The Santa Claus Syndrome: Where Things Come From

Bernanke’s Interest Starvation

Why is one of the most important reasons people aren't spending being ignored? Low interest rates from the Federal Reserve is the problem. Few retirement planners anticipated this risk: A lunatic would get control of the Fed and give the banks all the money they wanted for free. This means that people who saved their nickels and dimes for forty years and have some money to invest are getting virtually nothing for it. Even if you had a million dollars, at the rates you can get on CD's, money market funds or bonds, you would only earn a few thousand a year, only a sliver of what even conservative planners expected. Many will be forced to invade principal which is the worst thing to happen when you are beyond your working years in that it's going to reduce your future earning ability even more.

The Fed has poisoned investment markets which no real benefit and some real negatives. I can't spend interest I never earn and won't spend what I do earn if it appears to be dwindling. It's hard for even consumers with some money to gain confidence in these circumstances.

No matter how cheap money is, people won't borrow if they don't believe they can make a return on it. Whether rates are 2%, 4% or 12%, if you don't think you can employ it in something that will make money, borrowing is a bad idea. Lowering interest rates in the current economy is of little value. If rates were in the staggering, double digits of the Carter Administration, lowering them would remove a barrier but the rates now aren't the problem.

The current Fed policy reduces the value of capital to virtually nothing. In the long run, this is a problem. I mean real capital involving people saving money to invest, not fictional money created by the Fed. Nothing good can come out of this. Salvation will not come from the Fed, and wherever it comes from, it won't be soon. The economy won't perk up until people have money to spend and making a little on investments is one way to get money to spend. When you are starving for interest, you aren't spending.

Poor Millionaires?

    Nobody knows what rich and poor mean anymore. Of course the majority of us are neither, just part of the vast unheard majority in between. 

    The only way you can measure the value of an amount of money it to relate it to something else. You can’t say whether $500 is a lot of money without some reference point. It is a lot of money to pay for a hamburger but not much to pay for a new car. 

    So how can we decide if the millionaires are rich or poor? One way is to look at what sort of income they might earn on this and relate that to average income. Remember, having a million dollars is a lot different from spending a million dollars. When people describe what they would do if they had a million dollars, they often describe how they would spend it. Usually they would spend it immediately and several times over. This should be a clue as to why they will never be in that position. 

    Let’s describe someone who could be a typical millionaire. I’m using total net worth to define “millionaire.” Some like to use a definition that only includes investable assets so excludes the value of their home. This is important to investment advisors looking for clients because they are looking for what they could earn a commission on. For the rest of us, the total is fine. 

    Let’s assume a case of someone who accumulated a net worth of a million dollars over 30 or 40 years of running a small business, say a couple of dry cleaning stores or maybe a couple of drugstores. Let’s say our millionaire is 70 years old and no longer working. So how are things going in this situation? 

    Many investment advisors say that it is safe to spend 4% annually of your savings in retirement. Of course with the low investment incomes now, you might have to cut back. And say our millionaire has $200,000 of his net worth invested in a home. You can’t spend that as you go along and you aren’t going to be getting any income from it unless you are renting out a room so we should take that amount out of consideration. If you spent 4% of the remaining $800,000 it would only amount to $32,000. 

    Then let’s assume a Social security payment of $20,000, fairly typical. You would have a total income of $52,000 a year, very close to the actual median income. Our millionaire is not poor but is a long way from rich. Depending on the cost of living in your location, he could be on the lower end of middle class. You could just plunge in and spend more of your capital but those who think like that aren’t likely to accumulate much anyway. So it’s good to remember this example when you hear the media discussing millionaires.

Democrats Against Obamacare

Roy Barnes, former Georgia governor and the Democrats’ nominee for this year, is campaigning against his party’s health care bill that so many of them are so proud of.  An AJC/AP story published yesterday points out that while Democrats favor the plan, he will need votes of Independents and moderate Republicans to get elected and they are highly suspicious.

            Barnes criticized the plan as “financially devastating” to the state without a plan to get Medicaid costs under control.  He is concerned that in 2014 when the federal government cuts back to their normal Medicaid contribution, it will impose staggering new costs on the state.  He sees the current Medicaid tab for the state going from the current $2 billion a year to as much as $5 billion a year.  This is while the state is going through a big reduction in every program because of lowering tax revenues.  (No, the state isn’t likely to raise taxes either.)

