It's the Stupid Economy! Part Four

How many times have you heard a politician tell you that " It's your money, " or it's the taxpayer's money? Well, it is! But not if you throw it away, and that's just what you're doing if you don't adopt a sound budget - and stick to it! When you give it away, your money is no longer yours in fact, even though it may be in princple. You can't buy things with principles. What's the answer?
Budget.
But too many people don't know how. Across-the-board cuts are not successful in the long run. Often these unwise reductions, made only on a money basis, fail to distinguish between essentials and frivolous expenses. Trying to cut back on food or transportation can, and often does, lead to crisis points further along where adjustments have to be made that cut into other considerations. It becomes a game of " robbing Peter to pay Paul " and ultimately leads to failure. There are three reason why most poory conceived budgets go wrong.
First, people tend to regard a budget as a fixed entity rather than a dynamic process that continually changes. Static budgets fail to anticipate the unforeseen items that crop up in the course of a month. Secondly, people who contentrate only on allocation of money to specific accounts fail to consider rates of consumption. Finally, most people try, without realizing it, to rationalize two different time bases.
Taking the last item first, a person who works 40 hours a week at $12.00 an hour earns $480.00 in a pay period. After deductions, the net return may be $420.00, or $1,680.00 per month. Trying to spread this out over the entire week or month leads to difficulties that are simply resolved using the WHAM method. This an acronym for Waking Hours Accounting Method. The idea is simple. An individual is usually awake for 16 hours a day when he or she is liable to spend money. Seven days a week at 16 hours a day works out to 112 waking hours per week. To set thing on a equal basis just divide the net earnings per week by 112. In this, all too typical case, the WHAM number is $3.75 an hours. Not much, granted, but that is the rate of return every waking hour for a whole week. The next step is to start subtracting weekly and monthly expenses from this amount: 112 for weekly expenses and 448( four weeks per month ) for monthly expenses. Here's how it works.

Starting with $3.75 an hour, say the food bill is $80.00 a week or $160.00 bi-weekly.
Dividing this by 112 or 224 gives $1.07 which, when subtracted from the WHAM figure leaves $2.65. If the rent is $575.00, dividing by 448 gives $1.28, leaving a WHAM figure of $1.37. In an actual intance, after reducing every conceivable expense in this way, the boiled-down WHAM figure was $0.10. "Ten cents?" the man said when I finished processing his budget. "That's not much." That's when I showed him the magic! Yes, ten cents isn't a lot of money left to spend after you have deducted all your expenses, but - it's ten cents an hour for sixteen hours a day, seven days a week! In a month it works out to about $48.60, over a year it's $584.00! And it was there the whole time.
Hardly a bonanza but if given the choice of having it, or not, there is little doubt about which way you would go. The numbers will vary, some will even come out negative - but that's fine. At least you will have an accurate view of where you stand. Of course, this doesn't take debt into consideration, but before going there let us look at the subject of disbursements.
Development of your budget will resolve itself into a monthly expense figure, a certain amount of money you will allocate to pay the esxpenses listed on your worksheet. You will, of course, not spend the money all at one time, but will pay it out over a period of time; that's the way to keep track of and control this aspect of your budget. It's about rates, specifically the rate of time lapse versus the rate of expense outlay.

To get the time rate, just divide the current date by the number of days in the month and multiply by 100. To get the expense outlat rate, just divide the amount of money already paid out by the allocated amount for the month and multiply this by 100. As you go through the month you will try to keep the time rate behind the money rate: that is, the time should be running out faster that the money. Should the money start running out faster than the time you will likely find some way to cut corners until the rates reverse, and the time runs out faster once again.

