Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use "high yield" bank savings account now, FDIC insured - John]
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
- If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
Continuation of: USA Manufacturing is Healthy
The real problem with the USA economy is that a country cannot live beyond its means forever. Those living in USA have consumed far more than they have produced for decades. That is not sustainable. The living beyond our means is mainly due to massively increased consumption, not shrinking output (in manufacturing or service). One, of many examples, of the increased consumption is average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.
In case it isn’t totally obvious to you. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing. Personally, as this continues you reach a point where getting another credit card does not work. The same holds true for the collective health of a country. A country cannot solve the problem of having bills come due from decades of living beyond its means by charging more so that they can continue to live beyond their means.
Where the USA is in the continuum, is hard for me to judge. For the sack of illustration, lets say a consumer can get to 10 cards before they finally fail. If the consumer reaches the limit on 2 credit cards they have the choice to continue to the party by getting another credit card. Or they have the choice of addressing the situation they have gotten themselves into. If they decide to become responsible they have a challenge but one they can endure with some hardships.
If they press on to 5 credit cards and then max them out they come to the same decision. Dig themselves deeper in debt to avoid the problem today or live up their past behavior and become responsible. The work they have ahead of themselves is much more challenging than if they had started working on the problem when they only had 2 cards.
If they press on to 9 cards and now have the decision again. The effort to find a solution may be almost impossible. Borrow more to pay for past mistakes while maintaining some expenditures may be possible (but they will have to live on less than they earn). By the time you are this far down the failed path you have so much going to pay for your past bills you can’t spend even close to what you currently earn on current expenses. Letting yourself get to this point is very bad. And most likely as a person you will go bankrupt.
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When looking at the long term data, USA manufacturing output continues to increase. For decades people have been repeating the claim that the manufacturing base is eroding. It has not been true. I realize the economy is on weak ground today, I am not talking about that, I am looking at the long term trends.
The USA manufactures more than anyone else – by far. The percentage of total global manufacturing is the same today it was two decades ago (and further back as well). For decades people have been saying the USA has lost the manufacturing base – it just is not true. No matter how many times they say it does not make it true. It is true since 2000 the USA increase in manufacturing output (note not a decrease) has not kept pace with global grown in manufacturing output (global output in that period is up 47% and the USA is up 19% – Japan is down 10% for that period).
I would guess 20 years from today the USA will have a lower percentage of worldwide manufacturing. But I don’t see any reason believe the USA will see a decline in total manufacturing output. I just think the rest of the world is likely to grow manufacturing output more rapidly.
Looking at a year or even 2 or 3 years of manufacturing output data leaves a great deal of room to see trends where really just random variation exists. Even for longer periods trends are hard to project into the future.
Conventional wisdom is correct about China growing manufacturing output tremendously. China has grown from 4% of the output of the largest manufacturing companies in 1990 to manufacturing 16% of the total output in China today. That 12% had to come from other’s shares. And given all you hear from the general press, financial press, politicians, commentators… you would think the USA must have much less than China today, so may 10% and maybe they had 20% in 1990. When actually in 1990 the USA had 28% and in 2007 they had 27%.
Manufacturing jobs are not moving oversees. Manufacturing jobs are decreasing everywhere.
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Singapore is again ranked first for Ease of Doing Business by the World Bank. For some reason they call the report issued in any given year as the report for the next year (which makes no sense to me). The data shown below is for the year they released the report.
| Country | 2008 | 2007 | 2006 | 2005 |
|---|---|---|---|---|
| Singapore | 1 | 1 | 1 | 2 |
| New Zealand | 2 | 2 | 2 | 1 |
| United States | 3 | 3 | 3 | 3 |
| Hong Kong | 4 | 4 | 5 | 6 |
| Denmark | 5 | 5 | 7 | 7 |
| United Kingdom | 6 | 6 | 6 | 5 |
| Ireland | 7 | 8 | 10 | 10 |
| Canada | 8 | 7 | 4 | 4 |
| other countries of interest | ||||
| Japan | 12 | 12 | 11 | 12 |
| Germany | 25 | 20 | 21 | 21 |
| France | 31 | 31 | 35 | 47 |
| Korea | 23 | 30 | 23 | 23 |
| Mexico | 56 | 44 | 43 | 62 |
| China | 83 | 83 | 93 | 108 |
| India | 122 | 120 | 134 | 138 |
| Brazil | 125 | 122 | 121 | 122 |
The rankings include ranking of various aspects of running a business. Some rankings for 2008: starting a business (New Zealand 1st, Singapore 10th, USA 6th, Japan 64th), Dealing with Construction Permits (St. Vincent and the Grenadines 1st, Singapore and New Zealand 2nd, USA 26th, China 176th), Employing Workers (Singapore and the USA 1st, Germany 142, Korea 152), protecting investors (New Zealand 1st, Singapore 2nd, Hong Kong 3rd, Malaysia 4th, USA 5th), enforcing contracts (Singapore 1, Hong Kong 2, USA 6, China 18), getting credit (Malaysia 1; UK and Hong Kong 2; Singapore, New Zealand and USA 5th), paying taxes (Maldives 1, Hong Kong 3, USA 46, Japan 112, China 132).
