Money is freedom

The Thinker by Rodin

Americans celebrate freedom. Everyone is free, we proudly proclaim. But what exactly is freedom anyhow? Freedom amounts to being able to do what you want when you want to do it. Based on this criterion, it’s clear to me that some of us are freer that others, and those are people with more money. When you have a lot of money, you have the freedom to go backpacking in Tibet. You are probably not going to realize this particular freedom if you are a product of a single-family household and your mother lives in subsidized housing.

We sometimes celebrate the homeless as free people. Perhaps there is a certain freedom in being a vagabond. You can go where you want but chances are to get there you will have to walk. You had best not walk into certain planned communities, particularly in Sanford, Florida. A George Zimmerman type anxious to try out the Stand Your Ground law may kill you. The homeless are free, but you are likely to frequently go hungry. I understand that the dumpsters behind neighborhood Burger Kings offer al fresco free dining opportunities. Sleep will probably be uncomfortable as you will be outdoors and subject to the elements. You likely won’t be allowed to sleep just anywhere, not even places you would think you would be, like a public park. So be prepared to be rudely woken up at 3 AM and asked to shuffle along, or hauled to a nearby police station and booked for being a vagrant. There you can at least you can get free meals and a warm place to sleep.

For most of us, this freedom is very limiting, and something to be avoided not embraced. In fact, it is a faux freedom. Wild animals have this sort of freedom too, but no one envies them. However, with money freedom becomes tangible. Money can buy you freedom from constant hunger and provide a safe place to call home. With more money it can buy health care and likely keep you out of a whole lot of unnecessary misery. With even more money you can become educated, attract a quality mate and take regular vacations. With yet more money you can take exotic vacations, afford homes in the Hamptons and maybe run for political office.

So in reality freedom is not so much about being free, it is about the how much freedom you can afford to purchase. And that depends on how much money you or your parents have. Consequently, in a nation that values freedom we also value wealth, because the more wealth you have the more freedom you have.

We are also aware that freedom is constrained by law. In many mostly Southern states, your right to vote can be constrained by requiring state issued IDs to be shown at polling places, which curiously affects the poor almost exclusively. Sometimes fewer polling machines show up in predominantly poor neighborhoods as well, making it harder to have your vote count, such as happened in areas around Cleveland in the 2000 election. The consequence of actions like these is to give those with money more leverage to influence laws than those with less money. The rich also have disproportionate resources to influence others politically. This is perfectly legal. In its Citizens United decision, the Supreme Court also asserted something wholly absent in the constitution: that corporations have the same rights as people and can give unlimited amounts to PACs. Unsurprisingly then, our government tends to disproportionately reflect the interests of those with money over those without.

Effectively money not only buys freedom, but also allows some measure of being able to take away freedoms from others. Lately the aspiration that all should have roughly the same amount of freedom has been classified as socialism, a strange assertion for a nation founded on the assumption that all men are equal. Make health care available to all regardless of their ability to pay, and poorer people will effectively have more freedom, but in the eyes of many it is an unearned freedom, thus it should not be allowed.

How does one earn more freedom? If freedom is wealth, it happens through acquiring wealth somehow, which can be hard to do without a good education and the right connections. Some time back I wrote about the rags to riches myth. Yet there was one famous president who arguably demonstrated that it was possible to ascend from rags to riches. He was our greatest president: Abraham Lincoln. He had no formal education and never went to law school, yet he became a lawyer and eventually president of the United States. How on earth do you get to become a lawyer with no formal education? At the time it meant convincing the Illinois Supreme Court, which had only recently become a state, that you were competent to practice law. Honest Abe did it somehow.

Rest assured that Lincoln’s tactic no longer works in Illinois or likely in any other state. If you want to practice law, you had best get a law degree and join the local bar association. That of course will require money, and it’s unlikely some benevolent nonprofit will be giving it to disadvantaged inner city youth. Anyhow, if you can acquire a law degree then maybe the Illinois Supreme Court will deign to let you argue before it. Since Abe’s time, Illinois has tightened its standards on who is allowed to acquire higher levels of freedom, and it is generally doled out only to those with the means. In effect, it has cut one pathway that enabled someone to go from rags to riches. There are virtually none left, but the Republican myth remains that there are all sorts of ways to achieve the impossible.

We have created all sorts of barriers to keep people from moving from one socioeconomic level to the next. If it happens at all, it requires superhuman effort. Few of us are supermen, so we are virtually doomed to fail and we will stay in our social class. This seems to be fine for those who are already have wealth. Indeed, they seem anxious to add additional barriers that have the effect of making it even harder to ascend up the socioeconomic ladder. This is done in the guise of welfare reform, reducing or eliminating subsidized housing, and strict time limits to food stamps and unemployment benefits. The effect is to give certain classes of people more freedom than others and through lowered estate taxes give them the ability to extend those freedoms to their children. It also helps ensure a permanent underclass of citizens and keeps a permanent upper class as well.

The lack of defined pathways to become upwardly mobile feeds resentment and fosters insular behavior, heightening class-consciousness and dividing us as a society. To understand the brouhaha in Wisconsin, one has to look not at the bottom of the income scale, but at its middle and the brazen power of those at the top to push the middle class further down the income scale by lowering their pensions, making them pay more for their health insurance and not allowing collective bargaining. In effect, through legislation the middle class’s freedom and wealth is being moved to those with more wealth. Ironically, this is classified as being part of a pro-freedom agenda. The reaction by a vulnerable but politically important middle class was entirely predictable. It was fed by cluelessness and a sense of superiority of those with wealth that they know better. Mostly it is due to a fundamental unwillingness by those in power to understand the connections that implicitly bind us.

Some of the wealthy understand this connection. They know that their wealth is predicated on keeping the other 99% hopeful for a more prosperous future. They understand that marginally higher taxes on their income are actually an investment in their prosperity. Moreover, the smartest ones understand that for society to be stable there must be viable economic ladders to move between all financial classes. Most of those ladders have disappeared, mostly between the lower and middle classes, but also between the middle and upper classes. These ladders do not appear magically, or they would exist now. Instead they must be constructed by civilized society. While capitalism helps provide the wealth that makes these ladders possible, they do not occur from largess, but are a result of government.

In truth, upward mobility is what truly drives growth and by extension wealth and freedom. It is in the best interest of the rich to empower the poor and the middle class so their talents can be maximized for the benefit of society. For when that happens, rather than wealth trickling down from the moneyed, it trickles up. All are enriched, all share the benefits of greater connection, and all share in a greater freedom. It is a formula that worked well for America until it was abruptly changed with the election of Ronald Reagan. To become great as a country again we must rebuild these economic ladders. The decline of our country will be marked by the day when we deliberately destroyed these ladders of hope and opportunity.

A question of monetary confidence

The Thinker by Rodin

In my last post, I was feeling a bit dazzled because on paper my wife and I became millionaires, although just barely. I found our new wealth somewhat suspect, in part because stock prices seemed surreally high and the dollar was steadily sinking in value. The dollar simply isn’t worth what it once was and the trends suggest it may never recover its wealth in relation to other currencies. In addition, prices for commodities are soaring. No wonder I felt deflated reaching the milestone. It’s not how much money you have that matters; it’s what it will buy. It won’t buy a mansion in Beverly Hills with a cement pool in the backyard, that’s for sure.

