Time for a break

Ugh. Too much time spent thinking about money. I need to take a break. Losing sight of what's really important.

Hey, but if you like thinking about money, here's a pretty much awesome retirement savings calculator: Retirement QuickPlan.

AARP -- It's for hotties!

Even though I'm not strictly AARP-eligible (11 months to go), when they sent me an invitation to join, I leapt at the chance. $39 for a five-year hitch.

What do I get for my forty bucks? Well, if they live up to their word, they'll be sending me a cool new wireless indoor/outdoor thermometer (sweet!). Plus someone to whinge on my behalf in Washington. And, they've got a great discount package for motorcycle and mobile home insurance.

Woot!

So what do you think about this?

Jane over at Boston Gal's Open Wallet is a top, top personal finance blogger. Focused, disciplined, and with real financial goals for herself. But this post of hers stopped me cold:

Every so often you hear about someone who has received an amazing gift of good fortune. They won a lottery, received a large inheritance, or obtained a job with crazy stock options that have made them millionaires. Basically, through shear luck, they have managed to leap frog into great wealth and early retirement. But these are the rare exceptions. Most of us will never be that lucky.

For the majority there are no short cuts. Getting ahead requires hard work, steady employment, evolving skills, delayed gratification, life-style compromises, spending hours, months, years in jobs we don't particularly like, prudent investing, increasing savings, and on and on. Eventually, if we work hard enough and save long enough, we reach the day where all of our efforts have paid off and we can retire our stresses and worries and support ourselves in our golden years.

Now maybe it's because Jane is a New Englander, but man is that a grim view of life. You have to slog your way through a joyless existence at a job that sucks, never getting what you want, until one day -- long in the future -- just as your teeth rot out and your vision goes, you can finally enjoy the fruits of your labor.

Like this poor dear:


who didn't get to smile until it was too late.

On the run

I've got this stack of e-mail drafts, pieces of paper, and ideas floating around in my head for blog posts, but I have no time to do anything about it.

The $100,000 Quandary
One of the most popular topics in this blog (based on traffic stats anyway) is the whole question of what it's like to try to raise a family on $100,000 per year. We've been tracking our expenses much for carefully for the past 9 months, and I have some new data to post (and some new observations).

Scamfotainment
I saw this link (save money by refinancing your car loan) in the Globe (ha!) a while ago. It's even worse than the cr*p that they syndicate from bankrate.com.

The Medical Costs Meme
In my last post, I wrote about health costs and how lucky we are not to be in Bright Side of Debt's situation, being chased by collectors on medical bills, even though she and her family are insured. Yesterday there was a feature in the Times on that very subject:

Many of the 158 million people covered by employer health insurance are struggling to meet medical expenses that are much higher than they used to be — often because of some combination of higher premiums, less extensive coverage, and bigger out-of-pocket deductibles and co-payments.

With medical costs soaring, the coverage many people have may not adequately protect them from the financial shock of an emergency room visit or a major surgery. For some, even routine doctor visits might now take a back seat to basic expenses like food and gasoline.

P.S. Thanks as Always to Claire
I've just got to say, it always makes me happy when my feed reader says there's a new post over at Tired But Happy. Maybe it's the fact that she and her partner are older parents like me, or that their kid is about the same age as my eldest. Or maybe that hers is the road not taken. After we got married, Mrs. Bluebird and I thought, for maybe 5 minutes, about staying in the somewhat funky, transitional Boston neighborhood where I was living. But a shorter commute, and the chance to live in the midst of a lot of recreation-friendly open space won out.


But we could have been like Claire.

Fairness

The Bright Side of Debt writes about her struggle to pay off a series of medical bills incurred when her husband was sick. I naively asked her whether she had health insurance -- she does, but it's a policy that requires that she pay 20% of all the costs -- in this case about $4,500.

Our policy, which costs us about $4,000 per year (and my employer another $16,000 or so), has $20 office copays, a $250 inpatient admission copay (including day surgery), and a tiered set of copays (up to $50) for prescription drugs. When I was in the hospital for a day last summer (2 ER visits plus outpatient surgery for a rather large kidney stone), my total out of pocket was about $400.

