeches with an ounce of charity?

To repeat: I’m not asking whether you think it’s a smart move to send troops into Afghanistan, or even more generally whether it is ever the right move to use military force and call yourself a peacemaker. What I’m asking is, can you say this without necessarily implying, “And so Martin Luther King was wrong when he made his speech in this forum” ?

I Challenge Krugman on His Home Court

[UPDATE below.]

In this quick blog post Krugman wrote:

There are a lot of good things you can say about international trade. But it does not, repeat not, do anything to alleviate a shortage of overall demand. Yes, if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X-M, it’s a wash, because X and M rise equally.

I said in the comments (still awaiting moderation):

On most matters I have the intrepidity to challenge Paul Krugman, but even I hesitate to question him when it comes to a Keynesian analysis of international trade. Nonetheless I must throw caution to the winds and ask:

Dr. Krugman, are you saying that if all countries sealed off their borders completely, world Y (real output) would remain unchanged?

–Bob Murphy

UPDATE: I used a reductio ad absurdum in my comment, but somebody else (Scott Wentland) really hit the nail on the head:

Imports are subtracted from exports…but they are included in consumption. The imports are a wash, but exports do add to GDP…

I have already submitted a Mises Daily on this issue, so I can’t include this point. It’s consistent with what I was saying, but I think Wentland boiled down my entire article to two sentences.

The standard GDP equation measures C as the total amount of money spent on consumption goods by people within the country’s borders. That’s why you need to include the (X-M) component in the first place, to adjust the C and I figures for Americans who spend on foreign goods, and for foreigners who spend on American goods.

So let’s say there initially are 1000 unemployed Americans, and then a new trade deal “creates jobs” so that they can ship $50 million worth of novels to South Asia. Americans collectively then import $50 million of electronics goods from South Asia. That influx of electronic goods into the US is counted as (a) an extra $50 million in consumption spending by US consumers and (b) $50 million worth of imports used to offset the $50 million increase in exports.

Thus, GDP goes up by $50 million, and the “new demand” from Asia allows 1000 previously unemployed people to get jobs paying $50,000 each. If you don’t understand how this is possible, imagine the newly employed workers spend their $50 million on local merchants, who then use the extra income entirely to buy $50 million more in electronics goods from South Asia. There is no reason for anyone in the US to reduce his original consumption spending, and the people who are buying more Asian goods have exactly that much more income to finance it. The “trick” is that you’ve got 1000 people working who previously weren’t doing anything.

Of course in reality, things would be a lot messier. I’m just putting some meat on Wentland’s point, which shows Krugman’s argument is simply wrong.

I Just Emailed With Something Worse Than Banana Fungus…

…or so Paul Krugman would have you believe. On an unrelated business matter, I have been corresponding with someone (who wishes to remain anonymous) who told me the following in an email today:

Last night, my friend and I attempted to persuade Paul Krugman to debate the Austrians at his presentation on “Are We Getting the Change We Need?” at Baruch College. My friend politely asked Dr. Krugman to comment on Dr. Paul’s audit the Fed legislation, which he responded to derisively with, “Ron Paul wants to return to the gold standard” and “the Fed’s monetary policies are already audited.” My friend tried to emphasize foreign governments and foreign central banks but was interrupted by the moderator.

I later commented that the collapse is due to the failure of Keynesian economics, not free market capitalism, which was predicted by the Austrian school and asked if he would be willing to engage in an academic debate with Austrian economists. He dismissed the Austrian school as passe and incapable of explaining unemployment and preventing the Great Depression. I again asked politely if he would debate one of you since the Austrians correctly predicted the housing bubble, subsequent collapse and is growing in popularity. His answer was basically, “it sounds like intellectual snootiness…and it is…I have better things to do with my resources.” And so he spent his resources writing this on today’s NYT blog.

If it affects your verdict, my correspondent is a female but not a student. (I didn’t ask her her age, as my momma raised me better than that.) But her “friend” mentioned above (not sure if guy or girl) just graduated, so he or she must be pretty young.