When communism fell in Eastern Europe, Yugoslavia experienced incredible hyperinflation. It currency essentially became worthless. In October 1993, the government tried to solve the problem by printing new money. One new dinar became one million old dinars. Not coincidentally, the country fell apart, but not before we observers got an abject lesson in the meaning of money, two lessons of which I opined on some years ago. My take was that a currency is only as valuable as people’s confidence in it. Attempts to prop up the dinar failed miserably and triggered a horrendous inflation and a depression. Once balkanized (literally) into separate countries, former Yugoslavians found their new country’s currency and leadership were more trusted than the old dinar and communists, and things began to recover. What didn’t recover was the country of Yugoslavia, which dissolved. It was always a country on paper more than in fact, and existed mostly due to Soviet support and because of the heavy hand of its military and secret police.

The steady decline in the value of the dollar against other currencies thus should be worrisome. For some, America is undergoing a slow loss of confidence. With enough rumored whispers, some official institutions will take notice. Standard & Poor took notice recently and issued a warning that in two years the U.S. would lose its AAA bond rating if it did not get its deficits under control. Right now, federal deficits are causing concerns about the solvency of our currency.

If investors are wary of the U.S. dollar, so far they don’t seem to be slacking off purchasing dollars via U.S. Treasury bills. If you have surplus you have to save it somewhere, and you also want some of it to be a stash of money, so you can spend it quickly if needed. The currency needs to be in something reasonably stable. The major choices are the dollar, the Euro, the Yen and the Chinese Yuan. It’s unclear if the Euro will be around in a decade. The Japanese Yen looks suspect, particularly since their devastating nuclear accident. The Yuan is as stable as the Chinese government, but in part because they own so many dollars, inflation is becoming a serious problem that could discount their currency and maybe take down the government. The dollar is not a perfectly safe bet anymore, but it is still safer than other currencies. So many want to buy dollars as a monetary hedge, and that it is keeping interest rates artificially low, likely exacerbating the dollar’s fall.

Most commodities are priced internationally in dollars. Oil is the most prominent example, and oil recently topped $110 a barrel. A good part of its price rise is uncertainty in the oil market, but it is also due to oil being traded in dollars. If oil is in demand and the dollar is cheap, oil will cost more dollars. The same can be said for most traded commodities, particularly food. Rioting in Egypt, Yemen and elsewhere may be due in part to the high cost of foodstuffs priced in dollars and the inability of people to afford the inflated prices. The same is true here in the United States. One reason obesity is epidemic in this country is that unhealthy food is much cheaper to buy, in part due to subsidies.

Loss of confidence in the dollar is also probably pushing up stock prices, and helps explain my millionaire status. Why would this happen? What do you do if you are concerned that the dollar you have today may be worth ninety cents next month, but you have enough cash for an emergency? You try to invest that dollar today in something tangible and profitable instead. That is my suspicion. While a recovery is underway, it is a weak recovery and there are no real signs that it is going to turn into a roaring recovery. How to explain exorbitant stock prices? I explain it as we are bidding up the price of businesses because we have more confidence in their retaining long-term value in than than in the U.S. government.

This works fine unless instead of a currency decline there is a currency collapse. Is there a way to anticipate a currency collapse? Porter Stansberry sure thinks so, and he says he is spending his own money to try to warn others. Others think he is just running another scam. I spent about an hour listening to his pitch over the weekend. Unfortunately, there is no fast forward button and he likes to reiterate his points endlessly. I ran out of time and interest, but if you are patient enough and paranoid enough, he has suggestions on how to protect yourself from what he feels will be a major collapse of the dollar and the economy over the next few years. The “good stuff” apparently requires purchasing his report. So I doubt he is acting out of the goodness of his heart.

I agree with Stansberry on one point: if the dollar really did collapse, it would take down not just the U.S. economy but also most of the world economy, at least for quite a while, probably for years. Having a ready supply of Yen, Yuan and Euros to pay for life’s expenses instead of using dollars probably won’t help that much. We’re all tied together now; there are no safe harbors. If the U.S. dollar goes on life support, my suspicion is most other currencies will as well, because so much commerce is traded in dollars which are traded for local currencies. The good news is I have a third of an acre for my lawn. I could become my own farmer until the depression caused by a dollar collapse is all over, providing of course I can rent a tiller and enclose my backyard in twelve feet high fencing with barbed wire to keep out hordes of desperate and hungry people. Or I can do what everyone else will do and procure things with possibly hyper inflated dollars.

Can a dollar currency collapse really happen here in the USA? Perhaps. No one really knows if such a scenario will happen, but it can be triggered if enough people think it will happen. The dollar is as solid as our faith in it and our institutions, which at the moment is low. Arguably people, like Porter Stansberry are rooting for it as a way to acquire wealth by spreading fear. A dollar collapse is possible, of course, but so many have so much currency valued in dollars that no one really has incentive to root for its collapse, except, possibly al Qaeda. Which is probably why Standard & Poor issued its warning. It is trying to make politicians do their jobs.

My suspicion is that the root of investors’ concerns is not the deficit itself, but the underlying problem the deficit exposes. Until now, when parties could not compromise, the difference was charged to the future in the form of deficits, because there was always agreement to extend the debt ceiling. That seems to be changing. What would normally happen in dire circumstances like this would be we would find our better nature, and move toward compromise and shared sacrifice. So far, there is not much evidence that this will happen. My suspicion is that if we can affect a meaningful compromise where all parties have real skin in the game, it will remove most of the financial jitters underpinning the drop in the dollar.

Unfortunately, what’s much more likely to happen is a high stakes game of poker that ends badly. It is already well underway. I am no more prescient than anyone else how it will play out with a vote to raise the debt ceiling. I suspect it will get raised, with much wailing and gnashing of teeth, and in small, tortuous increments and play out like a bad horror movie. I can say that if we reach a point where the United States cannot come together politically to raise the debt ceiling and find real middle ground on raising taxes and reducing expenses (and yes it will take both), I will need my own vegetable garden with its twelve foot fence and maybe even a gun or two and a bulletproof vest. If that happens, unfortunately, it will be too late for all of us.

Who wants to be a millionaire?

The Thinker by Rodin

Not me, at least I never set out with the goal to be a millionaire. When I entered adulthood around 1978 with less than a thousand dollars in my savings account and $5000 or so in student debt, the idea of me being a millionaire someday seemed preposterous. The only millionaire I knew was a character on TV named Jed Clampett, and he had a mansion in Beverly Hills and a cement pond in the back. I kept my expectations more modest. Perhaps I could afford to go into hock for a townhouse, which my wife and I finally did at age twenty-nine. At the time I felt very much overextended, and I was. The first time I wrote a mortgage payment check, my hand actually shook. I had never written a check for that large an amount before and writing a check that big once a month was scary and sobering.

Today, on Good Friday of all days, I updated our accounts in Quicken and found that we had become millionaires. Quicken told me today that our net worth is $1,000,531.14. Approximately. I looked around. Nope, I wasn’t living in Beverly Hills. Nope, Texas Tea was not responsible for our amazing wealth. Nope, no cement pond in the backyard either, although after heavy rains we do get a transient pond, which occasionally will be inhabited by feathered friends. No BMW in our driveway. No butler to fetch my coat. No maid service either; I still clean our toilets. We do have a lawn service. Maybe in 2011 that is one clue you can use to judge if someone is a millionaire. In my case, it is because I am just lazy.

