Chances are they will find it in the technologies and sciences.

Diminishing Options

Once upon a time you needed a pair of hands to do just about anything. Whether it was organizing archives or processing credit card applications, a human had to do it. Ever since the early 1980′s that’s been changing at an exponential pace. Every year, one or two professions became obsolete due to a newfangled machine or revolutionary software. In order to remain employed, many people had to return to school and learn a new trade. Typists became paralegals; assembly line workman became auto mechanics, et cetera.

But now even the paralegals and auto mechanics are becoming obsolete. The well of opportunity is running dry to a critical point. Add in the economic slump and resulting shrinkage of human resources across belt-tightening industries and the obvious result is an extreme shortage of employment options for present and future populations.

New Industries

Those serious about remaining viable in the modern workforce need to investigate the frontiers of modern industry. It is there that the Bureau of Labor Statistics projects will achieve the most growth this decade. The BLS anticipates the “professional, scientific, and technical services” sector to increase by 34%, far ahead of any other category on the list. Conversely, “management of companies and enterprises” are only expected to see 5% growth in the next several years.

Consider the following: if technologies are replacing jobs, then the new jobs must be in creating these technologies. The logic doesn’t add up to the math when you factor the entirety of unemployment, but that of course is why you pursue higher education and make yourself one of the few people who can remain useful in these budding industries.

Improved Industries

The “second industrial revolution” won’t happen overnight. Countless preexisting industries will continue to exist; they’re just expected to change drastically. These outlining sectors may not demand as much cutting edge expertise as those at the forefront of technological achievement, but they nonetheless still qualify as technical pursuits. For example, the BLS predicts that the “healthcare and social assistance” sector will grow by 26% in this decade, no doubt a reflection of massive healthcare overhauls and the demands for them. Waste management remediation follows third at 18% growth by the year 2018.

Meanwhile employment in utilities is expected to decrease by 11%. Improved industries are a double-sided coin though. It’s imperative that you consider a technical profession where the technology isn’t expected to out-do the human element. Look for industries primed to improve that still demand the interaction of human hands and more importantly the human brain.

The number of careers that were similar to those of previous generations is dissolving rapidly. In their place are few opportunities to succeed in the advancement of technologies that are themselves the replacements. But this is where aspiring professionals must look to find work. When hiring resumes to pre-recession levels, it will not likely be to the tune of the pre-recession job market. The employment landscape will be almost unrecognizable. Will you know your way around?

Ryan Sandberg is an Internet Marketer working for Growth Partner Capital with a passion for entrepreneurship, efficiency and ice hockey. He enjoys sharing his opinions/findings on finance, marketing, entrepreneurship and current tech trends.

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Debt Levels

As was underlined in the recent U.S. debt ceiling debacle, the impact of the overall debt level can play a role in FX as well. Countries that carry large quantities of debt are incented to let inflation run higher because it allows it to pay back these debts with cheaper currency (less purchasing power). Of course, since inflation has a negative impact on a currency’s exchange rate in the open market, high debt levels can cause an increase in inflation expectations, thus driving down FX rates as a result.

Interest Rates

This factor is the most directly connected to the level of an exchange rate between one currency and another. The phenomena is easiest observed in terms of changing rates, so consider the case where the prevailing interest rates in Country A and increasing relative the interest rates in Country B. At higher rates, borrowers must pay a higher cost to receive capital and foreign investment becomes drawn to those rates. The increased demand for the currency of Country A, the basis for the loan, rises, and the exchange rate increases relative to Country B �’ essentially, foreign investors bid up the currency so that they may then lend the money at higher, more attractive, rates. Because the prevailing interest rates in a given country are deeply impacted by interest rates, the actions of that country’s central bank play a central role as well.

The Current Account

This is the name given for the trade balance that exists in a given country between it and its trading partners �’ essentially, it is a number that measures the value of the goods purchased domestically and manufactured abroad relative to goods manufactured domestically and purchased abroad (imports relative to exports). When this number is negative, it means that the country is spending more abroad than it is earning. As a net borrower, it must demand foreign currency in order to pay for the goods it is importing. As is the case with a country’s debt profile, when the country is carrying excess debt, it tends to weaken that currency relative to others. Of course, when the current account is positive the effect is reversed.