Health care in this country is very expensive, compared to most of the rest of the world, and based on our health data, not any better. It is expensive because of a series of choices that we've made as a society:

• We've decided that doctors should be able to make a lot of money. (Average salary for a urologist: $358,000.)
• We've decided that drug companies should be able to make a lot of money.
• We've decided to allow the food industry to dictate national nutrition polices.

Well somebody's got to pay for all this, and that somebody is us.

The question is, who.

Right now, every American who has enough income to be ineligible for Medicaid has to pay the same for health care. A hedge fund manager pays the same $10,000 or $20,000 per year in health costs as the person answering the phones. As a percentage of income, however, there's a gross imbalance. I see this at my own workplace. I pay the same health insurance premium as higher-paid employees (for whom it's a neglible expense) and lower-paid ones. In the case of lower-paid employees, rising health insurance premiums and copays can quickly eat up the bulk of any salary increases.

One of the potential hidden advantages (at least to my way of thinking) for government mandated/subsidized/funded health insurance plans is that they offer the opportunity to introduce some progressiveness into how this is paid for. Specifically, to the extent that high-income families pay income taxes at a higher rate than low-income families, the portion of government money used to subsidize national health insurance can act to reduce the burden of health care costs on low- and moderate-income Americans.

Coincidentally, in today's Journal there's an article about how hospitals are now demanding up-front payment of copays and deductibles before starting treatment:

LAKE JACKSON, Texas -- When Lisa Kelly learned she had leukemia in late 2006, her doctor advised her to seek urgent care at M.D. Anderson Cancer Center in Houston. But the nonprofit hospital refused to accept Mrs. Kelly's limited insurance. It asked for $105,000 in cash before it would admit her.

Sitting in the hospital's business office, Mrs. Kelly says she told M.D. Anderson's representatives that she had some money to pay for treatment, but couldn't get all the cash they asked for that day. "Are they going to send me home?" she recalls thinking. "Am I going to die?"

Oh yeah. There's another reason that I feel so poor

Household income distribution for the town where I live:


... for the town where I shop:


... for the town where I work:

Boost your retirement savings and save money at the same time

From Mark Hulbert at the Times comes an article suggesting that trying to adjust your asset allocation mix as you age is at best useless and at worst counterproductive.

CONVENTIONAL wisdom recommends that investors start with a high allocation of stock in their portfolios when they are young and reduce it as they approach retirement.

That makes intuitive sense: In your 20s, you may be inclined to take bigger risks; in your 60s, you may feel a greater need to protect the wealth you have been able to amass.

But a recent study of real-world portfolio returns, which fluctuate significantly from month to month and year to year, has found that there is no particular advantage in this approach. You would do just as well, with no greater odds of doing poorly, by simply picking an allocation of stocks and bonds that you can live with for a long while and sticking with it.

That is the implication of “Hitting or Missing the Retirement Target: Comparing Contribution and Asset Allocation Schemes of Simulated Portfolios,” by Harold J. Schleef, an economics professor at Lewis & Clark College, and Robert M. Eisinger, an associate professor of political science at that institution. It was published last year in the Financial Services Review, an academic journal.

Here at Hedonic Adjustment, we only link to articles that support our narrow view of the world, and this is no exception. Spending money to hire a portfolio manager to rebalance your portfolio as you age has always been a dubious use of money (since it's so easy to do yourself).

We subscribe to the widely held view that it is asset type (stock, bond, cash, commodity, real estate) rather than asset selection (a particular stock, bond, or mutual fund) that is the primary determinant of performance.

Why do I feel so poor?

The year before we were married, Ms. Bluebird and I made about $300,000 between us. We each were living lives of frugal singlehood. She drove a Saturn. I had a VW. She lived in a 1-bedroom condo. I lived in a 2-bedroom house.

This was back before the invention of the personal finance blog, of course. But if there had been such a thing, we would have been the poster children for prudence and restraint.