And I still pinch pennies, although not as hard as I used to. There was a time when I kept track of all my cash expenses in a little notebook because I had to make my GS-5 salary stretch to the next payday. Perhaps as a result toward the mid 1980s I started tracking income and expenses. Around 1990 bought a version of Quicken for an antiquated operating system called MS-DOS. Back then our net worth was about $20,000. Still, I had no expectation of someday being a millionaire. For much of the last twenty years I didn’t see how it could possibly happen. Life was just so darned expensive! There were all these massive payments, for the mortgage, for childcare, and to keep our house from falling apart. I needed loans to live my lifestyle, principally car loans, and later home improvement loans. How on earth did we become millionaires?

It is still something of a mystery so I went investigating. One major factor: stocks have recovered. In fact they recovered so well I suspect they are currently overvalued, so my millionaire status may not last too long. In addition, thanks to the recession and all our deficit spending, the dollar has declined precipitously. Which means that a million dollars today is probably the equivalent of $750,000 or so a few years ago, based on what we can actually buy with it. I doubt our purchasing power has gone up that much since the recession began.

We became millionaires principally by holding steady jobs and steadily advancing in our careers, which at least in my case finally got me to a comfortable salary. We did it by investing in us, specifically our educations (a graduate degree for me in 1999, and a bachelor’s degree for my wife the same year). When our income allowed, we saved as much as we could. It also came from living for a few more decades. If you do your best to consistently follow a sound financial strategy, your net worth tends to grow. Another likely factor: having just one child.

It is also true that we were either lucky or canny. I had no idea that when I moved to the Washington D.C. region in 1978 that it would be financially rewarding, at least compared to other places in the country. The high cost of living appalled me, but I had the good fortune to settle in Fairfax County, Virginia, a prosperous county full of beltway bandits and clean industries, mostly of the software kind. It is a place where good jobs were as fungible as money and never required the hassle and expense of moving. While I often groaned while making my house payments, my property values steadily appreciated over the years. Real estate as an investment rarely returns more than inflation, but our house, purchased for $191,000 in 1993 is worth $460,000 today. I expect it at least held its value. We were also lucky. We generally bought in buyers’ markets, getting good value for our money. We could have easily ended up underwater, like many homeowners today. We weren’t bright enough back then to time our real estate transactions to the market.

Building net worth takes tenacity and well-practiced self-denial. It often meant buying used cars when I lusted after new cars, and when buying new cars, buying practical cars like Toyotas and Hondas instead of Lexus and Mercedes Benz. It meant gritting my teeth and adding a couple of hundred dollars to my mortgage payment every month. It meant living somewhat below my income; our single-family house with a one-car garage is modest living. It meant avoiding shiny new toys like cell phones until they got dirt-cheap. My cell phone is currently a $10 model from Virgin Mobile. I still don’t own a smartphone. Since I am by a computer most of the day anyhow, paying $50-$100 a month for an iPhone or Android device seems a poor value.

I still constantly scan the market for real value. Consumer Reports recently recommended the Ooma Internet phone for those of us with landlines who are already paying for high speed internet. I guess we don’t need a landline but we are used to having one for its clarity and reliability, attributes I don’t associate with a cell phone. I currently spend $25-$35 a month for a landline, which includes modest long distance charges. With my Ooma, after paying $249.99 to buy it, I will spend less than $4 a month, all of it going for taxes. I can do all the local and long distance calling within the United States I want for free, forever. My effective cost for a landline will go from $30 a month to $5 a month. Free from my bundle with the cable company, I will now get to play a bidding war between Verizon and Cox for my high-speed Internet and HD TV service.

While we may be “millionaires”, most of our wealth is not easily touched. Our house remains theoretical wealth until we sell it and/or we own it free and clear. ($75,000 to go!) About half of our wealth is invested in retirement assets that we cannot touch without penalties. Perhaps that is why even though we are millionaires I still tread cautiously financially. The kind of wealth where you can rarely think about how much money you are spending still eludes us, and always will.

Death by Objectivism

The Thinker by Rodin

Is Objectivism dead? Objectivism, in case you are unfamiliar with it, is a philosophy created and articulated by the writer and philosopher Ayn Rand, who died in New York City in 1982 at the age of 77. I became acquainted with the philosophy in my early adult years when I read her novel, The Fountainhead. It told the story of a brilliant but eccentric architect named Howard Roark. Much like Number 6 in The Prisoner, Roark lived life on his own terms. He would not compromise with this encroaching thing called the real world. I have to admit that for a while I liked the novel and the character, although Roark was so preachy he would put most ministers to shame.

I purchased but never finished Rand’s most seminal work: Atlas Shrugged. Not that I did not try. I plodded through it for several hundred pages then gave up. To call it a novel was charitable. Instead, it was a philosophical screed, which detailed Rand’s philosophy of Objectivism. If Howard Roark was excessively preachy, John Galt was an Objectivist supernova. I suspect most readers were like me and simply could not find the patience to endure its 1368 pages. However, a few key intellectuals of the 20th century did make it through the novel and absorbed it whole cloth. Sadly for America, two of them turned out to be prominent economists. One was Milton Friedman, who won a Nobel Prize for Economics. The other and far more important one was Alan Greenspan, who until a few years ago was the Chairman of the Federal Reserve and very possibly the most influential monetary guru on the planet. Markets trembled with every nuanced word that came out of Greenspan’s mouth.

I can see the appeal of Ayn Rand and Objectivism with certain economists. Economists by nature are enamored by numbers are less enamored with squishy artifacts like religion. Rand, an atheist, gave voice to the secular capitalists of the world. They latched onto her key idea, immortalized in the words of the fictional Gordon Gekko and spoken by the actor Michael Douglas in the 1987 Oliver Stone movie Wall Street, “Greed is good”. The “greed is good” mantra, formally sanctioned by President Reagan in the 1980s has been the philosophical cornerstone of the last few decades. Its unchecked version called Objectivism has now been proven bankrupt, much like many of us Americans.

In short, Objectivism became something of a sanction to charge forward with the reckless accumulation of wealth by all means, fair and foul. It is a “Me First” philosophy that really could care less about anyone other than “Me”. According to Wikipedia:

Objectivism holds: that reality exists independent of consciousness; that individual persons are in contact with this reality through sensory perception; that human beings can gain objective knowledge from perception through the process of concept formation; that the proper moral purpose of one’s life is the pursuit of one’s own happiness or rational self-interest; that the only social system consistent with this morality is full respect for individual rights, embodied in pure laissez-faire capitalism; and that the role of art in human life is to transform man’s widest metaphysical ideas, by selective reproduction of reality, into a physical form—a work of art—that he can comprehend and to which he can respond.

As a practical matter then, Objectivism is individuality gone amok, i.e. without boundaries. It does not care about the consequences of extreme selfishness. Embracing pure capitalism is more important than minor things like whether as a consequence we also wreck the planet, or impoverish whole other classes of people.

As we watch our economic house of cards dissolve I am also seeing, in part, the pure philosophy of Objectivism, articulated in policies by its rabid followers, proven utterly and catastrophically incorrect. This is to the detriment of nearly everyone, including Objectivists. For at its core Objectivism is in denial about the way things actually are ordered. It is in denial that we really are all connected to each other, and that what affects you in fact really does affect me, everyone else, the planet and even the universe. In fact, consciousness does change reality and when it does, it affects everyone else who lives because we too are inextricably tied to reality. Consciousness and reality are not wholly separate domains, as Rand postulates, but intimately connected. If you mess too much with reality by trying to change the way nature ordered it, the consequences can be dramatic and not very pretty. See it in global warming. See it today, for example, in Las Vegas neighborhoods where you can drive through neighborhoods where most of the houses on the street are in foreclosure.