Inflation

This factor is the countervailing force that acts with interest rates to keep things in balance; the inflation rate of a country tends to be highly correlated to interest rates �’ re-enter the central bank. Inflation is most simply understood in this context as the rate at which the purchasing power of a given currency is destroyed. As goods appreciate in price, the value of the currency decreases because it takes more units to buy the same goods. When interest rates are high, foreign investors can earn a better return, but inflation tends to be higher as well. This means that the units of the currency they earn are worth less in absolute terms. An analysis of the overall effect on purchasing power yields some basis for deciding which is the best overall position.

Gross Domestic Product (GDP) and Political Stability

GDP is generally considered the best measure of a country’s overall economic performance and strength. When growth is present, the feeling is that the country presents a solid investment and that alone will attract foreign capital and drive up exchange rates. Conversely, when growth slows, the perception worsens and the country is less attractive. It is important to keep in mind that each of these metrics is considered on a relative basis, so even a negative reading can be positive in comparison. Also under this heading is overall political stability. GDP growth is one measure, but if one gets at all away from the largest six currencies, government stability itself can come into play.

As you can see, there are numerous factors that drive currency exchange rates.  To be honest, we have only covered the surface on this topic.  However, if you want to learn about the basic drivers, look for debt levels, interest rates, current account, inflation, and GDP compared to political stability.  It’s important to know about these basic factors so you can better understand world events and the effects on world markets.

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To date, the argument for having a near zero percent interest rate for various loans and investment programs is that it will stimulate the economy. We currently have millions of Americans out of work and can’t pay their bills and other costs of living. The country has struggled just to get by during this current crisis through cash advances and automobile title loans. This approach at stimulating the economy, many argue, hasn’t worked and that the super low interest rate is now doing more harm than good.

The simple fact of the matter is that it’s not working nor are people aren’t being attracted to investments and loans. There’s been much debate, even within government circles over this controversial approach. The logic behind the current policy is that it would get people interested in investing and take out loans because the cost to them would be very little. It seems that it’s not the citizen that’s spending but he banks shoring up their coffers through no-risk investments in government bonds. It’s the people who still don’t trust the system and with the current policies in place we’re just helping the banks get richer. It’s, in effect, a redistribution of wealth on that’s being placed on the backs of the government and the people.

The federal reserve has yet to offer any indication that it plans to change the near zero interest rate,and top officials at the FED don’t agree with this stance. Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, is arguing that it’s high time that rates start going up again. He argues that this will be far more effective in fostering economic growth than the policy currently in place. Hoenig argued, “what good, what service, what transaction can take place at a price of zero. That’s a hard question for people to answer because none is the right answer. And I also think that applies to credit. Even short-term credit.”

When you leave interest rates at such a low point for a long time, you ultimately create new imbalances in the system. “The longer they remain zero the greater the likelihood we are to create new imbalances that we’ll have to pay for later.”

Lowering interest rates has long been a method used by the FED to inspire investment and growth, but it’s always been a short-term approach. Once the economic crisis is over and some stability has returned to the banking and financial system, rates must rise in order to stave off economic stagnation. Unless this is done, countries put their economies in greater danger over the long-term.

Many feel that raising the interest rates would be poor timing in a current climate where unemployment figures have climbed back up to 9.2 percent. In the face of such a bleak forecast, many FED officials argue that now isn’t the time to start rising the cost of investing and saving. Others feel that it’s this same policy which is hurting economic growth. Who is right is subject to debate, but it’s clear that current policies aren’t working and perhaps raising the interest rates might just be the thing to jump-start the economy and halt the dollar’s plummeting worth.

So, what do you think? I’m glad rates were low when I bought a house a few years ago, but I’m getting tired of low rates on savings accounts.

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Now that the stock market engine seems to be restarted for good (with a lot of volatility!), speculators are already trying to see which bubble will burst first! I am always surprised to see how quickly financial analysts are to predict that the stock market will crash again… I guess it is easier to predict the end of the world as sooner or later, it will happen and they could all say “I was right!”… only I was 5 years late….

So here are some of the bubbles that could burst at one point or another:

Precious metal, oh my so precious….