            One of the biggest shortcomings in Obamacare is that it focuses on health INSURANCE costs instead of healthCARE costs.  In many cases it will increase costs. Just the Medicaid issue will probably bankrupt a few states.  (Maybe that’s why many of them are suing the federal government to stop the plan.)  It imposes increased employment costs on small businesses that are already having a hard time paying their employees.  

Many small businesses have dropped health insurance not because they thought people didn’t need it but because of the cost.  So what is the Obamacare solution?  Force them to pay! 

So even some Democrats see the problems with this plan. As the features go into effect over the next few years, and the bills start to arrive, they will become more obvious.  But can we stop the monster before it sinks us?  The November election results will give a sign. 

It’s What’s and How’s Season

Like many other places, we are having a primary election in Georgia and are being swamped with political ads.  But as is often the case, they are mostly about what’s and short on how’s. 

            On a TV debate our former governor, who is running to get back in, was promising to reinstate regional crime labs and talked about how important they are.  I agree that they are important.  But the reason that they were cut back is a shortage of funds that isn’t getting better anytime soon.  

            It’s easy to promise all sort so things people might want or think they deserve.  Paying for them, especially when everybody is already broke is another matter.

            It’s not just the poor and ignorant who are voting for anybody who promises a free lunch, but they are certainly there.  Maybe a lot of others are living with a lot of wishful thinking.

            It seems like politicians usually run by promising a lot of things that are going to cost money.  I guess the hope that the voters don’t realize that all that money is coming out of their pockets.  Of course there are some voters who pay little in taxes and hope to gain much more in benefits.  When this group gets big enough, it can sink the ship of state. 

            In any case, when these politicians take office, they will have a list of things they have promised to do and no money to pay for them.  Serves them right. 

 

Hail the Soda Tax

    What could be better than putting a tax on soft drinks?  Why should they escape tax?  It would provide needed money to balance the state budget and get people to drink less harmful soda.  This is the “Double Do gooder scheme:  They take your money and say you are better off for it.

            This is the plan in New York State, among others, which has a bit of a budget shortfall.  New York is talking about a cent per ounce tax.  You would hardly notice.  But on the other end it would add up.  But on a 12 ounce drink, you would pay 12 cents.  Of course they do things big in New York, at least where money is involved.  Last fall I was there for couple of days and the hotel vending machine charged $2.50 for a 20 ounce drink, just add another 20 cents.  I went out to a grocery store and bought a 2 liter bottle for about $2 which is high but not that high.  But these guys would add 66 cents to it. 

            People don’t like naysayers but there is a lot of “nay” to say about this.  Like most taxes, it will generally come out of the same pockets as the other taxes, just from another angle.  It isn’t like it would apply to some new group of people who are paying no taxes at all now.

            The big “nay” on any new tax is the overhead.  You have to come up with a scheme to collect the tax.  You have to find a way to make sure people pay and pay the correct amount.  You have to make sure the money doesn’t get diverted.  You have to hire new people to do all this.  If you increase an existing tax, you just have to change the rates.  This costs little but may be more noticeable. 

            Another big nay is that it is another step in the direction where we get nipped from every direction and can’t have any control over the situation. If there are a small number of visible taxes, the people have some control.  When it’s a little here and there, it is much harder.

            But at the end, the vast majority of taxes are paid by the same middle class lump of people.  The poor pay little on a tax like this.  There aren’t enough rich to drink enough sodas for this to matter.  So it’s us again.  

Wrong Culprit in Healthcare Debate

As the Democrats healthcare bill, designed to turn health insurance on it head, is percolating in Congress, I decided to look into the situation.  The government has savaged the health insurance industry as if they were just a bunch of looters, taking all the money and leaving their customers high and dry.  Much of what the Democrats are working on is designed to put the squeeze on the insurers.  But they are looking at the wrong thing!

As a CPA, I like to look at the numbers. I have been reviewing the financial results of Wellpoint, the largest insurer with 35 million members and 42,000 employees.  They are the Blue Cross franchisee in a number of states.  If the health insurance industry is getting rich, it should show up here.  Their financial statements are available on their website for anybody to see.  