Wall Street barons, worshipping the almighty dollar, emboldened by extreme forms of laissez-faire capitalism promoted relentlessly through the monetary policies of Alan Greenspan and by the Bush Administration, promoted policies that took our money and effectively threw it down rat holes. With a pure (or close to it) laissez-faire capitalism, where new financial instruments could be created without government intervention, all the predictable things happened. We were caught in our own greed and were purposely mindless of the cost our unchecked greed and unregulated financial instruments would have on the economy. In particular, extreme capitalists like Alan Greenspan, through policies like making money artificially cheap to borrow, created a financial chasm. We were encouraged to overextend our financial lives, living in the moment and remain largely heedless to the long-term consequences of our actions.

Fortunately for me, it did not take me more than a few years of pondering before I realized that Objectivism was unworkable. Little did I know though that this philosophy would gain critical traction among an elite number of economists who could actually put it into practice on a large scale. It turns out that when this is implemented the philosophy, rather than enabling self-actualization, has the effect of moving much of our national wealth to better-run countries overseas. Before Ronald Reagan was elected, the United States was the largest creditor nation. Now, we are by far the world’s largest debtor nation.

Our Secretary of State Hillary Clinton was recently in China. She deliberately downplayed our concerns about their miserable human rights record, but did speak up about the need for China to keep buying our U.S. Treasury bills. They have cash that we need to execute our economic recovery plan.

Atlas Shrugged should go on the shelf with the other lunatic books like Das Kapital and Mein Kampf that have proven unworkable and destructive to humanity and the world. Communism does not work. Fascism by Aryans does not work. The extreme capitalism articulated in Atlas Shrugged does not work either. Objectivists should never again be allowed to control the levers of our financial system.

Ayn Rand died surrounded by admirers with a big dollar sign above her bed. I kid you not. This devotion to unbridled selfishness even on her deathbed helped inspire men like Alan Greenspan. Instead, her life ultimately proves how meaningless the obsessive pursuit of self-interest actually is. It destroys rather than helps us see the connections between each other. It is the vitality of these connections between us that builds the kind of wealth that matters: peace, tolerance, mutual understanding, healthy relationships, harmony and love. These are the true measures of a healthy world and a healthy person, not the number of dollars in your bank account.

Where did all my money go?

The Thinker by Rodin

Those of you who dared to read your brokerage statements probably have the same question that I did. Where the heck did all my money go? Some of my mutual funds are worth half what they were two years ago. Given the current dropping stock market, I am likely to see further losses in many of my funds.

If I had put my money into AIG stock then yes, I would expect to be able to get just pennies on the dollar. However, I own mutual funds. The whole point of owning mutual funds is to spread out the risk. Some stocks in the portfolio are bound to suffer but it should not matter because other funds will gain. It should all balance out somehow.

The short answer is that the financial industry came down with a bad case of the flu. Pretty much all of them are in the hospital and are being pumped with fluids from the U.S. Treasury and the Federal Reserve Board in the hopes that they will recover. Then they can resume that voodoo that Wall Street used to do so well: showing regular returns for investors.

This begs the question: how did they all come down with the flu and the same time? Here too we sort of know the answers. As best this non-economist can figure out there were two root causes. First, the Federal Reserve Board under Alan Greenspan had a low inflation policy, even at the cost of keeping credit artificially cheap for unusual lengths of time. This had the effect of encouraging borrowing and made it possible for many of us to live far beyond our means. This helped facilitate the second root cause: ever more complex financial securities tied to cheap credit provided to risky borrowers. They became popular because they required no government review. They had the effect of hiding the risk of investing in these securities while giving the cash-rich places to invest money that would otherwise go under a mattress or earn next to nothing in a bank account. They looked reasonably safe because they were packaged like a mutual fund and thus presumed less risky.

Like someone whose diet consists of nothing but nachos and cheese dip, there is eventually a day of reckoning. One day you find your bowels obstructed, your blood pressure high and your cholesterol levels are through the roof. The world now has all this and more. We gorged ourselves mindlessly on bad debt. Our coaches (Congress, President Bush and the Federal Reserve) encouraged us to consume even more nachos and cheese dip. Now we weigh five hundred pounds and can hardly move from side to side in our hospital bed. In fact, the orderlies are having a hard time moving us to change our bedpans.

It is technically possible for a five hundred pound man to get back to a slim one hundred fifty pounds with a diet lasting many years, but the odds are heavily against the patient. Once you are used to a diet of nachos and cheese dip, it is hard to eat salads. You might think though that those who are providing us the food might be at least providing us with healthy food. As best I can tell, when it comes to the financial industry, with some caveats, the answer is you are allowed to serve as much junk food as you want.

I looked up what it took to establish a bank in Virginia, the state where I live. You definitely need a lot of starting capital. You also need five directors who set the bank’s policy. In addition, you need to hire a CEO. Virginia does not specify criteria for such a manager, although it suggests:

a suitable background and adequate training, a strong, well documented record of accomplishment in banking at a comparable level, a capacity for leadership, familiarity with the current banking environment, analytical ability, and a realistic outlook.

State chartered banks in Virginia also are required to undergo a “supervisory examination” no less than every three years. However, the state does not actually audit the bank. In fact, it goes out of its way to calm potential fears of the bank owners:

Although in some instances fraud has been discovered during the course of a supervisory examination, detecting dishonesty is not a primary purpose of an examination. An examination is concerned with a bank’s financial condition, its compliance with the various laws and regulations and the soundness of its operating policies; it cannot be relied on to detect fraud and embezzlement.

Presumably, before a bank charter is approved, Virginia will at least give it a sniff test to see if it smells, but it is clear that in Virginia’s case bank supervision is mostly superficial. Moreover, there are no requirements that I can find that the bank’s managers must have actual banking education. (I was hoping for something more than “I know how to use Quickbooks”.)  On the federal level, most banks choose to be FDIC insured. Presumably, this brings some federal scrutiny, but clearly not enough to keep many of these institutions solvent. Even if the criteria are clear, enforcement can be problematical. Moreover, as the Washington Post reported recently, banks can and do “shop around” for friendlier bank regulators. It suggested that the federal Office of Thrift Supervision is one of the more lax federal banking regulators.

If my limited research is correct, banks can be managed and run by people who aren’t necessarily even qualified bankers. Even if they have experience in banking, it is not clear that they need a level of certification to be a banker. I would think the criteria for any banker would include being an accredited Certified Public Accountant. Presumably, a banker needs to know more than a CPA and should have a broad understanding of financial risk, credit worthiness, assets to debt ratios and the like. Maybe they do but apparently, most were asleep during the lectures in MBA School, as they gorged their balance sheets with dubious toxic assets, which were never accurately valued. Given that so many banks are teetering on the edge of insolvency, it is reasonable to think the problem exists both nationwide and worldwide.

Banking regulation may be scattershot but at least it exists. On Wall Street, apparently all sorts of new and creative financial instruments can be created with no government oversight. The Securities and Exchange Commission has many powers, but Congress limits its powers (and budget). Indeed, until recently we wanted to free Wall Street from the tedium of government oversight. By doing so, it was believed that they would be free to whip up the magic of the free market. I understand that if you do not manage a herd of cattle they tend to overgraze or could come down with ailments like Mad Cow Disease. The same appears to be true on Wall Street. All things being equal, Wall Street will look for ways to line their own pockets first and their shareholders’ second. This appears to be exactly what happened.