It’s been more than a year since we have seen gold push up from one record high to another. As many investors have enjoyed tremendous returns, more and more people are jumping on the bandwagon. I’d say that this is probably the first bubble to burst in the upcoming year. As far as historians remember (because the history of gold is way longer than any economic study), gold has always kept pace with inflation (but with much bigger fluctuations). In fact, an ounce of gold was good enough to buy a nice suit back in 2000 BC… and it is still good enough to buy a Hugo Boss today… after all this, the question remains: Do you really want to buy something that has already reached its peak? This is the case of gold in my opinion.

Canadian housing market to collapse?

As previously mentioned last week, the Canadian Government played with Canadian mortgage rules in order to reduce accessibility to the housing market. With these measures, it hopes to slow down the housing market and avoid a 2^nd American nightmare…

Since the housing bubble didn’t burst in Canada back in 2007 and we are still navigating through a low interest environment for a while, the government felt the urge to modify a few mortgage rules. While they ignore the concept of bubble yet, it is very possible that making a few changes over time will slow down the housing market and calm the flurry of first home buyers. If they could threaten to increase rates significantly, this would definitely put an end to this madness. However, economics is not as simple as raising or dropping an interest rate . This is why they opted for other alternatives.

Emerging markets �’ can they hold it for long?

Since 2009, emerging markets (more importantly the BRIC) has taken the world on their shoulders and are slowly taking most countries out of the recession with their huge appetite for resources. However, they also have started to run into a few speed bumps such as 8% inflation in China and striking employees looking for better working conditions in India.

These countries could experience their own industrial revolutions as well and god knows what will become of it. There is a lot of hope invested in the BRIC but their stock markets are inefficient and not transparent at all. I guess this is why we have such risk of having the bubble burst from the “truth”.

Among the top 3 bubbles to burst, I’d put my 2 cents on gold… I really don’t like this precious metal. In fact, I don’t even like its color… I prefer silver!

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If you are a representative of generation X, I might look at you as an old fart. As a generation Y fellow myself, I haven’t yet conceived of the notion it is possible to have a life passed the age of thirty.

Since you were around during the Great Depression, I thought you might understand something a Columbia Business School professor pointed out on NPR better than my generational peers.

In the years leading up to the Great Depression the American public was very “debt happy.” More people were buying homes and investing in the stock markets than ever before. They were using borrowed money to do it too.

But the entire economy of the 1920′s was built on borrowed money. Gross Domestic Product, the most common measurement of our economic health, was around $100 billion (in today’s money) in 1929. According to Columbia professor David Beim, the total amount of debt owed in the country was also $100 billion. That means the amount of money we owed in this country was the same amount as our GDP.

Flash forward to 2007. In 2007 our GDP was more like $13 trillion. What is our debt situation like? $13 trillion. Once again the ratio of GDP to total debt is 100%. Does that terrify you? It should. The only times this has ever occurred was in 1929 and again today.

Now don’t fret just yet senior citizens. Half of what caused the Great Depression was the economic policy and weak government action that followed the crash and bank runs of the late 20s and early 30s. The financially struggling government was forced to raise taxes to keep their programs alive. So far our government today has been smart enough to avoid that bad call. Here are some other preventative measures we took that were all lessons learned from the Great Depression:

FDIC: Deposit insurance didn’t exist back then. People ran to the banks to pull their money out.
With literally no money banks closed overnight, and the credit markets froze.

Federal Reserve: The Fed didn’t exist back then. The free market raised interest rates at first so no one could afford to borrow money. Our Fed has swiftly cut rates to nearly 0%, making borrowing easier (though still difficult).

Regulation: In short there was none at all back then. So when everyone lost faith in the markets, they crashed hard. With the SEC, FDIC, Fed, OTS, and other regulating bodies, many of us still have faith that the system works.

Granted, I’m not here to tell you we’re going to be fine and dandy for your retirement in five years. What I wanted to illustrate was first the gravity of this recession, and secondly show you exactly how far we have come. I didn’t expect you to learn from all of your mistakes from last time, but you did learn from some. Just like I’ll learn from some of your mistakes this time and not repeat so many of them in another few decades.

Now if I can just figure out a way to avoid paying social security to support you old timers I’ll be all set.

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How would you like to study a economics course offered by an Ivy League university taught by one of the top economists in the world from the comfort of your home? And what if it was all completely free? Well, you can. Thanks to Yale’s open courses project and great technology, you can take part in a higher learning experience like no other.

