Maybe you could.  Because interest rates aren’t just driven on the likelihood of default, they are also dependent on the market.  And while the US went from being “near perfect” to “perfect-ish”, the global bond market has been in turmoil.  This means that the US is still considered the safest place in the world to park your money, and so rates have fallen.  Just as a person with a 700 credit score today can get a better loan rate than someone with 750 a couple of years ago.

Rates have gotten so low they’ve actually been at zero percent recently and traded at a negative yield in the secondary market. The US Treasury may soon offer some short term Treasury bills with what’s called a negative coupon.  When investors submit bids for the bills they might offer $101 for a bill worth $100.  Under normal circumstances they might bid $99.  In 4 weeks the US would give them $100 back in either circumstance. When investors are allowed to bid $101 for the a $100 bill, that is a negative return, or negative interest rate.  The idea of investors paying for the privilege to lend money to the US is so weird the Treasury systems will have to be updated just to make it possible.  But this is something that has already been happening in the secondary market for these bills and so by updating their systems, the Treasury would either have to borrow less or could perhaps consider taking the proceeds and putting it towards our national debt.

Negative interest rates are not common, but you can effectively see them all around you.  Think about your checking account.  When you deposit money into a bank you are loaning it to them.  They will pay you a small rate (if at all) for allowing them to borrow it.  But then the bank slaps you with a couple of fees every month and even if you are getting interest the fees more than offset it.  So you’re paying the bank for the privilege to lend them your money.  Banks don’t see it this way because of all their overhead, but essentially that’s what you got.

Does it make you kind of wish banks would just get rid of fees and charge a negative interest rate?  Part of me feels that way.  Ditch all the fees, just charge 1% per year based on some kind of average balance.  But that will never fly because each account has a basic fixed cost.  If it costs $100 a year (it’s actually more) to keep a checking account going and they need $20k in balances to make that back then they aren’t going to charge wealthier customers for their business.  They wouldn’t need to because they could make the money back elsewhere.  People with balances below that line will just cost the bank money.  So you’d end up with a segregated population that is divided by the people who pay for the privilege to lend the bank money and have access to their  cash, and the people that are paid to have the same access.

Banks know that middle and lower-income demographics won’t respond well to that, so instead you have the al la cart menu fees which, while annoying, have the appearance of being fairer.  Plus no consumer is going to park $50k in a place that pays -1%.  So while the Treasury is looking forward to indulge in a little negative interest rate territory don’t expect to see it show up on your banking documents for a long time.

Read: Treasury may let investors pay to lend to U.S. government (Reuters)

Negative Bill Auction Yields Would Avoid ‘Grab-a-Thon’ (Bloomberg)

Image: SqueakyMarmot

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The year of 2011 may go down in history as the year that never was. Our financial markets, despite a rollercoaster ride throughout much of the period, ended the year amazingly enough at roughly the same levels as where they started. The S&P 500 index concluded 2012 at 1,257, the same as a year ago. The Euro versus the Dollar was still at $1.30, a figure difficult to accept with all of the dour news pouring across the Atlantic, and the Yen remained strong in spite of a horrific earthquake and devastating tsunami.

It may be time to buckle your seatbelts or resort to taking a long-lasting sleeping potion. Most experts believe that we will see a repeat of 2011 right before our very eyes in 2012. Hopefully, we learned a few lessons along the way, but here is a brief recap of a few significant events that transpired over the past twelve months:

• We learned to broaden our definition of the word “crisis”. The European debt crisis actually began to surface in November of 2009, and it is now entering its third year on the global stage. The word “crisis”, as a matter of fact, comes to us from the Greeks and is supposed to represent a situation that has reached a critical phase. Perhaps, things move more slowly in Europe or the “critical phase” keeps being delayed by political machinations, but the officials in the know are now telling us that the so-called crisis may last for years. It is hard to believe that a country with an economy no larger that that for Dallas-Ft. Worth could cause such a stir, but credit default swaps may be the “culprit” once again, this time on sovereign bond issues instead of toxic mortgages;
• In Japan, we witnessed a true natural and national crisis occur back in March. For some of the hardest working people on the planet, an earthquake and a subsequent tsunami was the last thing anyone expected for a country still trying to recover from two decades of recession. Living on the “Rim of Fire” is far more risky than living in California, as “24/7” news cameras revealed. The national grid came to a screeching halt, export trade froze in its tracks, yet the Yen strengthened, even after several interventions by the Bank of Japan and other central banks. A weaker currency would bolster the rebuilding effort in progress;
• On our shores, the Fed was successful in expanding the money supply by its buyback of $600 billion in securities with its quantitative easing program, dubbed “QE2” by the press. Banks were still hesitant to loan the funds to small businesses, stalling the modest recovery that began to take shape before June. What will make commercial banks focus on lending instead of transaction–based bonus compensation? Bring back “Glass-Steagall” was often heard in many corridors, but political gridlock blocked the debate on any new initiatives and resulted in a credit-rating downgrade, to boot;
• We learned that uncertainty begets volatility in our financial markets. Equities, commodities, and currencies gyrated wildly during the year, yet the Euro and Yen maintained strong positions despite numerous shorting attempts by forex traders. The lesson was that, in a time of crisis, banks, companies, and individuals repatriate their private “stashes” of assets overseas for survival of the home front. These capital flows thwarted major forex hedge funds and retail traders alike, leaving both groups speechless and recording losses.