Where did all my money (and yours) go? Much of it went to buy stocks and funds at prices that were way too high because they were not accurately and independently valued. Much of it also went into the pockets of swindlers on Wall Street who used the money to buy estates in the Hamptons, private jets, and luxury yachts. The federal government largely looked the other way. We investors largely looked the other way too, assuming that we were “safe” if we spread our risk by doing things like investing in mutual funds. However, primarily it was those we entrusted with managing our money that deliberately looked the other way. They were anxious for a big bonus for making quick profits rather than to looking out for the long-term needs of investors. Take my financial adviser. He is a bright guy. He knows how to find a good bet on a mutual fund. Nevertheless, he like most of them was clueless about the size and scope of our current financial disaster. He should not have been.

Supposedly, animals know when an earthquake is coming and move to safer ground. Our financial industry needs to be like this. Our bankers are fiduciaries of a public trust: our money. They should all be certified to the highest standards, maintain current credentials and demonstrate their financial acumen by showing that their funds are invested prudently. They should take an oath to such effect, go to prison if they do otherwise as well as have their personal wealth returned to their customers in the event they fail.

Similar criteria are needed for fund managers. Before creating any fund, they need to demonstrate to the government that the fund accurately states the risk of ownership. Rating firms similarly need to be impartial; in fact, they should be nationalized. Our money is too important to leave its valuation entirely in the hands of the free market.

In short, these investments belong to those who own them. Fund managers are fiduciaries with a solemn obligation to act prudently in the best interest of the owners. Funds are not funny money; they represent real dollars and reasonable expectations of future income. Since they deserve a high level of scrutiny and oversight, these fund managers need sterling credentials, certifications and regular oversight too. As for new financial instruments, they should get an impartial government examination before they are allowed on the market.

These are the sorts of long-term steps we need to take to ensure we are never caught with our financial pants down again. Anything less means that we will see similar debacles like this again.

Scary times

The Thinker by Rodin

On New Year’s Day, I wrote this post wherein I assessed my family’s financial situation. Like many of you, I determined that my family’s financial life had been sharply devalued. I had done the things that prudent Americans do to have the expectation of having a decent retirement only to find out that someone had pulled the financial rug from underneath us. I am likely doing better than most, but I am still wondering where half of the value of my daughter’s college fund went, particularly since I am now paying her tuition bills and other expenses.

We now have a new Administration and Congress. Congress is about to approve a stimulus bill with a price tag of $790 billion. President Obama claims it will add or save four million jobs. In addition, our new Treasury Secretary Tim Geithner is getting ready to spend the second half of the bailout that Congress hurriedly passed shortly before the last election. Meanwhile the Federal Reserve is looking for new weapons to deal with the financial mess. It no longer has the interest rate lever, as the bank discount rate is effectively zero.

One option the Fed has is to print money. They do not have to bother cranking up the printing presses. The U.S. dollar is a fiat currency, which means its wealth is not based on anything tangible, like gold. The Fed can simply declare that more dollars exist. Whoosh! They can use the money to do things like buy troubled bank assets. The money spent and obligated to try to solve our financial crisis is currently between two and three trillion dollars, depending on which news reports you believe. Bear in mind that Bush left office with about a ten trillion dollar federal debt. We are about to bump that up by another third in just a few short months.

All this money is to fix a problem that no amount of money may be able to fix. Frankly, even our best financial wizards do not really know what it will take to fix this crisis or the magnitude of its cost. There is the hope that if toxic assets can be taken off the books of financial institutions at least they will be able to value their assets with some accuracy again. If that happens then they will feel free to lend credit. Maybe. Whether these steps would actually cause the economy to rebound is unknown too.

During the Great Depression, President Franklin Roosevelt did not know whether his various initiatives would turn things around either. Neither does President Obama. The only imperative then and today is that government must so something. It cannot just stand back while millions join the unemployment roles. President Roosevelt created an alphabet soup of agencies that put people to work on worthwhile endeavors like the improving our national parks. Similarly, President Obama wants to put Americans to work rebuilding our society to fit the 21st century. Only we really do not know what the 21st century economy will look like. Perhaps we will know when we are done.

There are some unanswered questions. If the Federal Reserve can create money by fiat, doesn’t all this new money just devalue the dollars we already have? Could this be good? After all, if deflation is a problem, devaluing our money promotes inflation. We seem comfortable with inflation, providing it is in a manageable range. However, we are uncomfortable with deflation because it is toxic to growth. On the other hand, could all this new money ultimately scare off investors, who will be paid back in dollars that are worth less? Similarly, what happens if the U.S. Treasury puts new treasury bills on the market but not enough creditors snap them up? How do we turn things around then?

No one seems anxious to spend too much time thinking about these scenarios, of course. If realized they could become catastrophic, leading to mass unemployment and hyperinflation that would make the late 1970s seem nostalgic. It could lead the unraveling of society as we know it.

One hopeful sign is the value of the dollar. Logically it should not be rising against other currencies when our economy is quickly contracting. Yet it is. This is true in part because this economic downturn is hardly just a United States phenomenon. It is global. It may seem counterintuitive to give your money to the U.S. Treasury at times like these. Yet, in a world rife with instability, our government is perceived as the most stable in the world. If you think about it, this is understandable. We had one civil war but are unlikely to ever have another one. We have no neighboring countries interested in invading us. And as we witnessed on January 20th, we have a tradition of peaceful changes in power, even during times of great trial. In a very uncertain world, the survival of the United States government is a good bet. So if you have money under your mattress and it doesn’t feel safe there, why not loan it to the U.S. Treasury? Even at niggardly interest rates, it looks safer in the federal government’s care than in any other place. So it is likely that when the U.S. Treasury auctions off the next trillion dollars in securities, there will be buyers. Perhaps we can ride this thing out by acquiring massive new amounts of federal debt.

It is hard to know how much of this crisis was preventable and how much is just a result of moving from a 20th century economy to a 21st century one. It is clear though that much of it was preventable but government chose to either ignore the problem or actively exacerbate it. Americans emulated their government by living far beyond their means. For myself, I find myself less ideological and more pragmatic. I have no patience for any politician who cannot see past their ideology.

We need leaders capable of impartially evaluating the present and taking pragmatic steps to address our present problems. The good news is that we have a ruthlessly pragmatic president. The bad news is that the vast majority of the Republican Party, and a small minority of Democrats, remain slaves to ideology. There were just enough of these people to gum up this stimulus bill. This means that the stimulus bill is likely to be half a loaf, rather than a full one. Let us hope there is enough sustenance in this half a loaf to actually revive our economy.

The meaning of money, Part 2

The Thinker by Rodin

Banking is another one of these activities that to an outsider unschooled in finance seems a bit mysterious. Just how is it that you can put your money in a bank, know that it is safe and somehow your money will grow?

We understand that if we were to put our money in our mattress, it would not be particularly safe. If no one knew it was in our mattress then at least it would be safe but most of us cannot take the chance that it will be discovered. However, even if we kept our savings in our mattress, the money would not grow. In fact, over time it would be worth less because in most countries inflation is an unpleasant reality. If you want to keep your money safe, it is better to put it in some sort of financial fortress where it is hard for anyone other than you to get the money out and where it is always safe: a bank.

You would expect that if your goal was to safeguard your money the bank would charge you money for the privilege of banking it, rather than the other way around. After all, if you have a million dollars in gold bullion you do not want to find that it mysteriously disappeared one day. Instead, it is just the opposite. We give the banks our money and somehow they manage to give us some modest amount of interest for letting them guard it. (Granted, with the many fees banks are charging these days, it may negate some or all of your interest.)

