Thursday, April 23, 2009

Do You Know Where Your Money Is? (reprint)

Reprint from February 26, 2007

The question has to come up sooner or later. Why put money in the bank with these lousy interest rates?? Using the rule of 72, when you divide the savings rate into it (3%), you get the number of years for your money to double. In this case, it's 24 years. The inflation will eat you alive. A $100,000 in 1964 dollars is equivalent to $1,000,000 in purchasing power by today’s standards. So, to make it simple, over the last 44 years, we have had 90% inflation. The decimal point has been moved one space to the right. In 1964 gas was 30 cents a gallon and a house cost $20,000. Today gas is $2.65 a gallon and a house is around $200,000 (definitely not California!).

Examine a concept that is being glossed over and not taken at face value. Every house, stock, bond or mutual fund share has an owner at every instant in time. The certainty is, selling at the top is good and buying at the top is bad. Every dead horse has an owner (owning one is not a desirable thing unless you process dog food).

So let’s see, we have a zillion houses out there that are empty. We have 424,805 bankruptcies and 154,910 foreclosures nation wide according to The question comes to mind, who’s footing the bill? The money has been spent, just whose money was it?

It looks like the next thing to drop dead is going to be a credit card company. Wouldn't that be a real mess! Every layoff is a potential no pay. How many credit cards do you have in your wallet??

Any way you look at it, somebody OWNS all of this junk that is going bad. Its almost a forgone conclusion that whoever it is, has no idea of their vulnerability or their potential liability. Naturally this will all go away if we just close our eyes. My retirement fund or mutual fund couldn’t be that stupid or could it?


Sackerson said...

Good point, Jim.

Rob in NS said...


My wife's RRSP (401k) is down 39% year over year. That loss was someone elses gain wasn't it? If so who do you think got the money?


Joseph Oppenheim said...

Why put money in the bank with these lousy interest rates?? Using the rule of 72, when you divide the savings rate into it (3%)<<<<<

Actually, one could get 6% at one bank I know for sure, for a long term CD, in 2007, easily exited if interest rates rose with only a moderate early withdrawal penalty. It actually pays to shop around.

Plus, what most people didn't realize, is that there were few at the time, if any, nations which insured such bank deposits. Rule of 72 is important, but it isn't the only factor to consider.

It always got me why investment talking heads rarely mentioned FDIC insured CDs. But, the reason was pretty simple, there was no profit in it for them, commissions, expense fees, etc.

Plus, as far as the rule of 72, we have been in a deflation for many things since 2007. So, if one just parked some money in CDs, they could pick up assets now at much cheaper prices than in 2007.

So, anyone who invested in FDIC CDs, at least with some of their money, in 2007 was doing a very wise thing, as it turned out.


Anon On a Calif Mountain said...

This is an historical point in time, economically and politically. There will be significant change in this great country (USA) over the next few decades (not the change that Obama touted).

The population is becoming educated and aware, thus there will be a revolution (intellectual) and the existing government will in essence be overthrown and restructured, and our money system will as well.

We are not moving deeper into socialism—we are actually moving into Fascism. Benito Mussolini defined a Fascist state as one in which the power of government and the power of big business both join forces.

The flames of rugged individualism, freedom, liberty, courage, strength, resilence, productivity and innovation may appear to have been vanquished... yes, the American populace has been lulled into apathy by bread and circuses and we have dropped out our vigilance and become inactive... yet, the embers are still red hot and burning below the surface of ignorance and sloth, and these flames will soon flare up and burn brightly again.

The attempt by the power elite to turn America into a Fascist state is the catalyst that is causing this intellectual revolution to manifest.

We will cast out the corrupt and unworkable and create a new, more civilized paradigm. The people will soon no longer tolerate the attempts to sustain the unsustainable status quo and to unfairly redistribute wealth.

Yes, there will be revolts, riots, and darkness at the incept, but that will only be a small introduction to this intellecual evolution. And it will spread to and benefit other countries as well.