With little more than a computer with internet access, you can view lectures, listen to audio, read transcripts, and print exams and notes right from your home. Here’s what you need to know so you can get started.

About the Course

Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on. The workings of these institutions are important to comprehend if we are to predict their actions today and their evolution in the coming information age. The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century.

What You’ll Need

To experience all aspects of the online course, you will at least need to make sure your computer is up to the task. Since the course has both audio and visual components, it is important to have the proper software installed so that you can take advantage of everything. 

If reading is your style, you’ll need nothing more than a web browser as you can pull transcripts of the lectures right from the site. In addition, any slides used in the lecture are in regular PDF format. You can also get audio clips of the lectures which can be downloaded in MP3 format and are relatively small. But to get the full effect, you’ll probably want to watch the videos of the lectures. There are two different formats: Flash and Apple Quicktime. Obviously, you’d like to be using high-speed internet if possible, although there is a low-bandwidth Quicktime option. The high quality Quicktime versions will run many hundreds of megabytes in size, so keep that in mind. I was mostly playing around with the Flash version, and I found the quality to be just fine and it streamed without a hitch on my cable connection.

The course also requires a number of readings from various texts. There are some classics on the list as well as some new books. Unless you want to build up your personal library with books on economics, banking, and financial markets, you’re probably not going to want to buy them all. While you can often find used copies on Amazon for pretty cheap, you’ll probably have better luck by just going to your local library and checking out the books as you need them. 

Take the Course

So with that, get out there and start learning. The good news is that you can study at your own pace, and you don’t have to worry about failing. And if you start reading and watching the lectures and find it’s just too much or not interesting to you, you’re not even out any money. So, if you’re looking to learn more about how the markets and broad economy works, give it a shot.

• Course Home Page
• Syllabus
• Class Sessions

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To see how prevalent this has become, just ask someone what they do for a living. This used to be a simple answer: “I work in manufacturing” or “I’m a teacher” or “I’m in sales.” But now, you’ll often find that people don’t have an easy to define label. They may rattle off a handful of things or projects they do. Try it on yourself. When asked what you do, what’s your answer? Is it a succinct 2 second quip, or does it take you a minute to explain everything?

While It Isn’t New, It’s Becoming Mainstream

The idea of the gig economy isn’t new. Those who have always been on their own or worked in a number of creative fields have been doing this for year. Moving from project to project, and getting paid as they go. Typically, we thought of these types of people as uneducated, low-wage earning workers without a direction. But it is becoming increasingly common for well-educated and higher income people to take up this kind of employment.

The Daily Beast did a poll in January and the results were somewhat surprising:

Five hundred employed U.S. citizens aged 18 and over were interviewed via the Internet on January 8 and 9.

A full one-third of our respondents are now working either freelance or in two jobs. And nearly one in two of them report taking on additional positions during the last six months.

Just as startling, these new alternative workers are not overwhelmingly low-income. They’re college-educated Americans who earn more than $75,000 a year.

As you can see, the idea of working freelance, or at least taking on additional projects has been an increasing trend as of late. I think an even bigger part of this shift is due to our generation, and those even younger. We don’t see the same loyalty to our employers that our parents did. We’re not planning on working for the same company for thirty years just to get a gold watch and a pension.  And as can be seen with the massive layoffs in the past year, nobody is safe. Because of the insecurity and lack of loyalty from our employers, it only makes sense that the younger generations are taking more control over their careers, which often means working on their own.

As Layoffs Mount, Planning Ahead Could Pay Off

If you’re already firmly established in the gig economy, you probably feel fewer effects of rising unemployment. Your work might not be tied to an employer, and it’s up to you to keep finding new jobs and to make money. While the bad economy can affect many aspects of your business, you can at least sleep easier knowing you won’t wake up tomorrow and be handed a pink slip.

But what about those who are counting on that regular paycheck from their single job? What happens when they are shown the door? Unemployment benefits are pathetic and can’t support a family, and the prospect of finding another job these days is pretty grim and could take months, or even a year or more. You can continue to send your resume to dozens of potential employers a week, and scan the classefieds and job boards, but that isn’t going to put food on the table. 