Last year, we made a little more than $100,000. While we now only have one house, we have three cars, and two hungry children. What's worse, the actual purchasing power of our $100,000 in pre-nuptual dollars (to make the comparison with our earlier $300,000 income fair) is only $80,645.

Ouch. In inflation adjusted terms, our income has fallen by 73% while the number of people in our family has doubled.

I say it again.

Ouch.

"Crime against humanity"

From this morning's Journal:

"When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels," said India's finance minister, Palaniappan Chidambaram, in an interview. Turkey's finance minister, Mehmet Simsek, said the use of food for biofuels is "appalling."

I have to say that I agree. Beyond jacking up world grain prices, biofuel production is extremely energy-intensive and causes additional environmental damage perhaps comparable to the damage caused by fossil fuel extraction.

Although the Journal doesn't say so, I am of the view that we, the United States, have contributed to runaway food prices not just by burning food in our cars. Our fiscal (low tax) and monetary (easy money) policies have encouraged Americans to consume, consume, consume and borrow, borrow, borrow (seen the movie Maxed Out?) Now that we can't pay the money back, all of the countries that export to us, and from whom we borrowed extravagantly to fund our buying, are stuck with (a) dollar-denominated debt and (b) currencies mostly pegged to the Dollar.

So not only is food in short supply and expensive, but the currency that hungry nations must use to buy it is eroding rapidly in value (see Helicopter Ben).

So the next time you see a big GM SUV with a badge on the back that says "FlexFuel Vehicle", Imagine it standing next to a hungry child somewhere.

What's wrong with this picture?

The Journal is running a puff piece today about job insecurity among Wall Street workers.

Derek Thornhill never imagined he would be canceling vacations and cooking dinner at home to save money. In 10 years working at Bank of America Corp., he rose to become one of the company's top equity salesmen.

But in January, Mr. Thornhill was laid off -- the day before he was expecting the annual bonus that typically accounts for 75% of his pay. Instead, he was paid 20 weeks of severance and a bonus that was only 5% of the previous year's. People in his position typically earn roughly $500,000 to more than $750,000, including their bonus.

Maybe it's just me, but I would be deeply reluctant to buy anything from a salesman being paid a half a million dollars a year. I mean an equity is an equity. When you buy stock from an organization that makes huge profits ($21 Billion in 2006) and pays its salespeople huge commissions, you are losing money, compared to what it would cost to buy that equity yourself.

Now it may be that Thornhill sells private placement equities that aren't publicly traded. In which case one would have even more reason to be suspicious.

When it comes to investing, I follow these three rules:

1. I only buy assets that I understand.
2. I buy them as inexpensively as possible.
3. I recognize that asset class, rather than individual asset selection, is the primary determinant of financial performance.

And if I must deal with a salesman to buy something, I choose the guy driving the Hyundai.

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Go to the happy place. Go to the happy place

So those clever bootses over at Lehman have taken a bunch of their toxic debt, shoveled it into a CLO, bought a few expensive lunches for the bond ratings guys to get an A rating for the tranche that won't default until 20% of the underlying debt fails, and then used it as collateral for a loan from the Fed.

That's our Fed. Yours and mine. The custodian of the government's money. Taking a reeking pile of investment grade Lehman garbage wrapped in a Moody's bow and passing out government money.

One person familiar with the matter said the vehicle was named Freedom because it was designed to give Lehman freedom to tap as much cash as possible if needed. The size of the borrowing from the Fed wasn't known, but the person said it wasn't "material" and was meant as a test of what the Fed would accept.

The loans in the pool included debt that was issued to finance last year's leveraged buyouts of First Data Corp. and TXU Corp., a person familiar with the matter said.

A number of Wall Street executives called Lehman's move "brilliant" and said they may follow suit. One senior finance executive at a rival of Lehman's said his main reservation with Lehman's move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash. Still, he noted that unlike many troubled mortgage securities, there is a discernible market for leveraged loans.

"It's a very creative way for investment banks to get liquidity from assets that they don't want to sell at fire-sale prices," said Todd Kesselman, managing director of Precision Capital, an investment-advisory firm that specializes in structured credit and private equity.