The 2009 results aren’t available yet but 2006 to 2008 are there. So did I find vast bundles of profits?  If I had, I would be buying their stock instead of writing this.  In fact, I was not moved at all towards that.  Annual reports are designed for potential investors so put an optimistic a face as possible on things. 

I would not buy into this industry.  Their profits as a percentage of revenues are nothing special and Nancy Pelosi is trying to grab that. 

It is clear that where the money is going is to the healthCARE industry, not the health INSURANCE industry.  Of Wellpoint’s 2008 gross revenues of $57 billion, $48 billion went straight through to healthcare providers: hospitals and doctors.  By the time they paid their administrative costs (salaries for 42,000 employees), taxes and drug bills, they were down to $2.5 billion which is only about 4.4% of the gross.  With Nancy Pelosi hell bent on grabbing as much of that as possible, nothing good can come of this. 

If the government is to reduce healthcare costs, they need to go where they are actually occurring, not after the industry doing the paying.  They can beat up the health insurers forever and it will never touch health care costs.  When you have the wrong people analyzing the wrong thing, they will get the wrong answer. 

Christmas at the Obama White House

        Nancy Pelosi and Harry Reid are handing out the presents and all is right with the world.  Or is it?  They are just putting the final ribbons on the biggest present, the new healthcare package, all the hundreds of pages of it.  It will take time to sort out just who gets what and what the cost will really be but it seems like if your U.S. Senators are Republican, look for switches and ashes.  If you have the other guys, the sky is the limit.

            I had not planned on a Christmas blog since my basic theme in my Santa Claus Syndrome book is that there isn’t really a fat guy in a red suit who is going to pay all our bills.  But Obama and his elves in the Congress are trying to prove me wrong.  The NY Times is reporting that deep in the bill there are lots of specific provisions inserted by Harry Reid to get the votes of specific senators.  There are reports of millions for this, hundreds of million for that.  All presents designed by senators for some specific need:  To get a vote here, a vote there to get to the magic 60.            

        Some of these benefits have very specific criteria and only fit a few circumstances.  Those who wrote these provisions may be the only ones who know the intended beneficiary.  How can anybody vote for something like this?  They seem to be just looking at the specific benefits to their own constituents and turning a blind eye to the costs to the whole government.

            Another big factor is the expected cost savings.  Like many government plans, they say they have devised ways to save money but instead of implementing the plans to see if the savings actually appear, they are going to spend the whole bundle first.  Wishful thinking is an important legislative tool.  One of the major savings they allege is by paying less to Medicare doctors.  These are the same doctors who are turning down Medicare patients now because of the low payments.  This is pure fantasy.             

            There may be a political urgency for the proponents of this plan but for those of us who might be on the paying end; a little more thought would be a big benefit.  In fact, they need to defer this plan for a year, not just for more study but to implement the cost savings schemes and see if the money really rolls in before they spend it.

            So while everybody is settling in to enjoy their new presents, remember there is a bill as big as the moon headed for somebody.    

Under Cut by the Federal Reserve

    We were once again undercut by the Federal Reserve on interest rates when the Fed announced this week that the bargains for bank borrowing will continue. When I say “we”, I mean people like me, and hopefully you, who might have a few dollars in a savings account or a money market fund or some similar cash like investment, made with the hope of actually getting paid some interest on it.  And also a little weary of the up and down stock market.

     As long as banks can get money from Mr. Bernanke and other government elements for virtually nothing, there isn’t much reason for them to pay us anything.  One thing that has allowed this in the past year is that we are worried about putting money in stocks.  After the collapse last year people have been willing to give up earnings for an assurance of preserving capital.  In the interest of salvaging principal, we have given up interest.  But this is not a natural situation and can’t continue indefinitely.  In the long run, people aren’t going to invest money just to get free storage.

    When I first had a money market account in the early 80’s, it was paying over 18%.  Now I’m only getting a quarter of a percent.  Neither extreme is good.  Rates need to be high enough to make it worthwhile to invest but low enough that borrowers have a reasonable hope of making enough money to pay the rate and have a little left over for themselves. 