I’d argue that if you are just plugging along at your job and hoping for the best that you won’t be laid off, you should be putting a contingency plan in place. Yes, you should have an emergency fund and some basic necessities covered in the event that happens, but you should look beyond that. What will you do for work? Just hope that you can find a job soon? Will you take a lower paying or unrelated job just for the time being? You could do that, or you could take control and put your skills and experience to work.

What skills do you have that you could put to work? What is your experience? Find out what you have that others may need, even if it isn’t directly related to what you were doing. Did you get laid off as a biochemist but have experience with and fun working with computers? Think about how you can possibly do computer consulting. Help people set up their home networks, build websites, or whatever it is you enjoy doing and could make a few dollars with.

A Blessing in Disguise

A job loss could also be a blessing in disguise. Many people have dreams of starting their own business, or embarking down a different career path, but the good job and steady paycheck is just too much to walk away from. So many people go through their whole life afraid to take that next step because they don’t want to give up what they have. It only makes sense, because if you’re supporting a family, it’s hard to just walk away from a job that pays the bills.

But if you find yourself out of a job, it could be the best thing to happen to you if you have dreams of doing something else. You didn’t have to make the difficult choice of quitting just so you could try something new. Your employer made that choice for you. This is the time for you to sit down and think about what you really want to do with your life. If you had a dream of changing careers or trying something new, you won’t have a better chance. The worst that can happen is you find it isn’t working out, and you can pick up the job search and go back to what you might have been doing before. The best that can happen is that you’ve found something that you love to do, and the freedom to do it.

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Of course, we have two political parties that have differing views on what is appropriate in terms of stimulus. That being said, the republicans have recently put together a list of what they feel is wasteful spending in the proposed senate stimulus bill. The list adds up to about $19 billion, or around 2% of the total proposed spending. It seems like 2% is a drop in the bucket, and in the grand scheme of things, it might be. But we’re still talking about $19 billion dollars. That’s more than the GDP of some small countries and U.S. states.

So, what’s on the list? 

•  $2 billion earmark to re-start FutureGen, a near-zero emissions coal power plant in Illinois that the Department of Energy defunded last year because it said the project was inefficient.
• A $246 million tax break for Hollywood movie producers to buy motion picture film.
• $650 million for the digital television converter box coupon program.
• $88 million for the Coast Guard to design a new polar icebreaker (arctic ship).
• $448 million for constructing the Department of Homeland Security headquarters.
• $248 million for furniture at the new Homeland Security headquarters.
• $600 million to buy hybrid vehicles for federal employees.
• $400 million for the Centers for Disease Control to screen and prevent STD’s.
• $1.4 billion for rural waste disposal programs.
• $125 million for the Washington sewer system.
• $150 million for Smithsonian museum facilities.
• $1 billion for the 2010 Census, which has a projected cost overrun of $3 billion.
• $75 million for “smoking cessation activities.”
• $200 million for public computer centers at community colleges.
• $75 million for salaries of employees at the FBI.
• $25 million for tribal alcohol and substance abuse reduction.
• $500 million for flood reduction projects on the Mississippi River.
• $10 million to inspect canals in urban areas.
• $6 billion to turn federal buildings into “green” buildings.
• $500 million for state and local fire stations.
• $650 million for wildland fire management on forest service lands.
• $1.2 billion for “youth activities,” including youth summer job programs.
• $88 million for renovating the headquarters of the Public Health Service.
• $412 million for CDC buildings and property.
• $500 million for building and repairing National Institutes of Health facilities in Bethesda, Maryland.
• $160 million for “paid volunteers” at the Corporation for National and Community Service.
• $5.5 million for “energy efficiency initiatives” at the Department of Veterans Affairs National Cemetery Administration.
• $850 million for Amtrak.
• $100 million for reducing the hazard of lead-based paint.
• $75 million to construct a “security training” facility for State Department Security officers when they can be trained at existing facilities of other agencies.
• $110 million to the Farm Service Agency to upgrade computer systems.
• $200 million in funding for the lease of alternative energy vehicles for use on military installations.

That is quite the list. And I’ll be honest, most of what’s on that list are things that would be good for the country. Even so, do all of these things work to actually stimulate the economy? That is what this bill is proposed to do after all. For instance, $448 million to build, and nearly $250 million to furnish the new homeland security headquarters. Really? Homeland security has been around for a while now, why didn’t they get a headquarters when the economy was doing well? How many jobs will that $700 million really create? Will that improve our financial markets? Will it ease the credit crisis? No. How about an additional $75 million for the FBI employees? Unless that is being used to bring in more new workers (I don’t know, maybe it is), that won’t stimulate our economy. 