Hope you paid attention in 2011 – the “record” is stuck in “repeat” and still playing!

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It’s quite simple really. Communist China and the USSR were close allies during the Cold War. Of course the US spent much of the cold war trying to spread democracy around the world. With it came capitalism too. In the 1970s some in China started to realize that the Communist system wasn’t going to survive in its current state.

They proposed reforms that through the last 3 decades have lead us to where China is today. Russia stayed the course and suffered a collapse. China slowly reformed its economy and now you can get stuff for next to nothing.

Think about it this way, many manufacturers in the US actually outsource the production to a Chinese factory. Chinese labor is cheap and American companies can enter into a contract with them because of the reforms in China. As a result goods in the US are very cheap. We get free toys with our Happy Meals, Walmart allows you to get whatever you want at whatever price you want so long as it came from China, and every weekend we go out shopping for more crap to put into our McMansions.

Because stuff has gotten so cheap, we’ve been able to buy more of it. If laptops cost $2000 for a basic machine again, we wouldn’t be able to waste money on new trays for the silverware, or that fifth vase.

As China was liberalizing economically, we were growing, physically. We got fatter and our houses got bigger. Laptops dropped to less than $1000, we could get coffee tables for the price of a family dinner at Subway, and our houses got filled with stuff.

If we hadn’t won the cold war, we would probably still be making most of our stuff in the US. That stuff would be pricier and we wouldn’t be able to afford as much crap. But it is just crap, and we’d be perfectly fine, or arguable better, with out it.

Now someone reading this will question whether we won the Cold War. Allow me to clarify. We didn’t win so much as communism lost. Communism was replaced by capitalism, which was a catalyst for globalization.

We could all choose to buy less stuff, but you can’t expect an entire population to do that. What you can expect is that over time the price of crap will become expensive again. Cheap labor is becoming harder and hard to come by. And the cost of a global supply chain is too pricey to ship goods half-way across the globe.

Consider the last twenty years the prize for the consumer winning over the communist. Of course, this all came at the expense of the American manufacturing worker.  Enjoy your crap America.

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In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.

It’s certainly not surprising is it? It makes perfect sense considering the rise of banking and Wall Street over the last generation or so. This blog has said before that this rise also lead to greater levels of compensation, and thus drew talent that may have otherwise focused on other areas (like science or education). This probably further grew the industry’s share of the economy. And when people read these kinds of comments about the rise of Wall Street it is worrisome that they always think this is a bad thing.

Consider the following. Your grandparents likely retired on a pension and collected social security and hardly ever needed to save for retirement. In 1950 the average person lived to be 68 years old. Retirement didn’t last very long, if at all. In 2009, we were living to be 78, and we all know this number is only going to rise with time. That’s an extra decade of living expenses. How is that being paid for? Pensions have had to invest considerably more money in order to deal with the burden of people living longer. Reforms here and there occasionally soften the blow for them, but the burden is still much higher than it used to be. Pensions now invest in riskier securities, and get better returns too. Wall Street’s role was to facilitate the transactions that enabled these pensions to survive just a little bit longer and pay the retirements of all these people.  And to say nothing of the rising insurance needs of the aging population.  Those premiums are invested too. When a new demand is born, an industry grows.

When you consider that baby boomers are just now retiring the rise of Wall Street makes even more sense. These were the first group of people that may have to sustain their retirement with personal savings and investments. 401(k)s became very popular in the 1980s and of course still are; IRAs too. Now people were taking their retirement into their own hands. This gave rise to the mutual fund industry and now you have a bulging population entering the prime of their careers and saving for their own retirement. Again, an industry grew to service this demand.