One could compare this coming revolution to the French Revolution, and compare the coming paradigm shift to the Age of Reason.

This is a classic point in history that could be described as the darkness before the dawn and the rising of the phoenix from the ashes.

And the serpent will devour its own tail and vanish.

Jim in San Marcos said...

Hi Sack

Thanks for dropping by. Looks like your part of the world is having the same sort of "recovery" as we are.

Jim in San Marcos said...

Hi Rob

I don't think that the stock market is a zero sum game like commodities. If you bought Google at $200 and watched it rise, you had a good ride. If you bought it at $700 you've been crying a lot. There are a lot of people with 40% losses.

The thing that really irritates me is that we put our money into a 401K to avoid paying income tax. Now we have had a loss far more than the offset of unpaid taxes, plus the losses are not tax deductible. On top of that, the government dictates how and when it can be withdrawn with or without penalty.

I'm of a firm opinion that if the government offers you a tempting program, that's reason enough to avoid it.

What sort of talent does a mutual fund manager need to be able to wrack up 40% losses?

I got so pissed off at the investment group managing my IRA that I transfered it to a bank managed IRA. I'm in charge of it now. Bear in mind that there are redemption fees if you transfer out of the fund before the funds have been vested for 5 years (about 5%). So if you have contribued to a fund for 10 years, 5 years worth can be transfered without penalty.

When you think about it, no one looks after your money better than you do. I'm sure Bernie Madoff's investors would agree.

Anonymous said...

One way to shut down the government would be for everyone to refuse to file and pay Fed income tax next year. Of course W2 salary workers can't, but all of us independent contractors and self-employed can do so. That is one way to force government to get smaller and privatize most of their activities.

The top 20% pays 70% of the taxes and most of them are ICs or business owners. Business owners could also refuse to do the IRS's job of withholding payroll taxes too. We could stop big government in its tracks.

Even though it was played down and smirked at by the powers that be and mainstream media, you must realize that tax protests in 750 US cities on April 15th is nothing to sneeze at. This disillusionment is going to continue to grow. The bill to audit the Fed is picking up steam in DC as well. More and more people are getting angry and this is a good thing.

Once everyone realizes that the government is the main source of all of are problems and takes action, the sooner we'll get them out of our life and make it smaller.

Government should just handle basic infrastructure, defense, basic law enforcement and regulation. The rest is up to the people.

Rob in NS said...


My wife's 401k rose with the stock market and has fallen so when you look at the end game she's coming out about even. I have to agree with you that one should be wary of any government sponsored program. I was contributing money to my own 401k but stopped a while back because I too was worried about how my money was being managed. My parents are practical and have invested their money in undeveloped land. The great thing about that is they pay next to no taxes on it and each year the trees grow a little taller and the government are none the wiser. I still think the vast majority of people are putting a little too much faith in other people controlling their money. The problem right now is most people do not know where their money is invested. So I guess most people if asked question posed in your post would have to answer no.

Jim in San Marcos said...

Hi Anon 9:07

"The top 20% pay 70%" Guess who gets their tax rates doubled? I don't think that the government can collect it.

The government has tripled spending, but their taxing ability is strained to the limits.

There is one place where more taxes can be raised and it worries me, health care. Right now the old are a big draw on Medicare and Medicaid. These programs are not tax supported. The young don't really pay into health care (they're immortal). Here you would have another tax. The young don't really use the health care system much, so this would help pay for the cost of present government liabilities towards retiree's medical.

What appears to be universal health care, is actually a tax on young people who presently avoid paying for health care. You could argue that they pay for health insurance, but their rates are 10 times lower than mine.

What you end up with is the "Disneyland Affect." Everyone gets into the park and then waits two hours in line for a ride. The net result is that the government turns the emergency room into a "concentration camp" for old people(It's not going to read like that in a newspaper). You die, you lose your place in line.