This, I suppose, represents the zenith of the Republican free-market ideology.

Grim News

While the fatuous Alan Greenspan works frantically to burnish his reputation (and preserve the impact of his Randian free-market obsession), the Journal observes that the world is now engulfed by rapidly igniting inflation.

Kimberly-Clark Corp., maker of household goods, began raising prices in February between 4% and 7% for some paper products, including Huggies diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods Corp. raised the selling price of its chocolate bars 13% in February after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc., which owns the Champion and Hanes apparel lines, has warned that sustained high cotton prices could filter through to retail prices.

It is obvious to everyone, except perhaps Ben Bernanke, that US consumer price inflation is accelerating rapidly while wages are barely budging. Anyone who depends on the value of their savings for income (now or in the future) is being savaged twice: rising prices and falling yields.

I am hoping that my salary will rise by something close to the current CPI rate of 4.3% this year, but there are no guarantees. Our household has been cutting expenses as best we can, but the most hard-to-defer purchases (energy and food) have been the most affected by inflation.

It's hard to picture the inflation picture getting better in the short term. I think it will create a lot of resentment among workers toward (a) their employers, who aren't likely to raise wages fast enough to keep pace with inflation and (b) the government, whose nominal job is to protect the integrity of the currency.

Oh sadness

Jon Clements has published his last column with the Journal. He will be missed!

Amongst the clamor and clangor of what passes for personal financial journalism ("10 Secrets to Instant Wealth"), he consistently offered simple, sane, sober advice about how to save and grow money. More importantly, he illuminated the connection, or lack of connection, between money and happiness.

From his column, the three things that money can buy:

1. If you have money, you don't have to worry about it. This isn't guaranteed. There are lots of rich folks who agonize constantly -- and needlessly -- about their finances. Still, if you save diligently, you should reach the point where money worries are relatively rare.

2. Money can give you the freedom to pursue your passions. Ideally, you want to spend your days engaged in activities that you find absorbing and satisfying, that you feel you're good at -- and where you feel you're doing good.

3. Money can buy you time with friends and family. You don't just need a reason to get up in the morning. You also need somebody to come home to at night.

I thought they were exaggerating..

Hedonic Adjustment is an all-Macintosh household. (Well, there's a PC in the basement that used to be a file server, but since we got a Time Capsule, the PC's been on craigslist.) At work, I use an XP system.

But yesterday, my new Vista-equipped PC arrived from Dell.

Wow. I simply couldn't believe how unpleasant it was to use.

I really thought they were kidding.

Frankly, I'd rather learn Linux than deal with Vista.

One or two incomes?

MP Dunleavy, whom I do not read on a regular basis, has a column about the question of choosing between living on one income or two. This is pretty much the same situation that Mrs. Bluebird and I are in, except that I'm working and she's home full-time with the kids.

Like MP (what kind of a name is that, anyway?), I'm keenly aware of the potential quality-of-life effects of having both of us work, as well as the fact that expenses would shoot up due to the need for child care.

We would have to find full-time day care for our son. That not only would mean an extra $1,000 a month — but I wouldn’t see the little guy at lunch or when he visited my home office to see mama “tippin” on her computer. If my husband was gone all day we would probably need a second car. And how would we divide the buying of groceries, doing the laundry, cleaning the bathroom, running to the hardware store and a thousand other chores?

As for what we would do with the extra money, it would be nice to have a fourth bedroom and a second bathroom. Right now, we don't have the cash to do this, and we don't have enough income to service the debt and other associated expenses (more taxes, more heating bills, etc.).

Of course that's just my take on it. I'm not the one actually has to deal with the children 24-7, day after day

Clements on Happiness

The world's best PF Columnist, the Journal's Jonathan Clements, had a nice column yesterday on happiness.

Despite the sharp rise in our standard of living in recent decades, Americans today are little or no happier than earlier generations. Why not?

A new study suggests one possibility: Maybe we need to be smarter about how we spend our time. And, no, that doesn't mean watching more TV.