Just as everyone was taking responsibility for their own retirements, the internet was about to start growing too. With the internet, people were able to take their own financial management to a new level. Soon, people would be able to buy and sell stocks within a few minutes, and then seconds through online brokerages. Once again, an industry rose to meet this demand.

Further still, consider the globalization that has occurred. More so than ever before, we are engaging in huge levels of trade, moving trillions of dollars to Moscow, Beijing, Tokyo, London, Singapore, Dubai, and Rio. This movement happens at the speed of light and the infrastructure to enable it was built and managed by the finance industry.

The rise of Wall Street shouldn’t be concerning at all. Given the changing demographics and economy, it makes perfect sense. And what of the greed and the financial crisis? Unfortunately, finance is not a stable industry. The financial crisis had a lot of causes, and Wall Street was certainly part of that. Together with a poor incentive structure, they again rose to meet a demand. This is a case of the industry getting ahead of itself.

No one should be surprised nor concerned that the industry continues to be a large part of the economy. Our lives are more financially complicated. The financial crisis is a perfect example of the growing pains. It’s impossible for this industry to grow and meet demand without making mistakes. Everyone made mistakes. I’m no apologist for the criminal, greedy, and immoral acts in any industry. But the rise of finance as a share of GDP is merely a reactionary metric of the way the world has changed.

Image: Jan Tik

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There are no real surprises from any of his returns.  Mitt is likely an honest guy and all we’re really going to see in his returns is just how complicated the financial lives of the Romneys are.  People like Mitt often create small companies just to manage their wealth because it can be so complicated.  There is nothing illegal about it, and really nothing immoral either.  But none of that matters.  I worry that by running for President, and being guilted into opening up his books, Romney may have doomed rich people.

Romney has done what the Occupy protestors have not been able to do, put a face on the 1%.  Previously, the focus was on the greed of bankers.  But Romney is making more than bankers do and it’s just residual income to him.

Be releasing his returns, Mitt Romney has now put into context exactly what people hate about the current tax system.  Sure Warren Buffett can talk about paying a lower rate than his secretary, but Mitt just gave the world a line-by-line inside view of how little he pays in taxes as a percentage of his income.

And there are many the can hope to make political gains based on his income.  The current President has already supported higher taxes on the wealthy, mainly in the form increasing the rates that Romney has benefited from.  GOP lawmakers have countered by saying such tax increases punish the job-creators (a line even a private equity insider says is kind of dumb).  Most of this conversation comes back to the taxes on investment income, which is taxed at a much lower rate than normal income.  This is a conversation that happens every once in a while but quickly falls out of the headlines.  Romney is shining a big, bright light on this tax rate and as long as he’s running it’s going to be a hot topic.

If it’s possible to worry for rich people, I am.  I am no political strategist but it is easy to imagine Obama’s team crafting a message around Romney’s career and taxes to leverage a populist opinion.  This could carry Obama back into the White House and give some power in Congress back to the Democrats.

None of this is necessarily good or bad, it’s just something that could shape the national conversation over the course of most of 2012.  We’ll see what will happen, but Romney’s taxes could give Democrats everything they need to sway enough opinion away.

What could help the rich keep these tax rates?  An improving economy could distract people enough and reshape the conversation back towards other policy issues.

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The plain English version is this: If these laws passed and someone posted a comment on Weakonomics linking to a site that might be doing something like letting you download movies illegally, I can get shut down. In the real world, if someone tried to sell bootlegged CDs in a single Walmart, the copyright owner could conceivably shut down every Walmart in the world. It’s impossible to police such things, especially on the internet.

Via: @acedtect

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You can find a poll to support just about anything. And recent polls support that idea. Another recent poll is showing people are very interested in changing the income tax deduction on mortgage interest and about a quarter of people are okay with eliminating it altogether.

Back before the days of the mortgage crisis I always thought the deduction to be kind of silly. It was believed that the deduction would encourage more people to buy homes, and that home ownership was better for the economy. A number of policies were put in place to encourage home ownership, especially at the lower income levels, and that’s partially where the subprime mortgage originated from.

The deduction didn’t make sense for a couple of reasons. First of all, it isn’t really fair to allow a deduction on mortgage interest and not something for rent. Second, I would expect most lower income people able to get a mortgage would probably just take the standard deduction instead of deducting interest anyway.

A number of ideas have been proposed to encourage home ownership among lower income earners and many could serve as a potential replacement for the interest deduction. The most well-known is the first time home buyer tax credit. This famously put a temporary floor on housing prices when it was available to people. When it expired, prices fell again. If this were available only to first time buyers then it does a good job of helping people get up and running. Unlike the standard deduction, it would likely play more of a factor into the home buying decision.