Your statement that "Government should just handle basic infrastructure, defense, basic law enforcement and regulation. The rest is up to the people," is a sound one. The problem, nobody's listening.

Thank you for your comments.

AIM said...

Rob and Jim:
I think Rule #2 in investing is that it is VITAL that one ALWAYS is in control of the money they invest, and never turns it over to someone to manage, etc. How many people now wish they had followed this rule?

(BTW, Rule #1 is "never invest in anything that you don't fully understand".)

That is why I never invested in the stock market, mutual funds, ETFs, used a 401k, etc.

Bonds are better than stocks (unless the borrower defaults) but with stocks you are totally at the effect of manipulation, the company and its management, the economy, the market, the sector, etc. (You can't do anything to control or enhance your investment.)

Notes, spec building, rehabs, businesses, etc. are investments that you can control and create exit strategies for.

Of course this approach to investment calls for one to be educated and to work at it but THAT'S what investment is all about and what investors do!

Due to ERISA, corps have been getting out of pensions and retirement concerns and foisting the problem off to the employee (in the form of 401k, etc.). Employees have been forced to become investors. They are terrible investors... they don't study, they have no choices, they put their trust in mutual funds, brokers, stocks, etc. End result... they lose, big time... brokers and funds make a fortune.

With a fiat currency, the Fed Reserve, government intervention and taxes destroying stocks and bonds... anyone who placed their financial future in the stock market was a fool... a sucker.

Face it, we are 100% responsible for our financial condition and future. Despite the fact that we exist in a dangerous and corrupt economic environment, no one screwed up and lost all, or a portion of our nest eggs, but us.

Learn to invest and participate in your building of wealth or just keep your money in a CD and barely grow it, otherwise you'll lose.

Anonymous said...

AIM is right. The lack of Financial Intelligence and Financial Responsibility is why the public is suffering and has lost so much.

Robert Kiyosaki's books and lectures are a cure for this problem--if people are willing to take the initiative to study and apply them.

9/10 of one's life is economic yet in school we are not taught anything about basic economics or even how to balance a checkbook or run a household.

People living paycheck to paycheck, no reserves, no savings, spending more than they make, buying homes they can't afford, using credit excessively, trusting others with their investment capital, depending on employers, etc. etc. These are all basic violations of Economics 101.

What happened to Americans?

frakrak said...

Not sure that blaming oneself for the current economic conditions is going to be productive for yourself and your family. Humanity has always concerntrated power to rule over itself, so why should this epoc in our collective development be any different now? And I would say that this is precisely what is happening now, a concentration of power! Our time on the "economic teet" is being savagely reduced, so why would anyone start to blame themselves? As for a lack of economic understanding (ignorance of the great unwashed) turn on the TV for a little entertainment and watch two opposing economists slug it out on where they think this is all headed! Clearly the current system breeds this confusion and lack of understanding because it has very little transperancy!!? As for taxes, this should be a topic of discussion that should be grouped along with politics and religion! As a salary earner I pay more as a percentage of my earnings than the big end of town, we also have a consumption tax in this country that adds to this disparity! But I realise it is all about your own particular view point, clearly we are all getting taxed at rates that we shouldn't! The important focus here is where the money is spent once it is collected!

Jim in San Marcos said...

Hi Aim

I quite agree. It reminds me of a famous open heart surgeon in Texas during the 1980's who invested 9 million in Texas real estate only to go bankrupt when the market fell out of bed. He was too busy with surgery to pay attention to his investments.

Investing is a little like learning to play poker. The more you play the more comfortable you will be doing it.

When you finally kick back and retire, your savings will determine your quality of life. At that point you will have to accept responsibility for how your investments turned out.

Investing is a learned habit. Exercise and eating right is an investment in body health. How many people do you know that have an exercise machine that doubles as a clothing rack? Exercise could be the best investment you ever make. But will it happen? Of course not, that's what human nature is all about.

