August 2011 – Page 3

Layman’s Terms: What Is the S&P Downgrade?

Well, I was going to rattle off my thoughts on the S&P downgrade like everybody else but first I thought I’d make a post explaining what that even means to help give some context for anyone who doesn’t follow world financial news or even national financial news all the time.

So, basically, there are three organizations known as the Big 3 credit ratings agencies – Standard & Poor’s (S&P), Moody’s, and Fitch. There are investors all over the world, from rich billionaires to folks managing the retirement portfolios of middle-class Americans, and they like to make more money by loaning the money they have to various groups of people, from governments to homebuyers, who pay it back with interest. Except sometimes, of course, people can’t pay the money back when it’s due – maybe a country got into too much debt and is about to collapse, or maybe a million people bought homes they couldn’t afford and then lost their jobs and then stopped making house payments and now the group that originally loaned the money to the homebuyers from the investors can’t pay the investors back. That’s oversimplified, of course, but the main point is that when you loan money there’s a good chance you’ll get more money back but always a small chance you won’t get any of it back. In general, the more investors are wary of a certain borrower, the higher the interest rate they will require to loan them money. If the interest rate for, say, bonds issued by a certain country is low enough that there aren’t enough investors willing to get in on it, then the rate goes up until enough investors get attracted by it so the country can borrow as much money as they need for that time period, and that’s partly why interest rates all over the world go up and down all the time.

This is all well and good, but it gets rather complicated. for your average portfolio manager (let’s name him Max). If Jane Smith has $25 coming out of her check every two weeks to save for her retirement, Max tries to decide where best to invest the money. But there are thousands of places where he could put that money, from stock markets to government bonds all over the world, and he doesn’t have time to keep up with the ever-changing details of every country’s financial situation – right now the 5% interest rate on Italy bonds is a way better return than every stock market in the world, but the reason it’s so high is there are increasing fears that the government there might default – so Max probably doesn’t want to put Jane’s money there. But that’s just one example, and Max doesn’t have time to keep up with the ever-changing risks associated with the thousands of available options. So how does he decide where to put Jane’s money?

Continue reading Layman’s Terms: What Is the S&P Downgrade?

What’s Wrong With Mandated Paid Vacation?

I’ve been reading The Price of Everything by Eduardo Porter, which was recommended to me by, of all things, a copy of Relevant Magazine I got from Cornerstone Festival, and it’s got a lot of interesting information in it. Some of it has to do with how money relates to happiness. We know in general that money can’t buy happiness, but Porter looks at decades’ worth of surveys done across dozens of countries that attempt to measure satisfaction, well-being, and happiness. He concludes that generally people in richer countries are happier than people in poorer countries, but that the happiness gains from income gains seem to level off once you hit a rich enough point, partially because things like time start to matter more than money:

Time is relatively more valuable to the rich, who already have money, than for the poor who don’t… The value of our time also rises with age. That’s because wages increase as we proceed on our careers, gain expertise, and acquire seniority. The number of hours in the day, by contrast, does not. (p. 34)

Porter claims that according to surveys, life satisfaction actually fell in the United States in recent years even though it has increased in most other countries. He says that while Americans are on average more than one-third richer than French or Germans, we report about the same level of happiness, and he has a pretty good theory, related to the value of time, as to why this is the case:

No other workers in the industrial world work as much as Americans. Every country in the OECD except the United States mandates a combination of paid leave and paid public holidays… While the time devoted to work has declined in most industrial countries, in the United States it has remained flat over the past thirty years…

This work has produced a lot of growth… Yet perhaps what went wrong is that all the happiness gained by Americans from the extra income was consumed by the unhappiness of having to work seventy-six more hours a year to get it. Compare this with the situation in France. The French economy has grown a little more slowly. But the French worked 260 fewer hours in 1997 than in 1975… The trade-off changes as we become richer. The value of our scarce free time increases, while the things money can buy become less important the more we have. (p. 75-76)

Well, that’s pretty interesting, isn’t it? The libertarian in me thinks there’s already way too many government requirements for businesses, and the proper response to a desire for mandated paid vacation would be to write it off without a thought. Just because all the other countries do it… yeah, that’s what they said about health care too. The more you require things out of companies, the more they just make up for it by paying employees less or charging more for products; nothing is free and everything has a cost; extra regulations just slow down the economy and make it harder for us to make progress.