These rankings are not the final word on exactly where each country truly ranks but they do provide a valuable source of information. With this type of data there is plenty of room for judgment and issues with the data. Several of my posts, from my other blogs, that I recommend on this topic: The Future is Engineering, Science and Engineering in Global Economics Read more
In a recent article in Business Week Michael E. Porter makes some excellent points – Why America Needs an Economic Strategy:
Second, U.S. entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world. While other countries increase their spending on research and development, the U.S. remains uniquely good at coaxing innovation out of its research and translating those innovations into commercial products.
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Third, the U.S. has the world’s best institutions for higher learning, and they are getting stronger. They equip students with highly advanced skills and act as magnets for global talent, while playing a critical role in innovation and spinning off new businesses.
Fourth, America has been the country with the strongest commitment to competition and free markets.
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An inadequate rate of reinvestment in science and technology is hampering America’s feeder system for entrepreneurship. Research and development as a share of GDP has actually declined, while it has risen in many other countries.
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A creeping relaxation of antitrust enforcement has allowed mergers to dominate markets. Ironically, these mergers are often justified by “free market” rhetoric. The U.S. is seeing more intervention in competition, with protectionism and favoritism on the rise. Few Americans know that the U.S. ranks only 20th among countries in openness to capital flows, 21st on low trade barriers, and 35th on absence of distortions from taxes and subsidies
I have discussed similar idea in this blog and the Curious Cat Science and Engineering Blog: The Future is Engineering – Engineering the Future Economy – Science Gap – Not Understanding Capitalism
Canada’s banking system kept high and dry by strict regulation: Flaherty
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Some of the fundamentals credited with keeping Canada’s banks in the safe zone were put in place nearly a decade ago by the Liberal government of Jean Chretien, including a refusal to approve any Canadian bank mergers.
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The finance minister said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus. “Other countries have been increasing their deposit standards, but they’re still for the most part below the high Canadian standard,” he said.
Related: Monopolies and Oligopolies do not a Free Market Make – Too Big to Fail – What Should You Do With Your Government “Stimulus” Check? – The Budget Deficit, the Current Account Deficit and the Saving Deficit – 2nd Largest Bank Failure in USA History
Warren Buffett quotes from the interview:
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- “AIG would be doing fine today if they never heard of derivatives… I said they were possibly financial weapons of mass destruction and they have been, I mean they destroyed AIG, they certainly contributed to the destruction of Bear Stearns and Lehman”
- The biggest single cause was that we had an incredible residential real estate bubble.
- [on consuming more than we are producing] I don’t think it is the most pressing problem at all. We are trading away a little bit of our country all the time for the excess consumption that we have, over what we produce. That is not good. I think it is terrible over time.
Related: Warren Buffett related posts – Credit Crisis Continues – Credit Crisis (August 2007)
CNNMoney is not exactly intellectual discussion of economic and investing issues but normally it offers fairly good material for the large number of people. Especially those who really don’t want to read Warren Buffett or Brad Setser. Still the following quote in their article, Cashing in on hot real estate is just wrong:
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San Diego-based certified financial planners Christopher Van Slyke and Terry Green recommend an unconventional plan: taking out a new $500,000 ARM.
Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.
To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall…
They can convert equity that might melt away.
They can what? In no way does increasing their leverage convert equity that might melt away. Any amount of “melting away” will still happen after this increase in leverage – no conversion has happened. They still have a full ownership interest in the real estate. If the value of their house fell $300,000 before or after this supposed “conversion” they would “lose” (on paper) the same amount: $300,000. The investment risk for the house has not changed (for the whole portfolio you could argue it has but that gets complicated and subject to debate).
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