The WHAM method may also be applied to existing debt. Suppose that, using the numbers we've been working with, your debt is $5,000.00. The first thing we will have to determine is how much additional income you will need to pay this amount off.
In one year there are approximately 5,840 waking hours. Dividing the amount of debt by the toatal number of waking hours will give $0.85 per hour additonal that you will have to come up with. Well, if we multiply 112 times .85 it works out to an extra $95.89 a week of additonal income. Take a part time job, say fifteen hours a week at $8.00 and hour minimum. You will earn enough to pay off the debt after making arrangements with your creditors to accept a fixed amount monthly over TWO YEARS. While the numbers given apply to a one-year payoff, why not take twice as long to pay the bills off and put an equal amount away. At the end of the first year you could have the debt paid down to $2,500.00 with a like amount in savings. You might then decide to pay the whole thing off or just let it ride.
The technique described here is not a quick fix, it requires discipline and committment, but it should be clear that the problem with excessive debt is time, not money. You accumulated debt over time and can only discharge it over time. The idea of borrowing money to pay off debts is foolish, like treating alcoholism with bourbon. When faced with substantial debt the only way out is to hunker down and work your way out gradually, following a dsicplined approach. In any event, saving is the key to ultimate success, and if your current financial position disallows a savings program, find an income source that will provide dollars to put aside. Now I am about to give the appearance of contradicting myself. Although I recommend saving your way out of debt and decry bill-payer loans, there is one notable exception: Credit Unions.
Savings in a credit union are called shares and they draw interest just like bank deposits. When shares accumulate to significant amounts ( as little as $500.00 would be enough ) you could take out a share-backed loan and pay it out over a period of time, all the while working to reduce your current outstanding debt. Take out two or three of these small loans as you go along and build a record of successful loan repayment along with your savings program. The idea here is to build a shares balance equal to the balance of a credit card obligation, then borrow against it to pay off the credit card. Credit union financing is so much cheaper than credit cards in terms of interest that a loan at 5% interest is better than the 18.9% ( or more ) that you would be paying on the plastic. And keep your eyes open.
In times of economic downturn, when enough people have bad credit suddenly everyone's credit is good! I personaly have had a low credit rating for twenty years, not because I defaulted on anything but because I just didn't use credit cards. A couple of years ago my bank sent me a credit card that I didn't apply for. After ensuring that there would be no penalties for not using the card I decided to keep it. I used it for small purchases and cash advances that I quickly repaid. When the credit union sent me a brochure about their credit card I applied for it; the APR is only 11.5% - a good deal. Both these cards have a $2,500 limit on them, but it's the one from the credit union that I use if buying something on credit ( like my new computer ) that I pay out over time.
Now about the Keeping Your Eyes Open part.
In a bad economy there are always people who have items they wish to sell for cash in what we call " distressed situations ", willing to sell at significant discounts to established value. I recently purchased an automobile, my first in twenty-five years. It's an excellent car in mint condition, nine years old with only 58,000 miles on it. The man I bought it from inherited it and needed some quick cash for a move he wished to make. I made an offer, held held the line, and wound up getting the car for $1,600 less than the current book value. It was easy to finance it through ( you guessed it ) the credit union at 5% interest. Now, imagine if you found a deal like that - and they're out there - you could finance the purchase of some item of value being sold at distress and turn it around in a quick sale, then plow the money back into shares.
In closing let me reiterate that the only way to financial solvency is work over a period ( perhaps a decade or more ) of time, following a disciplined approach, and an alterness to opportunties that may present themselves. Above all, don't hand your money over to credit counsellors or financial advisors to manage for you. Do it yourself. At this point I could say " Where ther's a will there's a way ", but that's so trite that...
I won't say it.

It's the Stupid Economy! Part Three

Where do we go from here? The problems with the economy are well known, less well known are solutions. But there is an old saying which states that the solution to a problem is found in the statement of the problem itself. In this instance we may look to the term Consumer Economy for the solution to our economic problems. If the corporations that have this country is a stranglehold are able to do so with their deep pockets, we only have to realize where this money comes from.
Us.
Well, you, because I have my own ways of dealing with the problem. For one thing, I never buy retail. I don't own a house. I don't have a cell phone. I don't watch television, don't even own one. I don't spend what I don't have. And I'm doing my part to deal with the present state of the economy in the best way, a way that the big corporations just hate.
I save money.
For about twenty years I got around on a bicycle and public transportation. There were cars available to me, through friends, when I needed one, which was only occasional. Through all that time I managed about 3,000 miles a year bicycling ( last year 3,623 miles ) and scored a double: not only did I save a pile of money but my health, strength, and stamina improved so greatly that today, less than five months shy of seventy years old, I am at the peak of physical well-being. I work out at a gym three times a week with people half my age, and they know I'm an older man, but they don't realize how old! I smilingly give the "bird" to big pharma, one of the biggest drains on the resources of older persons.
How about name brand suits? Want to spend big bucks for quality apparel? I don't. And I stay pretty well dressed for pennies on the dollar. How, you ask? One of my friends owns a dry cleaning establishment and he gets stuck with his share of clothes that people leave over the thirty day pick-up time; he shows me what he has and I just pay the cleaning bill. Voila! Designer suits for $15.00, and nobody knows the difference.
Last month I bought a car and financed it through my credit union. The seller was a criminal lawyer, a personal friend, who inherited it from his mother. " She only drove it back and forth to the liquor store, " he told me. A 1999 Toyota Camry with only 57,000 miles on it. For $5,000 I didn't buy it so much as stole it, as I can turn around a sell it for a thousand dollars more. And I have the money to pay the loan off, but why bother? The interest I earn on my savings ( 3½% ) and the interest on the loan ( 5% ) it's just as easy to let it ride.
Yes, the answer to our economic problems lies with us. Consumers. Spend less, buy wisely, and be patient. In the hole with credit cards? Who put you there? It wasn't the nasty ol' credit card companies, they just handed you the means to go broke but it was you who turned these on yourself. Stop doing it!
You see, we actually have two economies; when one fails, the other kicks in. It's the second-hand, cash money, under-the-radar business that people engage in. Once my girlfirend had an accident and put a huge dent in the right rear fender of her Monte Carlo. It looked like hell, but it would have cost a couple hundred dollars to repair. One day a Hispanic fellow knocked at the door and offered to " bondo " the damage for eighty dollars. I said OK and he had it done in just over an hour: a little paint and it was good as new.
So be patient and keep you eyes open. The bargains are out there just waiting for you to take advantage of them. Don't listen to Financial Advisors, they don't care if you win or lose, as long as they get their fees. Don't turn your money over to anyone to manage for you, you will only lose in the long run. Pay down what credit card debt you have, minus the fees and late charges - and take your time. So you're credit report looks bad; so what? Isn't it easy credit that got you into the hole in the first place? Stop feeding the dog that bites you.
In the next installment I will show you how to get out of debt without borrowing money using actual figures from people I have helped do just that.