Another idea is to limit who can take the deduction based on income. If you make a certain amount, you can’t deduct. From a government revenue perspective that sounds nice but I don’t think it’s fair. Perhaps the solution would be to make it so you can only deduct interest on the first mortgage, not a HELOC or mortgage for another house.

Here’s what sucks about the mortgage deduction today though. I don’t think it plays a factor in anyone’s decision to purchase a home. It’s just a nice to have. Since it’s a deduction you have to file for each year, it doesn’t have the effect of lowering the purchase price or keeping your payments low. Likely, all it does it boost your federal return a little bit every spring.

Honestly, I think there should be some equity. If we’re going to subsidize monthly payments on mortgages, we should do the same for rent. Just like if you have to buy your own health insurance, you should be able to deduct that too. But tax policy in this country isn’t efficient or well-planned. That’s why I’m very much in support of changing the way the deduction works now. But, because I don’t think the current deduction even factors in 99% of home-buying decisions, I’m okay with eliminating it completely.

Image: iAudioguide

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But it’s certainly going to be a point of conversation and will once again grab some headlines leading up to the election which is now a short (some would say) 10 months away.

Almost everyone has an opinion on healthcare in the US.  Some believe it’s a human right, others think costs are out of control due to liability, and still others note a big problem being poor record keeping.  Almost everyone has a problem with the current system, and almost everyone agrees that the costs are out of control.

As the chart above points out, healthcare spending has been a runaway problem.  Keep in mind, this isn’t a chart of increased healthcare spending over time.  It’s a chart of how much of GDP is taken up by healthcare spending.  It’s almost insane that close to $1 in $5 spent in the US is on healthcare.

But there is good news.  Spending is leveling off.  From 2009 and 2010, healthcare spending increased only 4%, the slowest pace in 50 years.  As a result, the amount of GDP taken up by healthcare spending stayed flat just under 18%.  Said another way, healthcare spending might be getting under control.  Are digitized records and hospital mergers finally paying off?  Are medical schools coming up with cheaper procedures?  Sadly, no.

What is happening is people are cutting back on healthcare just like they have everything else since the recession struck.  That wart on your finger isn’t hurting anyone, why pay someone to freeze it off?  Coughing up blood is a part of my morning ritual, no reason to go to the hospital right?  So maybe the second example is an exaggeration, but the first isn’t.  People are cutting back on tests and procedures.  And doctors are prescribing cheaper medications.  It wouldn’t be surprising if hospitals are smarting up as well.  If customers may not be able to pay for some needless tests, they might pass on them.  Much like changing your oil every 3000 miles, there’s probably some urban legend type procedures that doctors order despite not necessarily being appropriate.

Though digitizing records, new pharmaceutical laws, and other innovations may help streamline the system, the real way to reduce costs is to reduce demand.  Hospitals have demand generation procedures to drive business, and patients have demand for services.  Both seem to be cutting back a bit.  Hopefully this is a trend that can improve the lives of everyone.

Whether it’s a trend or not though, there’s still a long way to go.  5% of the population account for half of all healthcare costs and baby boomers have yet to start becoming a burden on the system.  Getting healthcare costs under control will benefit everyone.  Even if you don’t have insurance and don’t go to the doctor, you still pay taxes that pays for other people to go to the doctor.  Hopefully this is a trend and maybe we’ll see a reversal of rising costs while still increasing quality of life.

Data: Centers for Medicare & Medicaid Services

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Unfortunately for folks like Newt Gingrich, Mitt doesn’t have many real legitimate points at which he can be attacked.  Much of the focus has been on his past at Bain Capital.  By now we should all be familiar with the story.  He ran a company called Bain Capital that bought other companies and then later sold them for (hopefully) a huge profit.  Mitt made hundreds of millions running Bain and continues to collect income from it even today.  What actually happened to the companies Bain bought under Mitt’s leadership is a point of contention between Romney and his rivals.

The media have not been helping the matter as it’s pretty clear they don’t understand how all this works.  Here’s what people like Newt or Perry would say: Mitt raided down-home good American companies, laid off down-home good American people, sent jobs overseas, and then sold the companies for a huge profit. He got rich at the expense of others (Not to digress but it’s freaking hilarious that Republicans are bashing Romney for being a better capitalist than they are).

So the story goes.  Romney would tell it differently, his claim is that he created 100k jobs.  It’s an impossible number to verify, but it really doesn’t matter.  I actually don’t care at all if he created jobs or removed them, because whatever number you come up with can be contested.  What matters is the bad rep private equity has been getting.

