Category Archives: Economic Theories

Beware the Fed

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There is an old axiom on Wall Street:  “Don’t fight the Fed.”

The Federal Reserve holds an enormous amount of power over the economy.  While the President is usually blamed for a bad economy and praised for a good one, the fact is that the federal reserve actually has significantly more power over the state of the economy.

Despite the name, the Federal Reserve is not an institution of the Federal Government.  The Federal Reserve is made up of a board of bank executives from around the country — the “Governors” — with one individual chosen as the Chairman.  The Chairman is chosen by the President and confirmed by the Congress, but the post is meant to be non-political.  The group meets periodically to discuss the state of the economy and any action that should be taken.  The power of the Federal Reserve over the economy is so acute that the discussions held during the meetings are kept in secret with notes from the meeting only being released several months after they meet.

Often traders will move the stock market up or down before the Federal Reserve meets based on what they expect the group to decide.  If the group’s decision surprises the market, the stock market will often move up or down several percentage points.  The announcements made by the Federal Reserve are purposely made rather vague since they know the power of their words.


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The Federal Reserve controls the economy through two levers, the Discount Rate and the Fed Funds Rate.  The discount rate (http://en.wikipedia.org/wiki/Discount_rate) is the amount that the Federal Reserve charges banks that borrow funds from it.  Generally, it is frowned upon for banks to borrow from the Federal Reserve directly and they generally get a scolding when they do so.  The exception is during the recent money crisis where borrowing from the discount window was encouraged since other sources of capital had dried up.

The Federal Funds Rate (http://en.wikipedia.org/wiki/Fed_Funds_Rate) is the rate at which banks loan each other for overnight periods.  The Federal Reserve does not control the Fed Funds rate directly, but instead adds money to the economy or takes it away to affect the rate.  This is done by selling notes, which has the effect of removing money from the economy, or buying notes, which injects money into the economy.  Like anything else, the more money there is in the economy to lend, the lower the price for borrowing (therefore the lower the interest rate).

Because the bank’s costs of capital decrease when the rate at which they can obtain decreases, they also tend to lower the rates they charge.  This trickles up into the economy (except, interestingly, credit card rates), such that most rates tend to fall.  Because the rate savings accounts provide drops, bonds become more valuable, so their price tends to rise, dropping the amount of interest they provide.  Likewise, because the return of common stocks becomes more valuable, stock prices also tend to rise.

This is the reason to not “fight the Fed.”  When the Fed is lowering rates, it’s best not to be short, and when the Fed is raising rates, it’s best to prepare for a fall.  Note that in the early ’90’s, the Federal Reserve lowered interest rates to bring the economy out of the early 90’s recession.  The stock market took off first, followed by the economy.  President Clinton was credited with the good economy that followed, but it was all touched off by the Federal Reserve.

In the late 90’s, when inflation was starting to pick up and internet stocks were trading at ridiculous prices, Fed Chief Alan Greenspan warned of what he called “irrational exuberance.”  The Fed began raising rates to pick the ensuing bubble.  A few months later, the bubble burst and the early 2000 recession occurred.  President George Bush Junior was blamed for this recession, but the stock market had already started to fall before he took office because of the actions of the Federal Reserve.  Finally, just before the latest recession, the Federal Reserve, concerned about housing prices, began to raise rates to dampen the economy.  This caused the housing bubble to burst, leading to the current state.

The action of the Federal reserve typically takes half a year to have an effect.  It takes time for companies to start borrowing and hiring after rates are lowered.  Likewise, when the economy has a good head of steam it takes time for the wheels to grind to a halt.  The Federal Reserve set rates at near zero in 2008 and had been waiting for the economy to pick up.  It appears that there has finally started to be some growth, and the Feds are starting to slowly raise rates because they fear inflation picking up.  As they do so, it is likely to slow the economy and may cause stocks and bonds to fall, at least temporarily.

It would not be wise to fight the Fed.  If you have money invested that you need within a couple of years, it might be wise to take opportunities to sell.  If you are invested long-term, however, it would probably be better to just stay put.  You don’t know if the effects will be immediate or if there will be a great run-up through this New Years’ season as there often is.  If President Trump is able to get a tax cut through, that will also add fuel to the fire and you might miss out on a great advance in stock prices before the Fed’s effect is finally felt.  The effects of the Fed are temporary and matter little if you’re investing for 20 years.  Missing a big move up in stocks because you’re sitting on the sidelines will.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Love Letter to the American Press

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Mushrooms

Dear American Press,

You have always been an important part of my life.  From a young age I remember sitting at the breakfast bar in our house, reading through the local newspaper.  When I was younger still, I remember that they brightly colored Sunday comics were always anticipated and savored each week.  Through my teens I watched the local and national news each night.  Your anchors and reporters became uncles and aunts to me who would visit each night to tell about things happening around town, around the nation, and around the world.  I particularly remember being impressed by the local weather man, Stu Tracy, who would throw up the suns and rain symbols that would magnetically stick to the map.  I never understood how he would remember just where each symbol would go and was disappointed when he stopped creating the map real-time, instead having it setup before the forecast.

In college I made the decision to spend an hour each day in a particular chair in the student union and pour through the Wall Street Journal, cover-to-cover, as well as Barrons on the day it came out.  I also remember the start of CNN and ’round-the-clock coverage during the first Gulf War.  How amazing it was to be able to be there in Baghdad as the American bombs were falling.  I remember the chill in the air as Saddam Hussein fired scuds at American troops and Israeli cities that could be filled with chemical agents, never knowing where one might land.