The conclusion that Clements draws is that the reason happiness isn't going up, despite the fact that we are on average working fewer hours, is that we are replacing our work time with TV and internet time.

I know what makes me the happiest, though. Being outside:

But at 6:30 on a rainy morning, there's nothing like curling up with the internet.

This is not an April Fools Day Post

Apparently Americans' twin habits of overeating and driving everywhere, coupled with the push to reduce fuel prices by mandating the production of biofuels, has finally caught up with world food prices: We are on the brink of taking food from the mouths of the hungry so that we can afford to drive our Ford Explorers to the Burger King drive-through.

Noted bond investor Bill Gross is concerned that increased regulation of investment banks may cut into these banks' profits. I think that's going to be a huge problem too. As if the bubble-blowing, free-market fanatics at the Fed would be more than a paper tiger. Monetize the gains, socialize the costs, as Kris in JP says.

Although Americans' sedentary lives may be starving the rest of the world, they are providing great opportunities for profit for companies making drug treatments for high cholesterol and obesity. Fortunately for investors, the companies no longer need to worry about whether the drugs actually work. Thanks to an aggressive marketing campaign, Merck and Schering-Plough were able to rake in billions of sales for Vytorin and Zetia while at the same time suppressing the scientific evidence that these drugs didn't work.

_______________________________

If you're looking for less stridency from the PF blogosphere this morning, I would suggest two fine posts from two fine bloggers: A slice of warm, sunny family life from Claire, and a bit of a shocker from Jane over at Boston Gal's Open Wallet.

Pay off the mortgage?

We owe about $26,000 on our first mortgage. It has a fixed rate of 4.875% and a monthly payment of $300. If we continue to pay as scheduled, it will be paid off in about 9 years. We also have a home equity line of credit (HELOC) with a balance of zero and a current rate of 4.5% (it is prime minus 1%).

My kids' grandparents have given us about $20,000 to be applied toward the kids' future college expenses. Rather than put this money in the kids' 529 plans, I'm thinking about using this money to pay off our first mortgage, then taking the current $300 per month that we pay to the bank and writing that check to the 529 plan instead.

Here's why. Because of the current state of turmoil in the stock, bond, and credit markets, I'm not going to make a big lump purchase in my 529 plan. Instead, I plan to dollar-cost average over the next 6 months. I'm concerned, however, about the possibility of huge gyrations in the stock market. In particular, the S&P 500 P/E is still around 20 (forward). Given uncertainty around upcoming earnings, and the fact that P/E is about double what it normally is during a recession, it is within the realm of possibility for stocks to fall 20-40 percent over the next year.

In the mean time, the money is sitting in a money market account paying 3.3% (thanks, Ben) while the mortgage is costing me 4.75%.

If I were to take the money and immediately pay off the mortgage, I would stop the month-to-month bleeding caused by paying 1.45% more on borrowed cash than I'm getting on saved cash. Further, by buying 529 shares over the next 8 years instead of the next six months, I would have a more effective dollar-cost average.

Ordinarily, the biggest reason not to do this would be inflation. Specifically, if inflation were to heat up to 5 or 10 percent, the value of that borrowed money would begin to erode. Further, cash interest rates would rise to above the inflation rate, and my cash would suddenly be earning more than the cost of the mortgage.

Except, of course, that inflation is already close to 5% and interest rates have been moving down (see Helicopter Ben, again).

A hybrid scheme would be to pay off the fixed rate mortgage with a mix of cash and money from the HELOC, since the HELOC has a rate lower than the fixed loan. (By way of comparison, a fixed rate 15-year originated today would cost around 6%.)

What to do. What to do?

Odds and Ends

Scott Burns in the Globe with some basic advice and why it's harder to follow for young people today:

Marry, and stay married. The first part is easy. The second part is more difficult. But it's a great measure of capacity to adapt and change. The responsibility of having children teaches us to defer and to live on less because the children need more.

Be employed and stay employed. The fact that you have a sizable pension indicates you were a reliable and productive employee for quite a few years. It also means you benefited from having an employer who did a lot of your saving for you. So you never needed an investment adviser, and you could manage your basic saving on your own.