    So how long can this go on?  Let’s look at a few things.  The government is putting out cheap money to stimulate the economy.  But a big part they are trying to stimulate is the building industry.  The problem in real estate is the collapse of home prices, not high interest rates, except for the ones where the rate balloons.  There is no benefit to the economy to help people refinance a mortgage from 6% to 4.8%.  This just helps the particular individual.  There is a benefit to refinance a mortgage that is in threat of foreclosure because the interest rate went up and tripled the monthly payment and the homeowners can’t make the payment.  But the current plans don’t seem to recognize this.               

    We need to find a way to remind those in power that we are still out here and we are the good guys.  There is too much emphasis on helping those who are overextended at the expense of those who have done the right thing like saving money to take care of their expenses and old age.  So write your congressional delegation and anybody else you can think of.  Sooner or later they need to come around.

Government Fees Disappear

    If a government charges an extra fee for something, where do suppose the money goes?  You may think it has to go to whatever purpose the fee is charged for.  Some of it probably does.  But the Atlanta Journal Constitution has revealed that in our state, much of the fee money just goes into the pot to be spent on whatever priorities the government might have at a particular time.  

    One of the fees we pay in Georgia is a $1 per tire fee when we buy new tires.  It is supposed to go to cleaning up piles of scrap tires.  I guess many would call that a worthwhile purpose.  But in 2009, only $1.4 million of the $16.38 million collected is going to cleanups.  The rest disappeared into the General Fund.  

    In another case, a fee is tacked on to the sale of every prepaid cell phone that is supposed to support local 911 systems.  But the millions collected is being diverted to other purposes. 

    There are hundreds of these fees in our state and there seems to be little accountability for the funds. The AJC article has several other examples and you can read the whole thing at: http://www.ajc.com/news/misused-fees-lead-state-189810.html .

    But we need to look more broadly.  I’m sure Georgia isn’t the only state doing this.  And the federal government isn’t above charging fees for whatever it can think of.  I doubt they are any more diligent about accounting for the money than Georgia. 

    If you look around, you probably have the same situation in your state, and even with your local government.  It’s an example of how governments chip away at us in increments so small it is hard to fight them off.  But it adds up to a vast amount of money with little accountability.  Hordes of small fees nipping at us is good for them and bad for us.  We need to save this article and drag it out any time a government says they need a new fee for some purpose.  Make them prove they can be trusted first!

Casino Gambling in College

It’s everywhere or at least close to everywhere.  There are certainly ads everywhere for it.  It’s fun.  There are lots of things to do at the casinos and hotels. 

But the main business of casinos is to get your money away from you.  They don’t produce anything you can eat or that can provide shelter.  I suppose they claim to be providing “entertainment” just as many sports or show business venues do.  While these other entertainment choices can cost a lot, you don’t have to keep paying while it’s going on. You know the whole price when you buy a ticket.

It’s is important to realize that it is impossible to win in a casino.  Even those who run them say that.  There are a few short term winners but they inevitably give the money back by continuing to play.  You don’t have to quit while you are ahead.  You have to quit when you run out of money.  Of course as an accountant, I can see this as an especially bad deal.  Giving money away where the only benefit is the thrill of giving your money away isn’t appealing.

If casino gambling (I include various gambling machines that might be other places too) involved definable set of skills or methods, if it could be trained, then respectable universities would offer degrees in it.  If winning at gambling could be taught, who better to learn than intelligent young college students. 

If this were anyway legitimate, with your new casino gambling degree, you should be able to get a business loan to stake you and you are off to making a living.  But that isn’t what happens.  If this were possible, people would win so much from casinos that the casinos wouldn’t be viable.  If the odds approached being even, that would probably be the case.  If even a high level of skill in playing games was the necessary tool, enough people would turn their hand to gambling that the casinos would collapse. 

But none of this happens.  What happens is that millions of people enter casinos every year and most, necessarily, leave with less than they started with.  The saddest cases are those who are under some illusion that they can win.  It is hard to believe that casinos get away with this.  In fact, hardly anybody criticizes it.  I’m sort of libertarian leaning politically so I’m not saying it should be outlawed. I’m saying we shouldn’t do it because it’s not only expensive, it’s dumb.  Or at least wait until it becomes legitimate enough to be a college major.