              

Yes, I have loved you for all of my life.  But to truly love someone also means to be truthful when that person is making bad decisions that are hurting her.  To act like things were just fine when someone you love it tearing herself apart is not love, but enabling.  Having someone speak up may bring about anger and resentment, sometimes causing an irreconcilable split in the relationship.  It would be far easier to stay silent and not bring up difficult issues, but that would not be love.  God says to treat others as we would like to be treated; that should go doubly for someone we love.  If I were destroying my life, I would want someone to tell me.  So here goes….

Your reporting is full of incomplete and biased information – even some flat-out lies at times – and that is causing people to not trust you anymore.

OK – there it is.  Right out on-the-table.  I know that you think that people are generally ignorant and even dull, such that they would not know that you were trying to manipulate them through the facts you tell and the ones you leave out, the words you choose, and even the stories you choose to cover and those you don’t.  But they are seeing right through you and it is causing them to turn away.   They don’t want to be around you because you’re trying to get them to believe an alternative reality and then to act accordingly.  You want them to think that nationalized health care is a great thing, while they see the premiums rise and their doctor networks shrink.  You want them to believe that higher taxes, government programs, and strong regulations are the road to happiness for the middle and poverty class, but they have seen jobs disappear, wages stagnate or decline, and poverty increase as these things have come to pass.

Bottom line:  They no longer feel like they can trust you.

          

Need a little Honesty?  It’s such a lonely word.

And you see, trust is everything for you.  People don’t buy your papers or watch your newscasts because they like your witty writing and snappy graphics.  They don’t give a couple of hours of their valuable time each day to watch the evening news and read the morning paper because they want to be told what they should think, particularly when there are such clear holes in that thinking.  They do so because they have a need to know the truth about things for which they can not discover the facts themselves.  They cannot go to Iraq or Afghanistan and see the conditions and the interaction between the local people and American troops.  They cannot spend all day in Washington D.C. and see if their representatives are passing laws with which they agree and spending the people’s money wisely.  They cannot go to the police stations across the country and see if laws are being enforced fairly and effectively, if certain cities are safe or dangerous, and if government agencies are being run efficiently.  The desperately need someone to do this for them so that they then have the information that they need to make the right decisions.  

You are supposed to be the one who finds out the truth for them.

This is why your prevarication, equivocation, replacement of opponent viewpoints with straw man arguments, and manipulation of the facts is so damaging in your relationship with them.  If your product is truth, “All the news that is fit to print,” as one of your publications says, then damaging that trust is the worst possible thing that you could do to them.  They can tolerate mistakes, but they cannot tolerate lies and distortion.  There are plenty of more interesting things they could watch on TV for entertainment or tabloids they could find in the checkout line if they want to read great fictional stories.  They go to you for the truth, but you have let them down time and again, and they know it. 

                   

Lips are Movin’ $1.29 at Amazon                

Right now, I see that you are shaking your head.  You say that you may stretch things from time-to-time, but your overall purpose is to guide people to a bigger truth and the way you see the world, so changing things around once in a while or selectively leaving some things out that would just confuse people is justifiable.  And that is a big part of the problem.

You lack so much diversity of thought, since all of your employees coming from places where only one point-of-view was allowed, that you don’t even know that you are seeing the world through terribly distorting lenses.

People – evil people who want to seize control in America by centralizing power in a large government – have gone into the universities, then even the high school and grade schools, and filled them with people who all have the mindset that big government is good and socialism (and even communism) are better than free enterprise and capitalism.  The education you received did not include all of the facts, plus it included a lot of unverified conjectures.  If anyone questioned what was presented as facts, they were chastised and humiliated by the teacher and their peers.  People who initially didn’t believe in socialism either dropped out of the major or were made to change their minds.  They may have seen the inconsistencies, but they felt it was for the greater good that they just go along.  And so they came out of the classrooms and went into the newsrooms unable to objectively examine the facts.  They were sent with a mission to convince the readers and viewers that the orthodoxy they were taught in their schools is the right one.  

They became propagandists rather than journalists, even if they did not realize it.

Even once your journalists enter their careers, they continue to shelter themselves from other opinions.  Your newsrooms are echo chambers where everyone agrees with what they say, and your employees live in cities where everyone feels the same.  They are so sheltered that they come to think that their opinions are those of the average American.  They also think that they are far smarter than most people.  That everyone else has the intellect of a child compared to them.  Smart people think the way they do – anyone else is either ignorant or trying to take advantage of the foolish.  Hmm….  They are so convinced that they know better that even when they are proven wrong, such as in the last election when they were sure which candidate would win and the other did, they think there must be some sort of mistake.  Or some boogeyman like the Russians changed things.

          

And another thing….

Referring to the land occupying 90% of the United States as “fly over country” and thinking that those who live there are unimportant isn’t a good way to keep readers and viewers.

Now before you say that they watched and they read and they listened just fine before the internet came along and took their attention, let me counter.  You are right that fewer people are reading your newspapers and watching your evening news casts because of the internet, but it is not because the internet is more exciting or convenient.  If that were the case, people would be flocking to your online content as they stopped getting a daily paper.  But they aren’t, are they?  And no, it isn’t because of right-wing propaganda from talk radio and Fox News either, although both of those sources are part of your problem. 

Alternative news sources like the internet, Fox news, and talk radio are providing the facts that you are leaving out.