I don’t know about you, but when Krugman said the people asking him about Austrian economists were less desirable than banana fungus, I was picturing redneck guys in their 40s wearing camo jackets, passing around Skoal and Glenn Beck’s latest book, and discussing their next deer hunt. It changes things a lot that at least one of his alleged hecklers was a recent graduate, and I tend to believe my correspondent when she says they were polite to Krugman.

(It’s possible the rednecks shouted things afterward, of course.)

Gordon Brown and Nicolas Sarkozy Do Their Part for Global Government

I don’t know why even some libertarians (and no I’m not even referring to the recent spat) find it so taboo to occasionally remind people that an elite group is quite literally trying to take over the world. At Copenhagen we’ve got world leaders working on a global agreement to harmonize the intense regulation of energy markets, and today we’ve got an op ed in the WSJ from Gordon Brown and Nicolas Sarkozy calling for a global financial regulatory framework:

In regard to regulation, the EU has adopted a comprehensive set of new rules for the financial sector to avoid the repetition of the crisis: control over credit rating agencies, stronger capital requirements on complex products such as securitization, and strengthened deposit guarantee schemes. We have set up strict rules to make sure that compensation systems avoid excessive risk taking. We will also implement stricter capital rules for banks.

We also have agreed on a more efficient system for supervision of the financial sector within Europe to better monitor systemic risks…Banks must now hold sufficient capital, ensure liquidity, and reward only genuine value creation and not short-term risk-taking.

This crisis has made us recognize that we are now in an economy which is no longer national but global, so financial standards must also be global. We must ensure that through proper regulation, the financial sector operates on a level playing field globally.

There is an urgent need for a new compact between global banks and the society they serve:
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A compact that ensures financial institutions cannot use offshore tax havens to negate the contribution they justly owe to the citizens of the country in which they operate—and so builds on the progress already made in ending tax and regulatory havens.

Therefore, we propose a long-term global compact that will encapsulate both the responsibilities of the banking system and the risk they pose to the economy as a whole. Various proposals have been put forward and deserve examination. They include resolution funds, insurance premiums, financial transaction levies and a tax on bonuses.

The fulcrum for their entire case is the ostensible fact that taxpayers have to bail out big financial institutions when they get into trouble. Well how do we know that is true? Let’s see what Brown and Sarkozy have to say about it:

We have found that a huge and opaque global trading network involving complex products, short-termism and too-often excessive rewards created risks that few people understood. We have also learned that when crises happen, taxpayers have to cover the costs.

That’s a rather odd way of putting it, isn’t it? Sort of like the guy returning home and telling his wife, “I have learned that when I stop at the convenience store, our checking account has to pay for numerous lotto tickets.”

I know, I know, none of this is conclusive. It’s entirely possible that all these political leaders really have the best of intentions, and they are just misinformed with faulty economic models. I mean, the only way we could ever really know for sure that there is a global elite who are truly plotting for one world government, is if one of them, oh I don’t know, published a book and literally admitted it. But that would never happen. I mean, you can’t expect, say, David Rockefeller to write the following in his memoirs:

For more than a century ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as “internationalists” and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.

But if he were to do something like that, then you could stop calling me nuts for thinking there’s something to this one-world-government thing, right?

Blog Comment of the Week

It comes from yours truly, but hey I am not going to disqualify myself in some faux attempt to avoid narcissism.

David Henderson was promoting my EconLib piece on geo-engineering, and “H” (I think he’s Q’s brother) said: “Why should I take seriously the opinions of people who don’t even believe that climate change is man-made or that it is a serious problem?”

I replied:

H, go look at Tol’s survey article if you think I’m making things up. I was very surprised myself at how low the estimates were.

It’s ironic, isn’t it? You’re in the position of not believing the peer-reviewed models on the likely impacts of global warming. I hope you are not going to say Joe Romm has more credibility on forecasting economic impacts, than actual environmental economists.

That’ll show him!