At the same time, there are plenty of things on this list that I don’t think are wasteful at all. Just take the $500 million for state and local fire stations. This is a vital public service, and with tax revenues down, municipalities are having a tough time providing all the services they need. And $200 million to purchase computer equipment for community colleges? This is fantastic! It puts money right into the economy, and also improves the accessibility of education for those who can’t afford major universities. And the youth activities to improve summer job opportunities, again, this is something that directly impacts the bottom line. 

So, I’m just interested to hear what others think. There is a lot of self-serving on the government’s part to work on their own buildings and provide things for their own employees, but there are also a number of items that seem like no-brainers in terms of stimulating the economy.

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How dare I make light of economic conditions that are forcing people out of work and out of their homes, but everything isn’t all doom and gloom with the recession. If you’ve lost your job recently, there is probably little optimism in thinking that the recession is somehow a good thing. And it’s true, these economic periods are painful for individuals, corporations, and the country as a whole.  But this isn’t the first recession we’ve ever had, it won’t be the last, and it’s something that has to happen on a regular basis.

The Business Cycle

Without going into a complicated economics lesson, it’s important to at least understand the basics behind the business, or economic cycle. The economy isn’t static, and we regularly experience periods of growth and decline. The economic cycle is broken down into four basic components:

• Expansion - A period of increasing growth and economic activity.
• Peak - The apex of an expansion period.
• Contraction - A period of decreasing growth or slowing economic activity.
• Trough - The lowest point during a contraction period.

While the length and severity of each of these economic periods vary, the general cycle holds true. The economy will grow and expand for some time and eventually reach a point where it can’t continue that level of growth and it peaks. From there, it will experience a period of contraction. This may last a few months or a few years. After a period of a slowing economy, things bottom out and will again resume growth. And the cycle repeats.

This isn’t a new phenomenon. Looking back at just the past 50 years, we’ve dealt with 10 periods of recession. Some were short-lived, others lasted longer, and of course, some hurt more than others. While this recession is caused by factors different from past recessions, it was bound to happen, and was even expected. We didn’t need a crystal ball to predict that. But what we can’t predict is exactly how long it will last, and who will be hurt by it the most.

Extended periods of growth can create excess in the economy, and eventually this has to be purged from the system. Unfortunately, this usually results in job loss, businesses closing, and a declining stock market. But the bottom line is that an economy can’t just continue to grow and grow non-stop. Would it be great if we had zero unemployment and our stock portfolios marched along earning 10% every single year? Of course, but that isn’t how the world works.

Americans Are Saving More

Americans have one of the worst savings rates in the developed world. We are one of the richest and most prosperous nations, yet we can hardly save any money. Part of this has to do with having a consumer-driven economy. If people are spending money, businesses are doing well, expanding, and creating jobs. That’s a good thing, but it also creates a situation we’ve experienced lately where people have very little money saved since they are basically encouraged to spend.

Even with dismal savings rates barely above 0%, this recession has done one thing, and that’s boost our savings rate as a nation. While it still lags far behind many other countries, an increase in savings is good. People are starting to realize the importance of having money set aside. Whether it’s for retirement or just an emergency. Of course, that’s also bad because it means people are spending less, which in turn doesn’t help stimulate an economic recovery. 

And the even better news is that if people begin to save more, they will have that cushion in place when the economy shrinks again at some point in the future, because it will. Of course, this is assuming people don’t go back to their old spending habits as soon as the economy begins to recover.

Back to Common Sense Spending

Frugality is making a come back in 2009. In recent years, spending got out of control, in large part due to easy access to credit. Virtually anyone could afford a brand new luxury car, buy a home out of their price range, and charge anything on credit cards. When times are good, you’re making money, and can keep up with the bills, that seems like a lifestyle you can afford. But as soon as the annual raises stop, you lose a job, or something else happens, suddenly you can’t make the car payment and can’t keep up with the monthly credit card bills. 