They are also providing alternative viewpoints and explanations.  They are giving different reasons why things may happen as they do.  They give different predictions about the effects of policies and government actions.  They also provide logical explanations for their predictions and assessments, rather than just focusing on people’s emotions or dictating how people should feel and what they should do.  They don’t just provide conjecture, using a snooty voice to make their listeners think they need to think the same way or they are stupid.  “Obviously, trickle down economics don’t work.”  “Even a fool should know that raising tax rates brings in more money for the government.”    The alternative news sources are resonating with the hearts of people because those who have worked a real job, built something, or had the real experience of trying to raise a family can tell logical explanations and ideas from, well, what they’re stepping in sometimes in fly over country.

So, it is with great sadness that I now need to tell you that I’m leaving. I no longer want you to show up on my doorstep in the morning.  I won’t be there with you before dinner or at night before going to bed.  I won’t waste my time listening to what you have to say, because I cannot trust what you are telling me and I have better things to do.  I also will not be telling you what I have to say, by writing letters to your editors, since doing so only helps you continue on your destructive course and gives you hope that continuing along the same path will eventual lead you to a better place.

No, it is better to step away and let you hit rock bottom, for it is often only by hitting rock bottom that people decide that they need to change.  I wish you best of luck.

Take care of yourself, because I won’t be there until you change your ways.

With great sadness, love,

SI

Got a comment?  Please use the form below to let me know what you think.  Please also leave a comment or contact me via vtsioriginal@yahoo.com if you’ve got an investing question you’d like to see featured.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Hey Republicans – Here’s Your Chance. Don’t Blow It.

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McKiosk?

                        McKiosk?

A couple of months ago, it looked like America was going to choose Socialism.  Like the Soviet Union and Venezuela, we would have seen jobs (continue to) stagnate, inflation rise, cronyism and corruption become the only way to become wealthy, and government in every aspect of our lives.  MSNBC was writing the obituary of the Republican party, and deservedly so, given the pitiful performance we saw the last time Republicans were in control of the White House.

Instead, Republicans have gained almost unprecedented control.  Not only do they control both houses of Congress and the White House, but the Governorships and legislatures of 25 states.  They now have the power to get most legislation that they want through and create or do away with all sorts of regulations.  They have gotten here by campaigning against an ever-expanding government, increased government control of virtually every aspect of the economy, and large amounts of government debt.  The question now is, will the Republicans actually do what they promised and replace government control with free enterprise and free markets, or is it all just talk and they’ll continue to use regulation and tax policies to enrich their friends as they’ve done in the past?

The last Republican President that we had who truly believed in the free market was President Reagan, and like President-Elect Trump, those in the Republican establishment hated him.  But President Reagan understood how government policies, in particular tax policies, affected the economy.  As he explained, as a high earning individual paying the highest tax rates on the last dollars of his income, there was a strong incentive for him to limit how many movies he made a year.  With progressive tax rates very high beyond a certain level of earnings, the second, third, and forth movies he made in a year would result in much less of a payday than the first one.  Since he was getting so little, relatively, there was a strong incentive for him to sit at the pool rather than get up and go into the studio, or travel somewhere in live in a trailer for several months, after he had made the first movie or two and had enough income to take care of his needs.

But movies don’t just make money for the stars.  There is a whole movie crew, caterers, set-builders, hotel workers, gas station attendants, restaurant workers, theater workers, and theater supplier network that benefits by more movies being made.  If Ronald Reagan just sat home rather than make more movies, there would be less work for these individuals.  Most of these people were not the wealthy, but the working class and those just starting in the economy.

So President Reagan cut the tax rates in the middle of a dismal recession, ignoring the cries that he would destroy government revenues and hurt the economy.  The terms, “trickle-down economics” and “Reaganomics,” were coined to mock the President and his policies.  What followed was an economic expansion that continued for 19 years until the higher tax rates imposed by Presidents George H.W. Bush and Bill Clinton brought the expansion to an end.  Instead of falling, government revenues actually grew with the economy.

Today, as government has taken control of the healthcare markets, we’ve seen premiums prices and deductibles soar.  More distressing, we’ve seen provider networks shrink and many doctors leave the market.  For the first time in modern American history we’re seeing people having difficulty getting the care they need because there are no providers that take their insurance near them and waiting times are growing to see the few that remain.  Imagine needing a heart surgery immediately and being told that it will be a month or two before you can get into the operating room!

The answers to America’s healthcare costs are simple and based upon free-enterprise principles.  Require everyone to save some of their money so that they’ll be able to pay for their own basic care out-of-pocket.  This will cut costs for everyone who is paying since they won’t need to pay for others’ medical care and since the costs for billing by the doctor’s office will be less.  Require everyone to get a major medical insurance policy so that they’ll be covered should a major health event occur.   Require doctors post their true, no-kidding prices in a way that would allow smart phone apps and websites to direct patients to the low-cost providers in their area.  This will eliminate the inefficient market that currently exists that causes aspirin to cost $10 each at a hospital or the same procedure to be $5000 at one clinic and $700 across town at another.  Get patients to care about the costs they are paying.  Get healthcare providers to compete for patients so they are motivated to improve quality and/or make their practices efficient.  Expand the deductibility of charitable giving to hospitals and clinics that treat those who cannot pay so those who would otherwise fall through the cracks could be covered.