Here’s the thing about what Romney and Bain Capital did.  They came in and bought companies no one else really wanted.  Companies owned by people who didn’t want to own them anymore or perhaps didn’t even have the money to stay up and running.  Bain bought Domino’s when the founder wanted to retire.  He wasn’t forced to sell to them, he chose to.

Bain Capital got into this business because the Bain consulting company had been very successful at consulting.  They thought, “if we’re so good at helping other companies fix problems, why don’t we just buy some companies and fix them ourselves?”  That’s what Mitt did.  Yes he likely was responsible for a number of layoffs he did what every other executive does.  They run the company the way they best see fit.  Sometimes layoffs are necessary for survival.  And if 500 jobs need to be outsourced or eliminated so that 7000 can survive, so be it.

The key here is that Romney wasn’t a job creator, he was perhaps a job preserver.  He helped keep companies moving.  If someone wanted to sell their company he bought it.  He would do what he thought was best to improve it, just as any owner would.  In some cases he, along with Bain, saved companies and jobs.  In others, they eliminated jobs.

That is the world of private equity.  I no more endorse Mitt than any other candidate, but it’s a flat out joke for Romney to be attacked for his past, especially by Republicans.  He’s a capitalist through and through.  And if you own mutual funds of any kind it is very likely you own companies that do the same thing.  You likely own companies that employ thousands of people that wouldn’t exist without Bain too.

Romney enriched himself by making smart investments and employing his knowledge to run companies.  Jobs are a byproduct of business, and they come and go like tides.  They are never the point, in any way.

Read more: Private Equity, Venture Capital, and the difference.

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Not so fast.  Such a tax could be great for the US, but at the same time to could be bad.  And it would of course create huge fights in Congress.

The right will start by saying this is an infringement on people’s rights.  Might like a cigarette tax is designed to punish behavior.  This is arguably unfair.  It’s something I agree with.  Cigarette taxes are more understandable because the smoke can bother other people.  But why should anyone get in the way of someone who wants to enjoy a soda?  And why just call out sodas?  Why not tax frappuccinos too?  How about potato chips?  They all contribute to obesity and reduced consumption would help.  A tax just on sodas is unfair, and may not solve the problem.  People will just switch to drinks that aren’t subject to the tax.  Companies like Pepsi will suffer huge losses due to a tax that doesn’t even solve the problem.  And let’s not even get started on what the government would do with it’s new revenue source.

These are all legitimate arguments that I believe in.

But I’m as blue as I am red.  The government is desperate for new revenue sources.  This is the kind that Republicans can be convinced to implement because it doesn’t hurt their traditionally more wealthy constituency.  I believe that government can implement responsible policy and while I concede a soda tax doesn’t solve all the problems, it’s a step in the right direction. It’s clear to me that while people are free to make their own decisions, they typically don’t make the best ones.  Like the cigarette tax, this helps reduce consumption of something that’s bad for people.  It also helps raise much needed funds for the government.

Again, all legitimate arguments that I believe in.

This being an election year, I should feel sick.  How can I have two completely different viewpoints on the same issue?  Actually, it’s quite easy.  It’s called being a moderate.  Politicians might call me a flip-flopper, which outside of our extreme political spectrum I would take as a sign of someone that is willing to be convinced they are wrong.  But there’s no place for me in American politics.  Being a largely rational human being, I find myself in the middle of the arguments above.

If you look at sales of soda over the last few years, they’ve actually been falling.  It’s not just the recession that accounts for that, because other types of beverages have increased in sales.  Part of that is due to people smarting up about sodas.  Part of it too are increased prices on sodas in the checkout lane.  It wasn’t so long ago you could easily find a 20 oz for a buck.  Not anymore. But to hit that magic dollar mark again manufacturers have introduced 16 oz bottles.  That means soda companies are making the same or more while you consume less.  All without the help of a national tax.  So you’ve got a lot of factors outside of the politics of the issue.

Where do I stand on this issue?  Somewhere in the middle.  It’s a problem for sure, but it could be a problem that solves itself in time.  I’m a bit too skeptical to believe a study that tries to extrapolate the direct health benefit of a soda tax.  People will likely get their fix some other way.  Extremists will start making their own soda, or if the tax got really high they’d buy it on the black market.  You think that’s a joke?  There’s been such a market for cigarettes forever.  At the same time, getting a tax on the books will raise some revenue, and adjust some behaviors.  Do I need to make a decision about this?  No.  I pay people in Congress to figure it out.  But what I expect is open-minded conversations and for these hundreds of supposedly competent politicians to actually come up with a solution to a problem they can agree on.

Image: robad0b

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