This isn’t to say that everyone was spending wildly or using more credit than they could afford, but since the banks were basically handing out money, a lot of people took advantage of it. Now, it’s coming back to haunt a lot of people. Those who were relatively frugal over the past few years are not being affected by this economic downturn as much as those who have lived beyond their means. So, more and more people are beginning to revert back to common sense spending — buying only what they can afford, and not relying on credit. 

It always amazes me to see stories in the news about how people are making so-called drastic changes to their spending habits in these difficult times. Most of these changes aren’t drastic or anything new, but common sense things people should be doing anyway. For example, take this story I saw in my local news this weekend about Innovative New Ways to Manage Money. Here are a few of the “innovative” and “new” ways this woman is saving money:

We used credit cards a lot and just changed some things,” Budzinski said. “We have dogs, and instead of buying high end dog food, we switched to the lower end dog food.

A good start, and how about:

[We're] buying generic stuff, and not going out to eat as much. And when we do, we more or less split a meal or we go out to eat lunch instead of dinner.

Amazing! You can save money just by not using credit cards as much, buying cheaper dog food, and not going out to eat as much. These truly are new and innovative money saving ideas! I’m sorry about the sarcasm and I don’t want to belittle anyone’s attempts at saving money, because it’s fantastic that people are making changes. But what bothers me is how the media treats this as news. I see articles exactly like this every week going on and on about how people are just using common sense and actively trying to save money. That’s not news, it’s just something people should have been doing all along, and it really just illustrates how excessive people’s spending habits were if they feel that eating out less or not using credit cards is some financial revelation. If it takes a recession to make people think harder about what they are spending money on, and to make a conscious effort to save money, that will help a lot of people in the long run.

Back to Basics in Housing

One of the root causes of this recession was a real estate market that got out of control, fueled by speculation and the ability for almost anyone to get a loan. Yes, there were plenty of shady lenders, but it got to a point where anyone could get more house than they could truly afford. A plethora of no-doc or low-doc loans allowed people to fudge numbers in order to afford their dream house, you could easily get 0% down loans, not to mention all of the ARMs and interest only loans. This put people in a position who had no business trying to buy a home suddenly find the bank willing to lend them the money to make their dreams come true. 

Owning a home is a privilege, not a right. Prior to the real estate boom, lenders had tighter standards in determining who could afford a home, and how much they were willing to lend. In most cases, a down payment was required, and this meant prospective buyers had to have the discipline to save some money on their own first. In turn, this down payment then provided immediate equity that could help minimize fluctuations in property values. In addition, lenders were typically more conservative in terms of how much they would lend based on credit history and income. With these tighter standards, it helped put people in a home that they could comfortably afford while the bank minimized risk.

Today, we’re moving back to the basics, although we’ve overshot the baseline a bit with the credit crunch. But banks are starting to move back to more traditional fixed-rate loans, requiring a good credit score, and down payments. They are also taking into consideration how much people make, and making sure they aren’t lending too much.  Unfortunately, this move has priced a lot of people out of a home purchase right now, and it’s made it harder to get a loan, but it’s a step in the right direction. It will hurt for a while to be sure, but it should create a more stable situation in the future provided history doesn’t repeat itself.

What Doesn’t Kill Us Makes Us Stronger

Without diminishing the pain and suffering people go through during difficult economic times, a job loss, or home foreclosure, it likely isn’t the end of the world. It may feel like it, and it may lead to years of trying to claw yourself back up, but it can make you stronger. People faced with difficult times learn things about themselves they may have never realized, may explore a new direction in life, or find out there is more to life than money and material things. 

But I’m not talking about individuals, as each story and situation may be a heartbreaking tale, but rather I’m talking about the country as a whole. We’re faced with some economic conditions of epic proportions, and we’ll get through it. It may change the face of our country forever, and create a new way for many businesses to operate, but we’ll learn from it and come out the other side even stronger. Of course, once we do, history is bound to repeat itself. Our economy will grow, money will be made, and jobs created, but at some point we’ll find ourselves a victim to the inevitable economic cycle. The best thing you can do is to learn from the mistakes, and take actions to ensure the next time it happens, you limit the impact.