You’ll notice above that I am suggesting the government require people to do things like save for healthcare and buy major medical insurance, which is not a free enterprise principle.  As with auto insurance, there are a lot of irresponsible people who will not save for healthcare or buy major medical insurance unless they are required to do so, so I do believe there is a government role to ensure people do the responsible thing.  This protects both them and society from the burden they will impose when they are not responsible.  True free-enterprise would be to allow those who don’t save to go without healthcare as a motivator to be responsible, but obviously that is not a choice in a compassionate society since there would always be some individuals who would get caught, so the requirement to at least save and buy insurance for major events, while not dictating how that money is saved and having competition among insurance providers, will strike a good balance that protects both society and individual freedom.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Five Economic Reasons to Like a Trump Presidency

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So about half of the country is happy to see Donald Trump as the President Elect, while the other half is freaking out.  At least Donald Trump hasn’t made up a little sign that says “The Office of the President Elect”  for the podium when he speaks like Obama did in 2008.  I’m sure that there will be things that President Trump will do that will be disappointing.  From a purely economic standpoint, however, there are reasons to be happy to see a President Trump, beyond just the huge rally that the stock market has made since the results of the election were announced.  Here are a few:

  1. Full-Time Work.  You may have noticed that there have been a lot of people in part-time work since about 2011.  A big reason for this is that part of the Affordable Care Act, aka “Obamacare,” requires that employers who have 50 or more full-time employees to provide extensive, expensive health insurance for their employees.  And full-time employee was defined as working more than 30 hours per week.  For an employer, following the law might mean that adding just one more employee to your small business would mean a new bill for $500,000 or more added to your expenses.  This has resulted in a lot of businesses keeping most workers at 29 hours per week.  This meant that not only did people still not have health insurance, but they got less pay as well.  If Trump repeals Obamacare as promised, this restriction should go away and employers should start offering full-time work again.
  2.  Lower Corporate Taxes.  Trump has promised to lower corporate taxes to 15% from their current levels in the 30’s.  While you may be upset that these “evil corporations” will now be paying less in taxes than they have been, realize that the corporations don’t really pay the taxes – you do.  Taxes are just a cost of doing business, so if the government charges a corporation more in taxes, they just raise their prices (and/or lower their wages).  Taxes also have no effect on the salaries of the chief executives.  If anything, if a company makes higher revenues because their prices are higher, the CEO may make a higher salary since it is a smaller fraction of the size of the business.  If corporate taxes are cut, expect for prices to fall, and maybe for worker salaries to rise ( a small amount).
  3. Less Regulation.  Trump has also promised to cut regulations on businesses.  And these aren’t regulations like “don’t make products that kill people.”  These are regulations like “fill out all of this paperwork that no one reads.”  This is just a cost which once again results in prices of goods and services being higher, because, once again, the costs just get passed on to the consumer.  Cutting regulations will also mean that fewer people will be generating paperwork that no one reads, which means maybe they’ll be making something useful.  The more people there are making useful things, the richer our society is and the more there is to go around.
  4. Actually Affordable Health Insurance.  A prime issue with the affordable care act is that it requires everyone to pay for insurance that covers everything  (after you pay a huge amount in premiums and a super-high deductible).  You can’t choose to go with a cheaper policy that you can afford that will cover big things, but not the smaller things.  Think of it as being forced to buy auto insurance that covers new tires and oil changes when all you really want is collision.  Repealing Obamacare will allow insurers to sell major medical plans again.  These will allow people to buy coverage for when they’re in the hospital, but not include all of the little things that drive the premiums up.  Combine this with more transparency in health care prices (like requiring hospitals and doctors to post the prices they actually charge like other businesses do) and you’ll see healthcare costs fall to the point where they are affordable.
  5. A Faster-Moving Economy.  After the market crash of 1929, the US stayed in recession until about the time we entered  WWII.  A big reason was that the Roosevelt Administration was passing all sorts of worker regulations like minimum wages and restrictions of lay-offs and firings.  This was great if you had a job, but it made a lot of companies leery to hire anyone.  The Affordable Care Act and Dodd-Frank have caused a slow economy as well ever since the 2008 crash, although not as bad as the 1930’s (because the crash wasn’t as bad as the 1930’s).  More recent Executive Orders and regulations requiring employers to treat salary workers at relatively high pay levels like wage employees, including paying overtime, has resulted in employers restricting the hours of those employees, making it tough for them to advance.  Look for a President Trump to cut these regulations and rescind these Executive Orders, which will result in a hotter economy and more jobs.

So there you have it:  Full-time work, lower prices, less wasted time at work, affordable health insurance, and more jobs with higher salaries if President-Elect Trump actually carries through with his promises.  No wonder the markets are shooting up..

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Hey GenY, You Really Aren’t a Socialist

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IMG_0123About a third of those in the GenY/Millennial demographic back Socialism according to an April Harvard Institute of Politics Survey, while just under half support Capitalism.  This trend has been seen in the support for Bernie Sanders in the Democratic primary among young voters.  Yet I wonder if all of those young voters are rejecting Capitalism, or just what passes as Capitalism in the US lately.

Capitalism is when the free markets decide on wages, prices, and success or failure of a business.  At the core of Capitalism is the need to provide for the needs of people in the most efficient way.  Companies that are able to serve the needs of the most people the most efficiently are rewarded and grow.  Those that don’t serve needs effectively fail.  Think about two restaurants across the street from each other.  Both serve your need to eat.  If one had slow, surly service and charged $20 for a baloney sandwich, while the other had fast, friendly service and charged $6 for a hamburger and fries, you and virtually everyone else would go to the second restaurant.  They served your needs better and more efficiently.

Socialism, on-the-other-hand, is when the government either owns the businesses/provides the services directly or has so much control of businesses through regulations that they effectively own the businesses.  Under Socialism, businesses that have the best connections politically are the ones that succeed because government officials adjust regulations to benefit those with pull.  Also, groups with political pull get special advantages over others.  The needs of the customer rarely gets much thought because the government generally doesn’t answer to the customer.