But what if we’ve already made enough progress that an extra week or two of free time would make us happier than the extra economic progress from the work? That’s a tantalizing thought. (For perspective, note that it’s estimated that about 75% of American workers already receive some paid vacation, although most of them probably do not get the several weeks offered in some European countries.) I’ve already seen time become more valuable to me as I grow up, and I’m only 22. Even the poor in the modern United States are fairly well-off, as this information from the Heritage Foundation suggests:

We already have plenty of stuff. Even if a mandate for paid vacation slowed economic progress in the United States, maybe we would all be happier. Of course, there are other arguments that we don’t want more vacation in the United States. CNN says, “Only 57% of U.S. workers use up all of the days they’re entitled to, compared with 89% of workers in France, a recent Reuters/Ipsos poll found… Working more makes Americans happier than Europeans, according to a study published recently in the Journal of Happiness Studies.” We get fewer vacation days, but we don’t even use them all – a bunch of us sure aren’t acting like more time off would make us happier.

Continue reading What’s Wrong With Mandated Paid Vacation?

End Aid To China. We Send Aid to China?!

They say that raw fraud and waste and inefficiency doesn’t make up a very large part of the budget. They say that all the easy low-hanging fruit has already been picked in the last couple years, and the only stuff left to cut requires hard decisions and painful sacrifices. But I sure keep getting surprised by stories of members of Congress trying to cut spending that I didn’t even know was happening. Here’s the latest:

WASHINGTON — A bipartisan group of senators is calling for an end to tens of millions of annual U.S. development aid to China, saying there are more needy countries than the world’s second-largest economy, which has trillions in foreign reserves.

The eight Democrats and four Republicans made their appeal Thursday to a Senate appropriations committee that must approve foreign aid funding for the fiscal year starting in October.

They urge an end to all development aid for China other than for Tibetans and for promoting human rights.

They say since 2001, the U.S. has provided more than $275 million in direct assistance to China, such as for expanding Internet access and improving public transportation.

If we’re still sending million of dollars to China to help them build roads or whatever – something we arguably shouldn’t have been doing in the first place – then I have to believe there’s still billions of dollars of easy cuts out there to horribly inefficient and unnecessary spending. (Also note that this one started when Bush was president.)

The irony with this one is that you could say the money we gave China probably came from China anyway. But the difference between this and China funding their own infrastructure is that we still have to pay the $275 million back.

The Narrative Fallacy and the Debt Ceiling

In Nassim Nicholas Taleb’s interesting book The Black Swan, he talks about the “narrative fallacy,” wherein we like to confidently prescribe reasons for random events. This happens all the time in financial news. Last Thursday the stock market dropped, and the headlines said, “Buyers exit market before House debt plan vote.” The article said:

U.S. stocks faded in the afternoon on Thursday to end mostly lower, with investors skeptical a key vote by Congress would lead to a deal to avoid a U.S. default. The S&P 500 fell for a fourth straight day as buyers kept to the sidelines while lawmakers tried to hash out an agreement on the deficit.

The next day, Friday, the stock market dropped again, bringing the Dow Jones loss over the last six days to 581 points. And what did the news say? Wall St ends worst week in a year on debt stalemate. Or, Markets on edge as debt limit debate drags on:

The Dow Jones industrial average fell nearly 100 points, its sixth straight decline, as the U.S. edged closer to a Tuesday deadline to raise the country’s borrowing limit or risk the prospect of a debt default.

Wow. We didn’t know if Congress was gonna pass a bill to extend the debt ceiling by August 2 (even though that date was part of even more atrocious reporting), and apparently investors were worried. That was repeatedly given as the reason for the stock market going down all last week. Then Sunday night they hammered out a deal, the House passed it on Monday, the Senate passed it on Tuesday, and it got signed into law. So what happened on Tuesday, August 2?

Stocks now down for year as economic concerns grow:

The stock market fell sharply Tuesday because investors have grown increasingly worried about the economy.

Aww! So much for the buyers coming off the sidelines because the debt ceiling got raised. Now it’s just the economy! But does anybody have any doubt what the headlines would have said if the Dow had dropped 265 points today and we hadn’t passed the debt ceiling bill?