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I don’t discuss politics on this site, and for good reason. It always seems to bring out the ugly side of people when a heated debate starts. I would rather talk about things from a pure financial standpoint and keep politics out of it, but something came across my news feed this morning that really caught my eye. When reading a headline about Obama’s economic rescue plan, I saw that one of the components of the plan would be to allow people to withdraw 15%,  up to $10,000 from their retirement plans, this year and next, without penalty. I don’t care what political party proposed this idea, but this is a shortsighted band-aid of a solution that won’t address long-term financial troubles. 

UPDATE 02/2009: As of now, the stimulus packages that have gone through and become law do not provide the penalty-free withdrawals that were initially discussed. 

Sending the Wrong Message

Suddenly allowing people access to some of their retirement funds without risk of an additional 10% penalty is sending the wrong message to savers. Many people that this economic plan is targeting are those who need retirement savings the most–the working class who are struggling to get by, yet know the importance of saving for retirement. These individuals aren’t typically going to be the ones to amass a few million to fund their retirement, and instead are going to rely on what they have saved to provide just some sort of supplement to Social Security and possibly a small pension. If you give someone an opportunity to wipe out 30% of their retirement account over the next 15 months, you’re just setting them up for having even less in retirement, whether that’s just a few years away or a few decades.

A Backdoor for Generating Tax Revenue

If you notice, this plan only calls for eliminating the 10% early-withdrawal penalty, but guess what. You will still have 20% withheld from your distribution for federal taxes. That’s right, the government would be nice and let you keep that extra 10% you’d otherwise have to pay, but they will gladly collect their tax on the distribution. If you do the math and look at the hundreds of millions that people would begin withdrawing, the government stands to rake in a good chunk of change.

Now, I’m not against the government getting their money. After all, these were tax-deductible contributions that have grown tax-deferred, so they aren’t doing anything wrong. But what I do have an issue with is that this comes across as a wolf in sheep’s clothing. You’re making it very attractive for regular people to suddenly get access to a few thousand dollars of their savings while you quietly rake in taxes that would otherwise be tied up for decades. Factor in the loss of the power of compounding by taking the withdrawal with the taxes they will be paying, and you’re making it a raw deal for the individual.

It Looks Good On Paper

It looks good for voters, but that’s about it. Obviously, everyone is saying whatever they can to try and elicit votes, and at first glance, it’s easy to see why this idea would make sense. In theory, this really would provide some cushion for those who are in a tight spot. The other part of the theory is that only people who are left with no other option would withdraw money from their account. The reality is that if you allow this, even people who aren’t on the brink of foreclosure or in dire straits will tap into their account to take advantage of this “free” money. It would be seen as another stimulus check.  So, while some people really could be helped out of a financial bind, there are just as many people who will see this as an opportunity to take the money out when they otherwise wouldn’t have considered it or even had the option to. This will just be a short-term shot in the arm that will put them at a greater disadvantage in the decades ahead when they need to rely on their savings for retirement income.

In addition, most plans also already allow loans and/or hardship withdrawals. Those provisions were put in place for exactly these types of situations, where someone might need real financial help. Not only that, but since over 80% of retirement plans allow loans, people should be seeking a loan first since there is already no penalty or taxes owed as long as you make payments on the loan. In addition, loans typically allow you to borrow up to 50% of your contributions, which may be far more than the proposed 15% or $10,000 suggestion. Even with these provisions in place, I still see people who use them to treat their retirement account like a bank account. So if you offer a period of time where they can take the money without penalty, they surely will.

You Couldn’t Pick a Worse Time

Most people’s accounts are down anywhere from 20-50% over the past year, so selling now to take advantage of this withdrawal would make matters worse. Not only would you be selling at a loss, but you’re going to lose another 20% to taxes. If that’s not a raw deal, I don’t know what is. Some people stand to take a 70% or greater loss on the money they would take out.

Not only that, but this creates more selling in the market. If we started to see a steady flow of people liquidating what part of their retirement plans they can, you’re putting even more pressure on the already battered stock market. They keep telling people not to worry, stay the course, and keep investing, but this plan basically encourages people to take their money out.

What Do You Think?

As I mentioned from the beginning, this doesn’t have anything to do with one political philosophy over another since I’d be equally dissatisfied with this idea if it was presented by another candidate, or a non-partisan academic. I might be a little biased since my line of work has me dealing with retirement plans and their participants, but with the stuff I see every day and the decisions people make within their plan, I know this would be a very bad idea that’s trying to fix a much larger problem. What do you think?

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