In our restaurant example, under Socialism, the baloney place  might stay in business if the owner had connections in the government because the burger place might be taxed and proceeds given to the baloney place.  Maybe the baloney place charges $20 for a sandwich because they pay their workers $15 per hour, and they are therefore seen as more benevolent than the burger place that pays workers $7 per hour.  Under Socialism, the burger place might also be forced to raise their wages to the point where the burgers cost $25 each and the quality was lower to keep the price from going even higher.  The workers would then be getting $15 per hour, but they wouldn’t be able to get a meal below $20, so they really wouldn’t be doing any better.  There would also likely be fewer workers since the restaurant might need to automate to cut costs, or maybe just the owner and his family might run the place without workers so that they wouldn’t need to pay the high wages at all, so there would be no jobs.

Really, the things that millennials find so distasteful about the US economy are due to government interference with the economy.  In other words, Socialistic actions.  For example:

  • Under Capitalism, the investment banks that made the bad loans in 2008 would have failed.  The CEOs and bankers who made the bad loans would have been out of a job and had to leave without their golden parachutes.  In a few days, new banks would have sprung up, hiring most of the people who had worked at the old banks, because banking services are needed.  They would have bought the loans worth buying from the failed banks.   Instead, the bank CEOs who made gobs of money when times were good were bailed out with our money by the government, leaving the same people in leadership positions.  If you want people to be rewarded only when they grow jobs and provide good services, and you want people whose greed and mismanagement results in the ruin of companies and lost jobs to be removed from leadership, you are not a Socialist.
  • Under Capitalism, if you wanted to start a hot dog stand (or another business), you would just go buy the cart, hot dogs, cooker, condiments, and a sign and open for business.  Existing businesses, however, have used their connections in the government to create all sorts of regulations, making it difficult for you to open your business.  Public safety is often used as a reason for the regulations, but many regulations just place a burden that keeps new companies from starting.  If you want the ability to start a business easily, you are not a Socialist.
  • Under Capitalism, there would be many businesses for most services,  This would lower prices to the minimum reasonable price since charging more would result in a loss of business.  Socialism would limit choices since you wouldn’t be able to start a business without the OK of the government, or there would just be one business – the government.  This would mean that you would pay more for things because there were limited choices.  If you don’t like to get overcharged because you have no choice, you are not a Socialist.
  • Just as Capitalism creates competition for consumers which lowers prices, it creates competition for workers which increases wages.  With Socialism, you are paid on a preset scale, usually based on the amount of time you have worked at a location.  You might also be paid based on perceived need.  If there is corruption (as there always will be), people who have political pull will be paid more.  If you want to be paid based upon the value you bring to your company, you are not a Socialist.

So, if you dislike business bailouts, big monopolies, lack of opportunity, high prices, and wages based on political pull and tenure, you are not a Socialst.  Maybe it’s time to reconsider that Bernie support.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Have Affordable, Plentiful Healthcare- Part 2

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Fountain

In part 1 of this post, reader Carl challenged me in a comment to provide solid numbers for the cost of a room in a hospital.  Well, I dug into the 2013 HCA   year-end report (HCA is a large company that manages several hospitals across the US) and here’s what I found:

In 2013, they had 42,896 hospital beds in their hospitals.  Those beds were full 54% of the time.   =.

That year they had 1,744,100 admissions and 2,844,700 equivalent admissions.  Admissions are people actually admitted to the hospital, while equivalent admissions is a representation of how many admissions they would have had if outpatients were counted as admissions for the amount of time they spent.  From a ratio of admissions to equivalent admissions, you find that the ratio of inpatients to everything is about  61% of the admissions are inpatient.

From a ratio of admissions to equivalent admissions, you find that the ratio of inpatients to everything is about  61% of the admissions.  Let’s therefore assume that about 61% of the hospital costs are inpatient costs.

For 2013, their total costs were $29.62 B.  Taking that number, multiplying by 61%, and then dividing by the number of beds times the number of days in a year, times the occupancy rate, you get:

$2210 per bed per day

Now this includes not only the cost of the room and staff to check on you while you’re in a room, but the cost of surgeries, supplies, and so on.  Given that these other activities like surgeries are a lot more costly for the hospital than a room where you lie around, I think my guestimate of $500 or so per day was probably fairly close.  Even at $1000 a night, it is a bargain compared to the list prices.

Other things in the report:

Managed care and insured are 30% of the business, but pay 46% of the costs.

This shows that you are subsidizing others, including those on Medicare and Medicaid, as well as those who don’t pay (charity care), when you have insurance or pay out-of-pocket.  Medicare was 45% of the business, but paid only 39% of the costs.  Medicaid was 17% of the business, but paid only 10% of the costs.  Charity care was 16% of the business, but paid 0% of the costs.

If people were forced to save up money for healthcare, such that most people had money to pay the bills when the need arose, we would see costs for those who are responsible (those who currently have insurance or pay themselves) drop by at least 50%.

Probably the most telling number was the gross charges, which were $181.1 B.  Compare this with the costs (already stated) of $29.62 B,  and you have charges of more than 600% of costs.  This is the list price you see on the bill and the charges that you get if you walk in without insurance.  The hospital only has revenues of $34.18 B, meaning that most people (those with insurance or the government programs) don’t pay anywhere near the list prices.  The average ratio of money  paid to costs was 115%.

This means that the people who don’t have insurance are hit with a bill of six times what things actually cost, whiole the insurance company only pays 1.15 times costs.

