Paul Ferraresi

The Fed stopped the QE2 program on June 30, 2011. The whole purpose was to provide liquidity to the Treasury market and to appease the Chinese who hold the greatest amount of Treasury debt. The Chinese were concerned that no one would buy their holdings.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

There is no correct age to start. The earlier the better. I was blessed with parents and grandparents that instructed, motivated and guided me in money matters at an early age.

Your plan should be to help them understand money management to avoid future stress, financial burdens, emotional strain and relationship problems that the misuse of money can bring.

Teach your kids to become savers and investors. Explain your values for spending and saving money to them. You will need to teach them the difference between need and want. Alert your kids to the problems of borrowing money to consume versus borrowing to conserve. As they grow up, teach them about checking accounts, savings, credit cards and investing. My folks, from my early age of 7, taught us that we had to have some type of job, and used our money for teaching us money principles. We were taught to set up “envelopes” to save for long term, which we deposited weekly in a savings bank. Then we set up holding pots for “charitable contributions,” short term goal spending and the rest was ours to “do as we pleased.” The folks had us buy stocks “on paper” and follow it weekly. When we ran out of money, Dad would lend it to us. We would sign a note and have to pay it back with interest, from our “do as we pleased money”. I learned to negotiate interest rates with my dad based on my savings account (which he held as collateral until the loan was repaid). He was tough on me from age 9 to 12 when I borrowed any money from him.

One of my other clients taught his children about money by giving them $100 on Friday night. The goal was to get through the weekend with some money left, but, the child had to pay for all family expenses and their wants out of the $100. When the money ran out…everyone came home – no TV, no games… everyone had to sit and talk as a family until bedtime each night.

Teaching the kids to be free from the stresses of unnecessary debt and overspending is a great legacy that you can leave them. Everyday I thank my mom, dad and grandparents for the knowledge of “wealth” they gave me.

Teach them the discipline or deal with the regret later.

If you bought an airline ticket before July 23, 2011, you may be entitled to a refund. You need only to have bought and paid for the ticket before July 23rd and traveled July 23rd or after that date.

The airlines stopped collecting taxes on Friday, July 22, 2011 at midnight. You can contact your air carrier for the refund. They may have you contact the IRS for the refund since the IRS has the money.

Watching some of the pundits on TV and the present administration’s policies, it is evident that they do have a clue how a business operates, how to get business to hire people, how the economy really works, or else they all got a D- in economics.

The other evening I almost lost one of my home TVs because I threw my shoe at the set because of what was said. One of the administration’s strategists said, and I paraphrase…

“The government has put money into the economy via the stimulus and created jobs.” (As if the government was an entity. No it is merely taking our money and transferring to another person. The government does not create anything and has never created a job.) “It is now up to business to put money into the economy and go out and hire people.” How dumb! What is a business to do… create jobs by hiring people when there is no demand (work), so all the new hires will get paid for sitting around doing nothing! Duh! Boy, if that isn’t socialist government thinking, I do not know what is. See, the spokesperson was thinking like the government and applying it to business. It is not the government’s money, it is ours. They throw it out and hope something happens. They have no responsibility or accountability to anyone. A business owner, has responsibility to their shareholder’s, the lenders, their employees, the community and their families. Business owners cannot just throw money out, and if they need more, they cannot tax their employees, or go print money. Am I making my point to anyone? If any business owner ran a business like the government, they would be sharing a cell next to Bernie Madoff for breach of fiduciary duty.

Look at the recent employment numbers. They are terrible. Business owners are holding on to their cash and not hiring because:

• Obama care will cripple them financially if they add on employees.
• They cannot borrow money to expand or stay afloat due to the suffocating Dodd-Frank regulations on the banking industry.
• We are two plus years into an economic recovery and the present level of employment is lower than in March 2000. With fewer employees, that leads to less demand, which leads to lower sales and thus no need to hire.
• The present administration’s statements and policies are all anti business. Plus the threat to raise taxes further on business pushes a business to lower costs by laying off more employees and moving jobs overseas.
• At this point in the business cycle, employment should be making new cyclical highs. Barely 20% of the 2008 recession losses in employment have been recovered to date.
• The economy is in the tank because of excessive non-corporate debt, excessive housing inventories, excessive reliance on imported oil and excessive labor market supply.

Remember the old expression… one who does not study history will be doomed to the same errors.

The present administration’s fiscal policies have been used many times in the past 100+ years and have failed every time. There are proven successful policies that have worked time and again, but, they will not use them.

Didn’t anyone but me go to economics class or were they all out protesting something? Hmmm.

In the June 13th, 2011 issue of Barron’s, a great article was printed…”The Threat of Screwflation”. Let me paraphrase the article.

As the article explains, back in the 1970’s, with stagnant growth and rising inflation, the term used to describe the economy was “stagflation”. The replacement term is now “screwflation”. This word describes inflation with the screwing of the middle class. This condition, like stagflation, threatens the very health and valuation of the stock market.

• U.S. economy has doubled (real terms) in past 30 years
• Corporate profits are reaching a new peak
• Real wages have made little progress
• Food, energy and other costs are consuming middle class incomes
• Lost decade of stock prices
• Four years of declining home prices
• Drop in middle class purchasing power
• Unemployment has hurt all but the wealthiest Americans

There are 3 megatrends going on:

• Integration and globalization of the world’s economies
• Broad advances in technology
• Temporary hiring as a permanent feature in the workforce

All three of these megatrends are major causes of “screwflation”.

A major shift has come about due to a drop in real estate, especially in the recovery of jobs. Work involving real estate made up 40% of all job growth in the 2001-2006 period. This percentage has plummeted recently. Please note, there are no policies from the present administration to improve this drop. Rather, the Obama administration is doing the complete opposite to reverse the trend and wants to eliminate mortgage deductions to raise more taxes (so they can spend more, NOT pay down the debt). This will hurt real estate jobs even more.

For middle class Americans, the increase in commodity prices hurts the low and middle income families more since it makes up a larger percentage of the necessities of life for them. Then, add in rising health care, education and other costs. Well, it is a poor foundation for growth.

The article suggests some policies that could help.

• Extend the payroll tax cut
• Reduce income taxes for the middle class
• Provide federal funds for infrastructure spending (not to shore up union pension plans)
• Create incentives for business to make new capital investments
• Allow tax-free repatriation of U.S. corporate earnings abroad if used for creation of U.S. jobs
• Launch an energy plan that has domestic resources
• Use Federal housing financing to slow foreclosures

It is a great article and I suggest you read it in full.

“Sorrow looks back. Worry looks around. Faith looks up.”