It's the Stupid Economy! Part Two

Inflation is a thorny issue with economists. It is necessary in certain instances but too much can drive an economy to ruin. It's all about paper money.
In and of itself paper money serves a purpose; it's handy, easily carried around, and as long as it represents value it has worth. But inflation tends to dilute paper currency and therein lies the problem. It's a dilemma. What we will view in this essay are; the causes of inflation, the degress to which it is beneficial, and the dangers of rampant inflation.
Firstly, inflation is necessary as a couterpoise to the depressant effect of a growing population on a fixed base currency: hard money. There is only so much currency available and the more people there are producing and consuming goods, the greater the need for the liquidity that more currency provides. While the inflationary trend in such a case devalues the currency, in small, well regulated amounts, it is beneficial. But it must always be kept in mind that paper currency is not money; it merely represents value. The proper role of paper money is the transferrence of wealth, not the creation of some false feeling of prosperity.
Inflation usually occurs when too much currency pursues too few goods; prices are bid higher and those who have adequate stocks of currency pay them, while those with less are hard pressed. A person who earns fifty dollars an hour doesn't mind paying $3.00 for a latté, a person earning ten dollars an hour would consider such a purchase a luxury. It's all relative, but allowed to grow beyond a certain level inflaton can cripple an economy. By its very nature inflation shatters the constraints that a hard currency places on its partcipants: Hard times? Just print more money!
At the domestic level inflation is bad enough; in terms of foreign trade it is calamitous as a cheaper currency tends to gravitate to offshore banks. This is because it takes more inflated dollars to purchase things abroad and fewer foreign currency units to purchase things here. What happens is that foreign governemnets assume a poition of power over the domestic economy by threatening to divest themselves of this devalued currency as France tried in the late 1960's. One of the attributes of money is the willingness of the issuing party to receive it in rerurn for goods, services, or other considerations. The international medium of exchange is still gold even though we have taken ourselves off the standard. A foreign government only has to specify that it will return so many dollars for so much gold, and the United States government would be obliged to sell the metal. The erosion that would take place is obvious: more dollars in circulation, less gold to back them in foreign exchange.
So we print more paper money ( coupons ) in the mistaken belief that volume equals value. The fallacy of this notion may be seen in the stock market. Once upon a time it was possible to amortize a stock purchase in ten, fifteen, perhaps twenty years.
This is a function of the Price/Earnings Ratio. If a stock sells for ten dollars a share and earns dividends of one dollar per year, in ten years the stock would have paid for itself, and the rest would be pure profit. In those days millions of shares were traded daily, today it's billions of shares because P/E ratios are now 30, 40, or in some cases approaching fifty. Looking at the Price/Earnings Ratio another way is to consider that what it truly represents is interest on the money invested. Flip the ratio over and you get, in the case of the ten-dollar stock, 1/10 or 10% interest. A P/E of thirty returns only 3.33%, so naturally investors trade at higher volumes: when you're earning dimes instead of dollars you need more of them.
Once, the Nationa Debt was measured in millions, then hundreds of millions, the billions, then hundreds of billions: the latest adminstration is proposing a budget of 3.1 trillion dollars. That's inflation!
But there is another side of the issue that government regulators don't seem to consider. I'll cover that in Part Three.