If you have the money but no insurance, you probably end up paying this hugely inflated cost.  If you have the money but are willing to fight a bit, you still probably pay 2-3 times costs while on average people are only paying 1.15 times costs.  This means that the people paying out-of-pocket are subsidizing the low payments made by the insurance companies and the government.  This forces people to get insurance or risk facing astronomical hospital bills.

This issue would be solved by making pricing transparent.  There is no way that you could charge someone six times costs while others were paying 1.15 times costs.  If prices were posted – true prices, not what they list but then cut by huge amounts if you have insurance – web aps would quickly pop up to show people the lowest prices and hospitals would be forced to drop their list prices to compete.  Suddenly you would be paying $1000 per night for a hospital bed instead of $12,000, making it easy to cover the costs with the money you had in your HSA for medical care.

Forcing people to save up money and pricing transparency relally are the path to affordable, plentiful, high-quality healthcare.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Have Affordable, Plentiful Healthcare

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IMG_0123There are a lot of things wrong with the Affordable Healthcare Act, a.k.a Obamacare.  Requiring all insurance to cover everything rather than letting people buy plans to cover what they can afford to cover is a bad idea.  Having health insurance pay for routine costs like checkups and doctor’s visits is a bad idea.  Putting everyone’s health information online where it can be stolen and used for embarrassment and blackmail is a really bad idea.  It should be repealed and replaced with something far better.  It did get one thing right, however, that should be part of that something much better – the requirement that everyone contribute to their healthcare costs if they are at all able.

Now I do think that this provision of Obamacare – the requirement that everyone buy insurance or face a fine – is unconstitutional and Justice Roberts got it wrong.  You can’t force someone to buy something just because they breathe air.  There is nothing in the Constitution saying the government can force citizens to buy health insurance or anything else.  Still, the option if we did not would be to let people die in the streets if they did not do the right things – get a job and save up some of their money for healthcare costs – and therefore were not able to pay for healthcare.  This is not an acceptable option in our society.  There is therefore little choice but to require people to do what they should be doing – putting aside some of their money to buy healthcare before they buy new cars and a load of junk at Wal-Mart.

The issue with Obamacare on this front, however, is that they are having people put aside money in the wrong way.  It is a pay-as-you-go system, just like Medicare and Social Security.  Both of these programs rely on the right demographics – lots of young people and only a few old people – since the money paid in today is used today, with excesses used to fund other stuff that it shouldn’t rather than being saved up in case the demographics shift.   In ten years it won’t matter if you’ve put aside money every year for healthcare and never used any of it since the money you put it will have been spent on other people.  If there is extra put away, that will be squandered just as the excesses from Social Security were squandered.  Unless there are people there, paying in money for you when you need healthcare, you’re just out of luck.

Plus, they aren’t even really forcing people to put money away because they know all of those young voters who thought they will get free healthcare would turn mean and nasty if they were fined for not paying for expensive insurance.  Sure, this is what they signed up for when they elected Obama (twice), but many of them didn’t read the fine print and choose instead to believe the lies and the rhetoric.  So instead of fining them enough to force them to buy really overpriced insurance, they have been given all sorts of waivers for whatever reason they come up with and the Obama Administration has been delaying implementation of the fines.  This has meant that those who were paying, because they were sick or just foolish, have been paying more and more.  As prices rise because fewer people are paying, fewer people pay, driving up the cost for those who do pay.

But we could have affordable, plentiful healthcare.  It just requires we use the same  free-enterprise methods that have made housing, clothing, and food affordable and plentiful.  We just need to undo everything that was done to healthcare once insurance started and start over.  Here’s what is needed:

1.  Require most people to pay for their healthcare.  Currently, if you go to the hospital, you’ll pay tens of thousands of dollars a night for the room and $10 per pill for aspirin.  It is not that hospital rooms cost that much per night to man, or aspirin are really expensive to transport to the hospital.  The reason is that a lot of people are paying only part of their bill – or none of their bill.  The cost is therefore “whatever you can pay,” and those who are able to pay more – either because they have the money or because they have been buying insurance, or because they are taxpayers – do pay more.  Lots more.

Think of it this way;  If you were to go out and have a steak dinner with friends, it might cost you $30 each.  Maybe $40 each if you add a couple of bottles of wine.  Sure, that’s pricey, but it seems worth the price.  But now what if there are ten friends, but only two paid the bill.  Now each of the people paying would be paying five times as much for the same meal.  Suddenly that $30 steak dinner cost $150 – certainly an outrageous price.

Healthcare is the same way.  A hospital puts a list price of $10,000 a night for a room at the hospital, which maybe cost them $500 per night to staff and pay for the room in the building.  Some people plead poverty and the hospital charges them nothing.  They talk about how wonderful it was for the hospital to give them free care.  Many people have insurance and pay $5,000 per night, including $1500 they pay themselves and $3500 that the insurance picks up.  They gripe a bit, but end up talking about how glad they were to have insurance since it both cut their bill and covered part of it.  The last group is made up of people who have saved up rather than spending their money, or those who make decent wages and can pay the bill given a year or two.  They end up paying the full $10,000, covering for the people who get free healthcare and those who got a cut rate due to their insurance.

The first step to plentiful and affordable healthcare is to expect most people to pay their own bill.

2.  Make sure people save up to pay their bills.  Most people see millions of dollars go through their hands during their working lifetimes, yet can’t shell out $10,000 for a hospital stay.  (This is assuming hospitals only charged you what your stay really cost, plus a reasonable profit).  You need to make sure people have the money needed to pay the bills when they come due.  The solution here is to require people to put away a few hundred dollars from each paycheck into a health savings account.  This way, they’ll have the money to pay the bill.  Note this is the same idea that is in Obamacare where everyone would be forced to buy insurance.  The difference is that the money you need would be sitting there, waiting for you, rather than have already been spent to cover someone else’s healthcare.