Most of us understand on that our money rarely sits in a vault somewhere. Instead, it goes to someone else who doesn’t have enough of it to meet his or her needs. Over time, debtors repay the principle to the bank with a fee for use of the money. At least some portion of the money earned goes back into our account as interest. The bank gets the rest. So it sure seems like a symbiotic relationship. Your money is protected. Both you and the bank are more prosperous as a result.

As we relearned recently though, money you put in a bank is about as safe as the U.S. dollar. The dollar is not backed up with gold and silver. As you may have learned from my last post, the real value of the dollar is that it is a representation in the faith that the U.S. government will be around in the future and the idiots will not be running it. The crisis of confidence that is painfully underway is a crisis of confidence in the United States government. It would be charitable to say our government was asleep at the switch these last eight years. In fact, it was worse than that. Our crisis of confidence was not a result of a lack of competence, but rather faith in a financial ideology and the free market that was misplaced. In short, the ideologues, not the idiots, were running the asylum, practicing some weird sort of Zen-like financial alchemy. The only gold they were producing was fool’s gold.

In some ways, a bank is like the federal government because in reality the proportion of its assets in cash is rather small. The vast majority of its assets are in loans to other people and businesses. Its job is to stay solvent and make sure it does not give out the money to just anyone, but only to people who are creditworthy. If it has confidence that the people it gives money to will repay the loans on time, it can stay solvent, maybe turn a profit and throw some small change into your account as interest.

Banks sell trust. That is why bank names so often have trustworthy names, like First Fidelity Bank. That is why bankers tend to look and dress soberly. They hope it will make you think they are sober people. They want you to believe that their bank will be around and will only lend prudently. Just in case they do not, because they are a bank, they are required to pay a fee to the FDIC that insures your accounts up to $100,000 (well, $250,000 temporarily under the Wall Street bailout legislation). As we learned though, the money banks paid into the FDIC looked like it might not be big enough to handle a major run on the banks. That is when the FDIC petitioned Congress to stand behind it. Congress passed a bank bailout and hopefully the crisis is contained. What has not happened, and would be more devastating than a nuclear strike, would be if our creditors lost financial faith in our government. Fortunately, we are not there yet.

One problem is that banks can have an embarrassment of assets. This happened quite a bit during the last eight years. The Federal Reserve, primarily under its former chairman Alan Greenspan, had this notion that the economy needed low interest rates, providing inflation did not go up precipitously. With interest rates low, the message was that it was okay to borrow more money than you could comfortably afford. Therefore, we did. In fact, those low interest rates may have been something of a facade. Most of the time, low interest rates were offset by higher prices, particularly for commodities like homes and automobiles. With interest rates so low though, we could and often did supersize our financial dreams, buying bigger homes, fancier cars and upscale furnishings. At some level, this made sense. Because historically low interest rates have been an aberration, it made some sense to purchase these items because interest rates were lower. Low bank interest rates also gave us more incentive to buy stocks, on the assumption they would offer higher returns. Otherwise, the effect felt like stuffing your money into your mattress.

All this purchasing through debt had the consequence of causing the economy to grow. This growth was real in the short term, but artificial in the long term. Growth financed by shaky debt generated more growth financed by shaky debt. One effect is that all this purchasing caused a lot of economic activity, which resulted in many dollars ending up at institutions like your neighboring bank.

In general, banks do not like to keep assets in their vault. They would rather loan the money out to someone else and collect the interest on the money, making their bank more profitable. We Americans were glad to borrow this money, but so much growth was happening so fast, particularly in places like China, that creditors became a bit desperate. They did not want to figuratively put money in their mattresses. They wanted it to grow too. Unfortunately, there was a dearth of borrowers. Wall Street rode to the rescue by creating new investment vehicles. Specifically it invented the sub-prime mortgage-backed security, which bundled high-risk securities into one large package for which shares were sold. Even though these individual loans were riskier, buyers of these securities thought they were protected because the risk was spread out among a larger number of loans. As long as too many debtors did not default at once, all was well.

It was a foolhardy mistake driven by need and greed. Risky borrowers proved why they are risky and defaulted in large numbers as soon as the economy got a bit shaky (and much of it was caused by rapidly rising oil prices). Sub-prime mortgage backed securities became like a pin puncturing a balloon. Moreover, all the complex financial instruments created to take the risk out of risky ventures also proved to be risky. Insurance giants like AIG did not expect everyone to make massive claims at once.

These financial mistakes trickled down perhaps even to your local bank, which in trying to find places for the rush of incoming money may have also invested in shady financial instruments. Some of these banks, like WaMu, you now own, at least partially, as a taxpayer.

Let us hope that next time we do not let new ideologues run the asylum.

The meaning of money, Part 1

The Thinker by Rodin

Money is on the mind of most people these days, with the collapse of stock markets and the bankruptcy of major financial institutions, including some names that epitomized trust. To many of us, it seems surreal that inside of a month or two our portfolio can drop ten or twenty percent even though we have been following “correct” wealth building strategies. Why all of a sudden has the worth of our investments changed so dramatically? Why can I not go up to Fort Knox with a few hundred dollar bills and get their equivalent value in gold? Just what is money anyhow? Why is our financial system set up the way it is? Why can a dollar be worth less next week than the current week?

I have been pondering these questions as I watch our own portfolio fall. This is the first in a series of periodic posts that I plan to make on the topic of money. I should point out that I am only an economist in the sense that I took one required course in economics in college. That is probably not relevant because I am not trying to explain economics, but instead I am trying to understand what money is and why it matters, which as you will find out is more an exercise in sociology than economics. In this post, I will look at the relationship between money and important intangibles, like confidence.

We all have a sense of what money is and why it is important, but it feels wholly abstract and therefore surreal. Yet we want it to be real. We crave the assurance that a nest egg of say $100,000 will always be there until we spend it and its value, if it changes, will only go up, not down. We understandably get very upset when it is not there, or its value is deeply discounted. Someone screwed us. Who? Why? How can we prevent this from recurring?

To understand money you have to go back to ancient times before money even existed. Back then, we all survived on our wits. Few of us though actually survived entirely on our own wits. Instead, we were part of a clan or a tribe. We generally worked together for the common good of our clan because we learned when our clan prospered we were all better off. We could not all be masters of everything.

This worked for a while until we encountered more powerful clans. If we had things the other clan valued a battle often ensued. After a while, clans saw some value in federating. We learned that there was power in joining into larger and larger groups that shared similar values, such as a common culture or language. Thus, we evolved feudal societies and early rudimentary civilizations, like the Sumerian dynasty.

When a nation reached sufficient size and complexity, the barter system broke down. More efficient ways of exchanging value were needed. Hence, money became a necessary invention. The value of money is easy to understand, but what is easier to miss is the context that money represented. Aside from an objective measure of wealth and a means to acquire life’s necessities, money also meant that we were vested in our nation. With a common currency of exchange, we had every incentive to bond together. Money promoted peace, integration and the survival of the nation.

The downside was that a form of currency was valuable only while the nation existed. If the money were coinage, it might retain some value, but more often (particularly in modern times) if the currency was a paper currency it became worthless as the nation disintegrated. Zimbabwe is but the latest example of a country whose currency became essentially worthless because it became a failed state. In general, the value of a currency is directly proportional to the cohesion of the state and the industriousness of its citizens. It is affected by many other factors. In modern times, one of these major factors has been international trade.