Live within your means. Your pension and Social Security benefits, alone, are greater than your annual expenses. You find this easy to do but, trust me, many don't. We live in a society that plays to grandiosity in all things. Living within your means allowed you to save enough money to build a comfortable nest egg.

Note that there are no miracles on this list, just consistency and the rewards of time. Sadly, the young are not so blessed:

Employment stability, even for reliable and productive workers, no longer exists.

Our pension system is being dismantled. Our corporations no longer take the responsibility for either saving for our future or for managing the savings. So many people need to have a financial adviser.

Advertising and electronic media have cultivated envy and expansive spending in ever more invasive ways. So it is a lot more difficult to lead a life of modest spending.

__________________________________

My Dad recently asked me what I thought about buying TIPS bonds. TIPS bonds are treasury bonds that are indexed to the rate of inflation (the CPI). The way the indexing works is that the principal amount of the bond is periodically adjusted to reflect the CPI. When the CPI goes up, the bond principal magically increases. TIPS bonds have a coupon rate, and they are bought and sold like other bonds, so the actual rate is determined by the price of the bond.

Currently, TIPS bonds have a negative yield. This is widely taken to mean that investors have very high inflation expectations (they are predicting that future adjustments to the bond principal will more than make up for the current low yield). Fed officials have downplayed the importance of this indicator.

My suspicion is that "smart" investors are attempting some sort of bizarre arbitrage with these bonds. Specifically, the bond is indexed to CPI while short to intermediate Treasury yields are tied, albeit loosely, to the GDP chain deflator computed by the Fed. I would also not care to own TIPS bonds if oil prices should happen to drop back into the $50 range, since we could suddenly see starkly negative non-core CPI numbers, which would reduce the principal value of the bonds.

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I am blessed with generally very good health, but I suffer from two common conditions that can be extremely painful (kidney stones and a herniated disk in my back). One of my biggest happiness challenges is figuring out how to not let pain make me unhappy. Even though I know that the pain will pass, when it is with me, it can be hard to stay focused on the keys to happiness. I have no insight here, just an observation.

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In that extremely irritating way that old people have of attempting to torment the young, I was trying to get my son to stop whining about how the DVR was not instantly serving up the desired episode of Word Girl by explaining to him what life was like when I was five:

• No DVR
• No DVD
• No videos
• No cable television
• No television at all
• No Google Video
• No YouTube
• No Disney
  
• No Internet
• No Computers

And beyond all of that, we didn't have one tenth the number of toys that you have. Some how, back in the day, people managed to survive without devoting an entire room to nothing but plastic kid crap. Kids just didn't have as much stuff?

Why?

Because before the wonderful world of "free trade" if you wanted to buy a manufactured article, you had to pay a worker a wage sufficient to live alongside of you, if not in your town at least in your state. And that meant that stuff was expensive.

Nowadays, manufacturers move instantly to the lowest-wage locations. Stuff is cheaper than ever before. And we're choking on it.

Largest current obstacle to happiness

That would be reading the newspaper. Consider this column from today's Journal.

[after Bear Stearns], the politics of targeting taxpayer money at beleaguered homeowners has shifted. No matter the merits or intellectual distinctions, it is nearly impossible for a politician to explain the following: Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were willing to risk as much as $30 billion of taxpayer money -- without congressional approval -- so that J.P. Morgan Chase could buy Bear Stearns cheap at an auction in which it was the sole bidder. But a taxpayer-backed rescue of homeowners whose mortgages are worth more than their homes is unwise and unwarranted.

Oh the inanity. The hypocrisy. The utter and complete moral and intellectual bankruptcy of the entire Republican ideology. From bailing out investment banks but not homeowners to subjecting hospital patients to adulterated Chinese drugs (got to preserve that free trade!) to trashing an entire economy so that buyout firms can make billions (hey, that's innovation at work).

If only I had the strength to just stop reading the paper.

Then I could be happy.

Stolen post*

A formerly obscure mortgage company, Thornburg, is now headed for bankruptcy, foundering under the weight of a portfolio of deteriorating Alt-A loans.