People also need to have major medical insurance for the rare and very serious things that happen to a few people.  This is how people can pay for the heart transplant or chemotherapy, which truly is expensive.  If everyone throws a little money into the pot based on the chance they’ll need to use it, the cost will be very low and the money will be there to pay for these procedures when needed.  Again, everyone pays for their healthcare.

3.  Make pricing transparent,  Along with making people pay for their procedures is making the pricing transparent.  This means that the price the doctor charges is really what she charges, not a first, ridiculous offer that no one except those with no negotiating power – the uninsured who have money – pay.  It also means making prices published online so that people can comparison shop.  It is crazy that a procedure that costs $5,000 in one place may cost $750 across town.  If prices were published, these differences would go away.  Think of a website where you enter your procedure and it gives you choices of doctors and locations just like a hotel room site.  Price differentials would be a thing of the past.

So there you have it.  Three simple steps to make healthcare plentiful, high-quality, and affordable.  Now we just need to undo the mess that has already been made.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why the Young and the Old Should Oppose a $15 Minimum Wage

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IMG_0123It seems like the idea of a $15 minimum wage just won’t die. As they like to do with these things, those who are pushing for a minimum wage hike won’t give up until it is enacted.  Once it is and all of the minimum wage jobs go away, as is very predictable, they’ll then say it was the fault of rich corporations.  Odd how they never take blame for the bad ideas.

Understand that the crowd pushing for the $15 minimum wage is the same people who unionized the auto industry and made is so people could never be fired, wages and benefits were high and fixed, and whether you were laid off or not depended only on your seniority – never your work quality or speed.  There was a time when people were sitting in a room for weeks at a time at the large auto manufacturing plants, playing cards, reading the paper, or just talking, because they could not be laid off. If there were no cars to be made, they just got paid to sit there.  Once all of the plants left Detroit and the place became a wasteland, just as those of us who can do math expected, the closings were blamed on bad moves by management and greedy executives.  Never were the absurd work rules and labor costs that exceeded the money being generated by the workers blamed for the plant closings.  No one mentioned the people paid to do nothing and the effect they had on the bottom line.

Now the same people who destroyed Detroit are trying to get the minimum wage raised to $15.  Understand they don’t really care about minimum wage earners.  They just want to see minimum wage increase since the union wages are tied to minimum wage.  If minimum wage earners get $15 per hour, they suddenly get $40 per hour.  If union workers get paid more, the unions get more money.   Some of that money goes to get Democratic officials elected, who then use the power of government to create more absurd work and pay rules.  It is a vicious, corrupt circle.

But maybe you think, “So what?  It would still be great to make $15 per hour.  Think of all that extra money.”

Realize that the company is only making a couple of dollars per hour off of each minimum wage worker.  The worker is making the majority of the wealth being created.  Companies just make a lot of money because they employ a lot of workers.   You could not raise wages to $15 per hour since the company isn’t making enough to cover those wages.  Maybe during the fast times, but not during the slow hours.  If you try to raise wages beyond what the workers are producing, one of two things could happen.  Something would need to happen since a company can’t keep paying out more in salaries than they are bringing in from customers.  In actuality, a combination of both would happen.  These are:

1.  Companies would cut back on workers until they were bringing in enough to pay the workers and generate a reasonable profit.

2.  Companies would raise prices to cover the salaries.

Cutting workers would mean cutting the number of people at a business during a given shift and leave more work for the people who remain to do.  This would mean companies would only keep the most capable workers – those who were able to do the additional work.  People who aren’t able to produce at a higher rate would be let go.  Technology would be used wherever possible to replace workers – expect to see a lot of self-service, phone apps, and kiosks.  Companies wouldn’t hire many young workers with no experience because they wouldn’t have the ability to have you learn on the job.  This would make it very difficult to find a summer job or even a first real job because almost all jobs would require experience and a really strong work ethic.  This is why young people should be against a raise in the minimum wage.

Old, retired people should be against this as well because of the second consequence, higher prices.  For those working, wages would rise if prices went up, so you’d need $15 to buy a burger and fries instead of $6, but you would be making $15 per hour.  Note you would still need to work about an hour to pay for a meal at a fast food restaurant – there would be no change in the amount of work needed to buy a given product since there would be no increase in your efficiency just because you were paid more.

Older people wouldn’t see an increase in wages since they were not working, however.  This means that the amount of money they had in their retirement savings, assuming it was in bank CDs as many people’s is, would effectively be cut in half.  People who are receiving money from a fixed annuity would also see their income drastically cut since they would be receiving the same number of dollars but those dollars would buy far less.

The effect would go far beyond fast food restaurants.  People in the healthcare industry include a lot of people currently making less than $15 per hour, so health care costs would soar.  Ditto for things like maid service and senior care, home repairs, services like cable TV, and even buying food at the grocery store.  You might still have $50,000 per year in income from savings and annuities, but it would buy what $25,000 buys now.  You would need to trade the hard work you did for so many years for far less.  Many of the hours of work you put in would simply be stolen.