As you may have noticed over the last few years, the value of the dollar has been falling in relation to most other currencies. What does this mean? Aside from the facts that our goods tend to be cheaper to purchase with other currencies and it costs more for Americans to travel overseas, when the dollar falls in relationship to most other currencies it signals a societal problem. Either America is doing some things wrong compared with other nations, or other nations are doing things better than we are. It amounts to the same thing.

If you think about our societal cohesion lately, you should ponder the discord in the current presidential campaign. For example, a McCain-Palin supporter hung Barack Obama in effigy from a tree in his front yard. Perhaps this has happened in other presidential campaigns, but I cannot remember it happening in my lifetime. That it happened at all is potentially an ill omen for America as is the Alaskan Independence Party, that Sarah Palin’s husband belonged to.

Obviously, the United States government and many of us as private citizens have lived beyond our means. With all the financial bailouts, the federal government may add a trillion dollars to our national debt this year. The rise in unsecured credit card debt is well established and is at record levels. While by itself this is unlikely to cause our nation to break apart, it does suggest that we are seriously off track. A responsible government would have noted this trend and changed policies to disallow it. Ours did not.

Most governments no longer have vaults filled with precious metals to back up their currencies. Since 1971, the dollar has been a fiat form of money, meaning that the government declares it has value simply because it says so. China for example owns about a trillion dollars of U.S. Treasury debt. It cannot cash it in for gold or bullion. Their value lies in the fact that the U.S. Treasury assures China that they can be redeemed with interest at a future time, to be paid out in the future value of the dollar. By purchasing our treasury bills then, China is essentially betting that it believes that this nation will be around when these bills come up for redemption and is betting they will have retained substantial value. They are betting that the United States, as a two hundred year plus democracy, is not going to go seriously off course for a sustained period. As a consequence, by lending its money to the United States, it is not only generally put toward a productive use but retains its value, offering some stability in an inherently unstable world.

If you are an American, whether you like it or not you too are a shareholder in the United States of America. You do not have to hold Treasury bills or Savings Bonds to be a shareholder. You simply have to live here, or have your livelihood depend on the success of the USA. When things get seriously off course, as they have recently, it is in your financial interest to take actions to correct it. The primary means of correcting these problems is to elect new leaders who are looking out for the solvency of its currency and prosperity of the nation as a whole.

The value of the dollar then, and your wealth, is intimately linked with our overall confidence in our government and its markets. Clearly, we veered off course by creating financial instruments like risky mortgage-backed securities whose value was impossible to measure. The rest of the world, driven by greed, generally looked the other way also. Thus, our inability to adequately regulate our markets, as well as our sustained inability as a nation and as citizens to live within our means, mushroomed into a global crisis of confidence. The United States was supposed to be the world’s financial pillar. With no way to assess what these new types of assets were worth, but with plenty of evidence that the United State is vastly overextended, fear drove the market, with the most fearful anxious to redeem securities into something they believed to be of enduring value, such as gold. This in turn created a cascading effect and lowered prices generally for all forms of securities. The value of our securities then is directly proportional to the level of trust and confidence that we have in our governments and financial institutions.

Our portfolio values may recover when we know their actual worth. Of course, they are currently discounted by the collapse of so many financial institutions and our bloated government and personal debt. To be prosperous again we must have transparency in our financial markets (a much harder thing to do with so much electronic trading). We also have to have confidence that consumers will start living within their means and (just as importantly) creditors will not allow people to live beyond their means. Money invested into products and services that inflate the value of money is not a real investment. Money that is invested into products and services that we all find useful and innovative builds wealth, and thus confidence, and thus makes us wealthier.

The United States of America can also become wealthier by becoming united again. We have let partisans on both sides of the aisle pulls us apart rather than allowed pragmatic politicians to move us together again. Back in 1994, Newt Gingrich led a Republican revolution on Capitol Hill. While his intentions were noble, the effect was to unleash a new and dangerous level of partisanship that eschewed compromise. Both Senators Obama and McCain promise bipartisanship if they are elected president. The best president though will be able to do this as well as intelligently guide government policy to make financial markets more transparent and to direct resources that build genuine wealth.

As a de-facto stockholder of the United States of America, you should insist on leaders who will deliver on the bipartisanship pledge and who can demonstrate clear pragmatic leadership based on sound economic principles, not ideology. Your portfolio will thank you.

Is cash obsolete?

The Thinker by Rodin

In my wallet is a bunch of crumpled greenbacks. In my pants pocket is a change purse bursting with loose change. Having cash in my pockets is as natural to me as fetching my newspaper in the morning.

Only fewer people are fetching newspapers these days. Instead, they are reading them online. The same thing may be happening with the greenback. While cash continues to feed a huge underground economy, (drug dealers just don’t take credit cards) for many of us cash is becoming unnecessary.

My daughter Rosie is this way. Her wallet is usually has no cash in it. In fact, she does not usually carry a wallet. Instead, she carries a little metal box for her handful of cards and documents. Since she got her checkcard a year or so back, except for an occasional bus fare, she has simply not needed cash. Every place she buys from has the ubiquitous card reader by the register. There is no pocketful of coins in her purse. One slim checkcard seems to be all that she needs.

I would say that she is the future but I think she is the here and now for those 25 and younger. (She is 18.) Money is becoming wholly abstract. I open my wallet and know with a quick glance how much I can afford for lunch. You see, the cafeteria in my building only takes cash, and ordinarily that is the only place where I still need cash. I cannot imagine the hassle of paying for gas with cash anymore. In fact, in many stores, cashiers are becoming obsolete. That is because they can save money by making you bag your own stuff at their fully automated registers. Moreover, since you are in a hurry, you are unlikely to stuff twenties into their bill machine. Slide your debit card in the slot, touch a few keys, get your receipt and you are out of there. It may not have that personal touch, but it is expeditious.

These days, I even use my ATM card to buy movie tickets. This is more due to the higher price of movie tickets than anything else is. Point in fact: virtually everything costs more. Hauling around change is becoming a pointless hassle. I am always getting pennies I neither need nor want. I religiously contribute them to the give a penny, take a penny jar by most cash registers. I do not want the hassle of hauling them around. My strategy does not seem to work very well. If it is not pennies, it is nickels, dimes and quarters instead. Of course, if you pay electronically, you do not have this particular hassle.

Granted, there are some drawbacks with using electronic money. One is that it is hard to keep track of how much money is left on an account. Yet my daughter does not consider this a drawback. When curious she goes online and checks her bank balance. She has no charge card so all of her transactions are on her debit/checkcard. Most debits these days clear within hours. She thinks my obsession with using check registers is rather quaint. In fact, if you download your transactions from your bank into a financial package like Quicken, you can see where your money went easily enough. It is generally easier to do this than to type them into a computer.

My daughter has a point, but then her financial life is very simple. She has no debts at all. So she does not have to worry about whether she is overdrawn. Me, I want a more intelligent card. It needs to be a smart card. Every time I make a transaction, it should store it on the card and keep my current balance on it. Ideally, it would recognize my fingerprint. When I pressed my fingerprint on it, it would tell me my balance and give me a way to scroll through my recent transactions. I keep waiting for a device like this but even though I wrote about this several years back, it is still not here. At least it is not available here in the States.

I am starting to realize that after our cafeteria remodeling is finished this summer, I will only need cash on the rare occasion that I use the toll road. Moreover, I really do not need it to pay cash for tolls either, if I could get off my ass and get an E-ZPass.