I guess I digress a bit, but the exercise rant shows how there are many different factors that influence how life can affect us. A lot of it is under our control, we just don't feel like taking the time to follow through on it.

It's not like we are getting old, that only happens to other people;>)

Thank you for your comments and take care.

Jim in San Marcos said...

Hi Anon 10:17

I think what we have here are a bunch of people that should never have been given access to credit. They did what would be expected, abuse the hell out of it.

These people really haven't lost much, they had nothing to lose to begin with.

The taxpayer gets the bill on this one. It's called the Green Weenie!

Thank you for your comments.

Jim in San Marcos said...

Hi Frakrac

Your comment, "The important focus here is where the money is spent once it is collected!" is where we are at.

It is going to be spent, but probably never collected. That's the sad part.

We have to accept blame for this mess, we did it to ourselves. You can't blame government, "We the People" are government.

There is an inherent problem with this. If 45% of the population is staunchly Democrat and 45% staunchly Republican, then the Lunatic Fringe 10% runs the country.

This could lead to what Anon on A California Mountain was referring to. You vote but you get no satisfaction.

frakrak said...

Thanks for your response Jim, yes we may be on the same page regarding government spending. My marginal rate of tax is around 25%, the top end of town has enjoyed ever increasing reductions in the top marginal rate to what I think is around 42%. As a student with four children my income is nearly all spent, so my real rate of tax, if you add in the consumption tax could be as high is 34%. We have complicated and voluminous tax laws in this country, over a thousand pages. As a wage earner I would be lucky to have one page of these laws to assist me in reducing my taxes, the other 999 pages go to the smart tax accountants or lawyers to reduce or complicate the process of tax collection for those that have the finances to find the loop holes in the system, so I think that the real rate of tax would be substantially lower. I have no issue with this except that I pay what is required, and the wealthy elite do not put themselves in the position of paying a token for their privilege.

Always surprises me that people define themselves through the political system! I am conservative with my politics, at fifty years of age I have seen only one politician in this country that has taxed and spent wisely but I would not call myself a liberal (Republican). I don’t see the government as the enemy, because they have a modicum of transparency, I do not feel totally powerless with the political process in this country. When people talk about “we the people” I would agree that we are the government but not the holders of real power. “We the people” may only succeed in changing the “lunatic fringe” because they are also visible to public scrutiny. I would agree on social issues, we are accountable for our lethargy, but the real power Jim, “we the people” to use the vernacular, are “up s**t creek in a barbed wire canoe.” Nothing of any substance will happen, because where it really matters there is no transparency! NOTHING WILL CHANGE!

I am not encouraged to rise up and take back power from the government, because the real power that may, in the future make me destitute, hungry and a serf is not yet revealed.

Sackerson said...

Hi Jim: "Looks like your part of the world is having the same sort of "recovery" as we are."

Worse, much worse, if you can conceive it.

AIM said...

The root of most financial crises is mostly always financial irregularities (aka fraud, deceit, corruption, criminal acts).

Our government and corporate are not exempt from this. Unless we address the corruption and deal with the individuals responsible, how can we ever correct our situation and improve our lot?

It has just been disclosed that the CEO of BofA was forced to acquire Merril Lynch by Hank Paulson and Bernanke under the threat of he and the board of directors being removed and replaced. This is criminal. Paulson's dealings as regards AIG and Goldman Sachs is totally scandalous.

The guys in office (many of them are responsible for the mess we are in) are so confused and afraid by how chaotic and disastrous things are that they are lying to the public and hiding the true facts. All of this deceipt and non-disclosure needs to be addressed.

William Black handled the S & L fiasco earlier in time. He is an insider and knows the score.

If you want to see a short video interview of Black blowing the whistle and outlining the fraud and scandal that caused all of this, click on the link below (prepare to be stunned and angered).

AIM said...

If the link isn't clickable... cut and paste it into your browser to get there.