So if you’re young or old, you should be opposing a minimum wage hike.  The only people it helps is the union bosses.  Everyone else loses their job or sees their savings evaporate.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Office Microwave – A Test of Capitalism

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Ask SmallIvy

This is a post I wrote a few years back.  I wanted to resurrect it for new blog readers since I enjoyed writing it so much.  –SI

While you may not realize it, if you work in a mid to large-sized office, you have been living in a Communist society.  This is not to say that your daily job functions involve distributing copies of Pravda, or that you are working for free.  From those readily available clothes you are wearing to that latte you had on your way into work, you spend the majority of your day enjoying the products of capitalism.

I’m talking about that 5-10 minutes of your day where you step from your office into the office break room.  It is then that you drop behind the red curtain.  For it is there that you encounter the office refrigerator and, that nemeses of the office manager, the office microwave.

Use of these items causes you to, perhaps unknowingly, enter into a communist collective of office property users.  The microwave is owned by everyone, and everyone is supposed to use it as needed but keep it clean.  Each takes according to their needs and gives according to their gifts.  If everyone were diligent of leaving it as they found it, there would be no problem.  Eventually though, someone cooks something uncovered, which spills or generally spreads food stuff all over the microwave, and then leaves without cleaning things up.  This will probably happen over time, but as the microwave becomes dirtier more people will feel justified in not cleaning up after themselves.

At first there may be a few people who get sick of the conditions and clean up the mess, but if this continues, those people (and it’s always the same people) will get tired of always being the ones.  There will be others who clean up their own messes, but don’t feel that they should need to clean up after others.  Eventually those who did shoulder more than their share of the cleaning load will stop cleaning and get their own microwaves or find another way to leave the collective.

One would think that living in an area with managers or professionals would mean a cleaner microwave, but this is probably not the case. In fact, many of those who have attained stature may decide that cleaning up is below their status. They may feel that the use of the microwave without cleaning up is one of their perks. After all, they are very busy on important things.

At this point there becomes a rapidly increasing quantity of food on the walls and ceiling of the microwave, after which only the most die-hard of users will continue to use the microwave.  Disease, famine, and death will follow.

This same scenario is right now playing out at offices around the country.  It does not need to be this way, however.  Capitalism, the process that built the great cities in America and brought prosperity to all of those who were willing to work for it can save even the office break room.  Here’s how.

Place a jar on the counter with instructions that those who use the microwave or refrigerator should pay a cleaning fee.  This can be a very small amount, perhaps 5-10 cents per day.  You could also just put a jar with the notice that it is for “donations to keep the break area clean”.  While the honor system will probably work for the collections, the cash raised should be kept with someone trustworthy in the office.

Each week, the amount raised should be posted in the break room next to the jar.  A notice should also be included that states that whomever cleans up the microwave (or the refrigerator) will receive the collections.

As time passes and the microwave gets filthier, the cash amount will build.  Some people, eager to get a clean microwave, may make extra donations.  Eventually it will be enough, maybe $20 or $40, to entice someone to do the work and collect the proceeds.  At that point the microwave gets cleaned, the person holding the money checks to make sure the job is done well, the worker is paid the reward, and the process starts again.

Eventually people may start cleaning the microwave sooner in order to claim the prize, so the price will drop and the frequency will increase.  It may even become a game to see who can swoop in at the right moment to collect the money.

If instead of following the communist system, which will lead to substandard conditions, feelings of resentment, and eventual threats to get people to clean up, let the capitalist system work.  Have people pay for the service of having the microwave cleaned and have someone collect a fair reward for doing the work.  Everyone will be happy.  Or you could continue with a system that has failed at offices across the country.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Don’t We Have the Fair Tax Yet? A Late Night Rant.

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IMG_0123About three years ago I published Ten Reasons that you should like the Fair Tax.   I gave ten great reasons that we should enact the Fair Tax – yesterday.  Things like not needing to keep records in case the IRS calls and asks.  Not needing to deal with the IRS at all.  Not needing to spend any time filling out forms.  Not needing to have special tax-sheltered accounts for anything.

How simple is this:  You walk into a store, buy something, and pay your Fair Tax when you pay your bill.  About 20% is added on to your purchase (assuming we stay with the same amount of government revenue).  This is compared with having 15% of your full income taken before you get it, plus another 12.4% for Social Security and 6% or whatever it is for Medicare.  If you spend all of your income, you pay 20% for the Fair Tax or about 30% with the income tax and payroll taxes.  If you spend less than your income and actually save, you pay even less with the Fair Tax.

The income tax punishes earning money.  The Fair Tax punishes spending money.

And it even gets better.  Because the company you’re buying stuff from doesn’t need to do fancy maneuvers to avoid taxes, like have a corporate headquarters in Barbatos, the price you pay for the things you’re buying are 10% less.  So you end up paying less than you pay now with the income tax.

So why don’t we have it yet?  Do you like keeping receipts?  Do you like funneling your child care money through a flexible spending account, and then risk losing it at the end of the year if you don’t spend it all?  Perhaps you like a check that is 25-50% smaller than it would be with the Fair Tax.

Maybe you’re worried that it doesn’t zap the evil rich guy enough and punish him for employing all of those people and making all of those products you use every day.  But then you forget about the prebate – money that comes to you to cover taxes up to a certain income level.  If you’re making $30,000 per year, you would still not be paying any taxes.  That evil high earning guy would be paying it all.  Ha ha haaaa….

So come on, what gives?  Why haven’t you called, emailed, and shown up on your Congressman’s door, demanding the Fair Tax?

Do you just like your accountant too much?  Do you like buying TurboTax every year?  ( Their ads talking about  your taxes being the story of your life do make it sound kind of exciting to spend an afternoon with your W2 forms and receipts.)

Tell me, please.  I’d like to know.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.