One benefit of cash that I might miss if I were younger is its anonymity. The government should not be snooping into my financial transactions but I have a feeling they are doing it anyhow. Cash is a great way to hide certain transactions. Until we reach an age when we do not care, most of us men prefer to buy that latest copy of Hustler with cash. Should I be inclined to take some woman who is not my wife to a NoTel Motel, I probably would not charge it to my Visa either.

I have a feeling though that soon all our financial lives will be transparent. Cash is going the way of the horse and buggy. Soon we will be saving greenbacks so we can show our kids how money used to work. They will no doubt give us incredulous looks. Cyberspace is not real. Why should money be real? Besides, just how real is paper money? All it is is a government promissory note. The government is asserting that the face value of the money is worth what it says. It is not as if you cannot take it to your local Federal Reserve Bank and get gold bullion for it.

If we must go cashless, so be it. However, at least give us intelligent debit and credit cards. I realize that credit card companies in particular would fight this idea. They would prefer to keep us ignorant of how much we are spending. Someday though the Treasury Department will decide that printing all those greenbacks and minting all those coins is truly unnecessary in today’s modern world. Then maybe they will insist that banks and credit card companies give us all the sort of smart cards we need to make a cashless society useful.

Smugglers and dope pushers will not be happy of course. I have confidence though that they could find a way to circumvent any system that is created. People are ingenious when it comes to making a profit. In the unlikely event that we could not create an electronic system opaque to such transactions, I at least will not shed any tears. The benefits of going cashless are now obvious to me. It just needs a few tweaks so it will be obvious to all of us.

Why be happy?

The Thinker by Rodin

Money cannot buy us love, the Beatles told us. Apparently, it cannot make us happy either. At least that is the conclusion of this article in today’s Washington Post.

A wealth of data in recent decades has shown that once personal wealth exceeds about $12,000 a year, more money produces virtually no increase in life satisfaction. From 1958 to 1987, for example, income in Japan grew fivefold, but researchers could find no corresponding increase in happiness.

I feel like the sirens should be wailing. Adam Smith should be rolling in his grave too. Could it be that our capitalist society is built on a foundation of sand? Wasn’t the whole purpose of gaining wealth for us to be happier? Would most of us really be happier, or at least as happy, grubbing at some minimum wage job and living in austere surroundings than we are in our McMansions with three cars in the driveway?

I am thinking of a man I see regularly where I work. I see him when I go home in the evenings. He is on the ground floor and he is pushing a wide broom across the tile floors. “Have a great evening sir,” he says to me without fail, with a big happy smile on his face. He is utterly sincere and the content sound in his voice is impossible to fake. Just down the hall a bit there is the guard I usually see in the morning as I enter our building. He is always exceedingly pleasant. He could even be described as perky. He is such a morning person. He greets me with a sincere, “How are you doing today, sir?” I always mumble something polite, but I just do not feel as full of life as he does. After he checks my badge, he tells me “Have a wonderful day,” and it is clear that he means it too. I say the same to him, and while I mean it intellectually, I do not feel it in my heart. I have other things on my brain other than how wonderful this guard’s day turns out. I head upstairs to my office to slog through a hundred or so emails. He hangs out in the lobby, checks badges and makes light conversation with the many people coming in and out. I have been admiring him for his contentment and wholeness, characteristics I still lack after 49 years. For this modest security guard also has something of a following among the women in the building. He flirts with them and they flirt back. He walks with a skip in his step. It is not that he is especially handsome; he is middle age like me. I suspect I make at least three times what he makes a year. Am I as happy as he is? I doubt it.

So here I am with my six figure income. Why am I not happier? I have been to Hawaii and enjoyed it immensely. In two days, I fly off to Paris with my family. That will make me even happier, right? I will have experienced more of this world. I do not know what kind of vacation, if any, the broom pusher in the lobby at work will be getting this year. I imagine pushing the broom is just one of two or three jobs that he is shuffling. I have time to exercise after work and even to blog. I hire people to cut my lawn. Maybe his idea of downtime is going to church, or bowling with friends. Yet, I must, I should be happier, right? Ain’t necessarily so.

I often ask myself, is this it? While I will not get into details, I realize we spend a lot of money in my family trying to make ourselves happier. For example, there is mental illness in our family. We do the modern things to improve the situation. Certain unnamed family members may or may not be on antidepressants and may or may not be talking regularly with therapists. Would we have been happier if we had less choice and opportunity than we do? Was our pursuit of prosperity the very thing that led us to having more unhappiness in our lives? Consequently, is this why my family now needs frequent consultations with mental health experts?

I appear to have all the things by which one measures success and happiness. I have a wife and daughter who love me. I have a job I truly enjoy and which fully engages me. I have a comfortably sized house that is well maintained and keeps appreciating in value. My nest egg grows every year and after talking to my financial adviser last week, I know it will grow even faster in the future. I myself earn more than twice the average national household income. Yet what fixates me is not what I enjoy about life, but those things that really should not matter at all. You might say I spent thirty percent of my time obsessing about the five percent of my life that I feel is out of kilter. I cannot be happy unless I am happy all the time. Otherwise, some part of me remains miserable. Otherwise, my life feels cheapened and not optimized somehow.

Perhaps happiness comes from letting that five percent go. Perhaps happiness is simply a state of mind. Perhaps it comes from the willingly suspending disbelief. Instead, I am fixated on what might happen. If someone earns $12,000 a year, he likely does not have any health insurance. Yet according to this article, he is as happy as I am. Yet for some illogical reason I feel I must be happier because I have health insurance and they probably do not. If they get seriously sick, they are in serious financial straights. They can even die. I am more likely to hang around. So I will be alive to do what? I will still probably do what I do now, and keep spending thirty percent of my time obsessing about the five percent of my life that is not optimized for my personal happiness.

The angels are whispering to me, “To be happy, let it go.” Let go of that five percent. It is beginning to dawn on me that the reason I obsess on the missing five percent is that all my life I have been in a Darwinian struggle for survival. Survival of the fittest is hardwired into my brain. I cannot escape from this pattern because it is integrated into my character the same way my irises have always been blue. However, improving the odds of my survival does not necessarily make me happier. It should make me less anxious. It is more likely to make me neurotic. Perhaps that is the reason my family spend so much money on doctors and therapists. Yet improving our odds of surviving will not keep us from dying in time either. However, there may be some illusionary satisfaction from keeping the wolves outside the gate. The happiest people though seem unconcerned that there may be wolves at the gate.

Yes, it was Paul McCartney who crooned, “Money can’t buy me love”. Moreover, didn’t he just turn 64? Didn’t this song suggest that no one could really love him when he turned 64 because at that age he was old and therefore unlovable? Well, maybe Linda would still love him had she survived. Is it just coincidence then that now at age 64 we find in the news that Paul divorced his baby doll wife? Heather Mills now has a reputed ten million pounds from Sir Paul to help her find happiness somewhere and with someone else. Presumably, her happiness no longer takes the form of spending time with a rich senior citizen.

I do know who is happy though. It does not appear to be Sir Paul, and it is not me at least for a significant chunk of my day (although logically I should be very happy). Whom do I know who is happy? I see him many days pushing a broom. Yet for the life of me, I do not know whether such happiness is worthy of aspiration, or delusional. Survival of the fittest may not actually make me all that much happier, but human history suggests that maybe it is a worthier aspiration.