It's the Stupid Economy! Part One

I took an economics course in college and learned two things; that economics is the study of how we attempt to satisfy our unlimited wants with limited resources, and that money is anything that has value. Unlimited wants? Thats a tall order, one that we have been unable to succesfully address since the United States became a world economic power. We now have the distinction of being the world's largest debtor nation as our pursuit of those unlimited wants has bankrupted us and reduced our currency to near worthlessness. The issue requires some corrective action; but what?
Presidential candidate Ron Paul (R Texas) wants us to return to the Gold Standard; that's a step in the right direction, and he has also mentioned a second currency, as I have recommended. I sent the proposal to Dr. Paul's campaign committee but can't claim authorship of the idea, but at least we're thinking along the same lines. But no solution to the problem will ever be enough if we don't understand how we came to this disastrous state.

About six-million years ago, before the Lords arrived, our ancestors were nomads, hunter-gatherers who roamed the forests and savannahs of the pristine world in search of small game, roots, and berries. Theirs was a pure subsistence economy; in modern terms we would call it a Consumer Economy, just like we have now. They didn't produce anything as everything they needed lay all about just for the taking. It was a hand-to-mouth existence but it had it's good points; none of these primitives went bankrupt, had their caves foreclosed, their clubs and spears repossessed; it wasn't all bad. These people lived from nature and were healthy; they didn't need doctors, psychiatrists, prescription drugs, health care, or retirement plans. Then something happened.
Eatly man, Homo Habilis, settled down about four-million years ago. They did this because of the introduction of agriculture, an art taught them by the Lords, as it seems unlikely that early man, habituated as he was to hunting and gathering, would have the time or inclination to develop horticulture on his own. Villages sprang up around the arable land and man acquired something he never had before.
Spare time. But wait! Let's back up a moment.
Lords of the World, you may ask. Settlers from somewhere " out there '?
Yes. Consider these facts. First, it is amply clear that isolated peoples never progress beyond the tribal level of socialization. Cultures advance only through contact with a more developed society: that's history. Where did it start? Even when hunter-gatherers came into contact with others of their kind, these others were no more developed that they were - so where could the advancement have come from?
Also, as old habits die hard, it seems very likely that the Lords would have taught early man animal husbandry: raising cattle, pigs, chickens, etc., as man was well used to killing and eating animals, and these had a nasty habit of running away.
And time was of the essence. People accustomed to satisfying their needs on a daily basis, employing methods that have proven successful, rarely take the time to think about other, more complex matters. Perhaps this is the source of mankind's inbred resistance to change. A primitive version of " if it's working, why fix it? "
No, there's much more to it than that.
Consider the development of agriculture. It is much more than popping a seed into the ground and watching for it to grow. The soil must be arable and conducive to plant growth; not all soils can claim this distinction. Another problem would be with the tending of the crop, a task that would necessarily involve a settled group of people to see to the proper watering and to ensure that no animal could just come along and eat the whole spread. Small tribal units constantly on the move would be reluctant to leave any of their small number behind to conduct such experiments for two reasons; one, their presence would be missed as important part of the hunting and gathering process, and two, those left behind would be vulnerable to attack by wild beasts or other small tribes which might not be too friendly. Then there is the question of when to sow a crop. Owing to the reasons already given for keeping the tribe together and on the move, it is also highly unlikely that any members would be afforded the time to conduct meteorological and seasonal research for the purpose of identifying the best time to plant and to harvest the crop. It's just too complicated to have been just " discovered ". But we got there eventually, and our reward for our labors was something entirely different.

Surplus. The subsistence economy of the hunter-gatherers was pure Consumerism flavored by immediate gratification. The only things that were traded were blows when two tribes found themselves eying the same boar. Or the same water hole. But with agriculture and the raising of domestictaed food animals, either those who produced it or those who became it, man was able to settle into more-or-less stable habitats. I personally claim descendacy from these people because their two favorite words are also my favorites: Free and More!
Surpluses had to be disposed of in some manner since they were perishable, or in the case of livestock, had a tendency to eat too much and multiply. Where on group had a surplus of cattle and another a surplus of pigs the two engaged in the first instances of trade, the exchange of commodities known as Barter. Simple?
Well, not entirely. Barter, though a primitive form of exchange, did have some stikingly modern considerations attached to it. One of these was Present-Value-Future-Value. A two year-old cow was worth more than one nine years old. A bull was worth more than a cow. There was also the matter of condition: animals were prone to disease and vegetation to rot and blights, some of which might not be readily apparent. Barterers took great pains in their deliberations. If all was well a bargain was struck. Simple?
Not exactly. There was also matter of supply and demand which affected the trade. If one of the traders wished to sell more than the other wished to buy, or vise-versa, this would affect the final agreement. The agreed terms of the trade constituted the Exchange Value, one of the characteristics of money. But because of the factors listed above, three trades of the same commodities could have three different values of exchange.
Barter was slow and some theorists have proposed that early man developed a set of standards wherein the values of commodities were based on a fixed relationship with a single good. The proposed standard in those days was one head of cattle against which the values of all other goods were compared. This would have proved to be of little added value: barter still took time.

Things plugged along this way for some time until the discovery of copper. Here we must pause to consider. If the development of agriculture presents problems explaining itself in terms of the itinerant, hunter-gatherer tribes, then the "discovery" of copper would present even greater problems. I believe that this was another gift of the Lords. Consider.
We are still stuck with the hunter-gatherer societies with no clear idea how they advanced their cultures while busy surviving in the primordial wilderness. Out there is was kill or be killed, the constant battle between predator and prey - and it still goes on today. The discovery of fire lent light and warmth, but it was out there, plainly seen and only needing to be harnessed. Copper is an ore that is not so readily apparent. It melts at just less than 2,000°F, much hotter that any wood fire used for cooking. What clue would the primitives have had of a metallic substance embedded in certain kinds of rock? And even if they knew, how would they conceive of making things from this substance? No, the simplistic view of history is just too full of holes. " Yeah! You guys go ahead and chase that wooly mamouth. I'll stay behind, build a real hot fire, and cook some rocks to see what comes out of them. "

However it came to be, copper waas the answer to barter, while being a form of barter itself but of a different kind. Being a metal, copper was immune from the ravages of injury, disease, aging, and decay: a pound of copper is a pound of copper, whether produced yesterday or ten years ago. In terms of utility, copper was also used to make a whole variety of impliments, tools and ( sigh! ) weapons; therefore it was a general good, rather than a specific commodity. Copper became the first Medium of Exchange, the fist specie metal. Economics really took off then!
The universal appeal of copper made it possible for trade to flourish as never before, and as it flourished it grew to transcend borders and waterways; caravans and ships carried goods ever farther afield, and copper was the blood that coursed through the arteries of trade. But as the volume of trade increased in most, if not all, commodities so did the amounts of copper needed to complete transactions. This caused a problem, since large amounts of copper were difficult to transport, and were always at risk of being stolen.
The Chinese are generally credited with the invention of paper money, but that is only a guess. This step certainly called for a literate society with a facility for the written word and some mathematics. Combining the need of some substitute for the transfer of copper from one place to another and the capacity for keeping records, it seems logical that one party to a trade would envision a solution: a Letter of Credit.
These letters of credit were not actual currency as they were not yet used for general ditribution, but they did have one characteristic important to money: they would be accepted by the issuing party for goods and services. Thus begn the trading of paper instead of actual metal - but you had to have the copper. Trade among nations relied heavily on thepossession of copper or the resources and manufactured goods to secure quantities of it. It was the first step in distinguishing between powerful and weak nations, later to be translated into wars of conquest. But for a time things went well; then a problem.
Over time it became apparent to the ruling powers that economies tended toward depression. There were two reasons for this: increased population, and the banking system of the time. Population growth acted on curency by thinning it out: if ten people equally divide a million dollars, each would have $100,000; if there were a hundred-thousand people, then each would have only ten dollars, a million people would have one dollar each. The need for currency putstripped the means to acquire specie metal, so more money was printed to keep up. This is called devaluation. In modest amounts devaluation does no real harm; carried to extremes it courts disaster.
The banking systemsback then also contributed to depressed economies by being storehouses for wealth, a place where wealthy merchants stored their treasure for safe keeping, where it was out of circulation. In fact they paid the banks for keeping their resources. Eventually banks started paying depositors interest and lending money.
All the while populations grew exponentially while the stocks of copper expanded by volume, creating the need for more currency. Expanding foreign trade further exacerbated the need for liquidity, and currencies began to devalue. As long as the value of a currency was predicated on a hard-currency principle there were natural curbs on population growth, levels of trade, and the dearth of money promoted greater efficiency. But our unlimited wants prevailed and societies began devaluating their currencies; when paper money replaced letters of credit, they began creating money out of thin air. Inflation became a fiscal way of life.
As stocks of copper grew apace with volumes of trade, it became less likely that one party would demand full restitution in copper, after all they were trading paper, and in the absence of any regulatory agency they just printed more coupons, which is what paper money actually is. Here, it is useful; to examine the phenomenon of inflation.