“I can’t believe it came to this,” Mr. Goldstone says. “The step down in the last two or three weeks is beyond anything I’ve ever seen, and I’ve been in this business 25 years.

“I’ve been sleeping two or three hours a night and working seven days a week for the last three weeks,” he adds.

Whether or not Mr. Goldstone can reprise Thornburg’s Lazarus-like return from the dead, Alt-A is likely to emerge as Wall Street’s next big worry. The Alt-A market totals $500 billion to $1 trillion, said Bose George, an analyst at Keefe, Bruyette & Woods.

IN other words, this isn’t the tip of the iceberg; it’s another iceberg entirely.

“Alt-A is such a broad group of loans, it’s very hard for investors to know which will perform poorly,” Mr. George says. “Big chunks will perform very poorly. Other parts will behave like prime.” That’s why so many investors are bailing out now.

The story of Alt-A and Thornburg also illustrates why the current credit crisis is different from past panics, like the market crash of 1987 or the crisis a decade ago when Long-Term Capital imploded. Those were rapid-paced events, which erupted and then faded from view. This is more akin to a slow-motion, chain-reaction car crash.

Hedonic Adjustment pooh-poohed this company years ago. Part of its marketing strategy was to work with financial planners to get them to have their clients take out home equity debt so that the planners could invest the client's money, and reap the management fees.

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*Why stolen? I'm on vacation, writing this on somebody else's computer while my kid runs amok in somebody else's living room.

The third bubble?

For the third time in the past 15 years, the Federal Reserve is trying to perk up a flagging economy by dumping interest rates.

The first time, it led to a massive bubble in stock prices.

The second time, it led to a massive bubble in home prices.

The third time, is it causing a massive bubble in oil prices?

The essential inanity of Fed policy is due to the fungibility of money: you can dump money into the system but you cannot control where it goes. All of this liquidity that the Fed keeps pumping into the system ultimately finds its way to trading desks at Goldman Sachs and others, and those folks are using it to speculate in, among other things, oil futures.

So not only is the Fed's cash infusion failing to stimulate consumer activity in any way (or business investment for that matter), it is directly fueling inflationary pressures through oil speculation.

Just a quick thought for a Thursday morning.

Two for a Monday Night

Yo, earth to Ben, earth to Ben...

My inflation expectations have become unanchored. My bagel store just raised the price of a dozen from $7.75 to $8.95 (a 15% increase). Filling up the family minivan now costs more than $50. A routine trip to the grocery store suddenly costs $145 instead of $120. Filling up the oil tank costs $700 instead of $400.

At the same time as my expenses are shooting through the roof, my income is stagnant. I'll be lucky to get a 4% raise this year.

And my cash savings? Thanks to Helicopter Ben, I am now seeing negative real returns from my money market and CD accounts.

I am not pleased.


When it comes to money and happiness, it's not how much you have, but how much your neighbor has...

From the New York Times, a story on how income and happiness are linked.

When measuring the economic welfare of the typical family, the natural focus is on median, or 50th percentile, family earnings. Per-capita G.D.P. has grown by more than 85 percent since 1973, while median family earnings have grown by less than one-fifth that amount. Changing patterns of income growth have thus caused per-capita G.D.P. growth to vastly overstate the increase in the typical family’s standard of living during the past three decades.

Some economists have advanced an even stronger claim — that there is no link, at least in developed countries, between absolute spending and well-being. Recent work suggests that this is especially true for spending categories in which the link between well-being and relative consumption is strongest. For instance, when the rich spend more on larger mansions or more elaborate coming-of-age parties for their children, the apparent effect is merely to redefine what counts as adequate.

Evidence also suggests that higher spending at the top instigates expenditure cascades that pressure middle-income families to spend in mutually offsetting ways. Thus, when all spend more on interview suits, the same jobs go to the same applicants as before.

Basically an elaboration of themes that the author raised in Luxury Fever.

Wal★Mart

My wife will not shop at the local WalMart. The parking lot is a pretty scary place. Poorly lit, filled with broken down, battered cars. Sandwiched between a down-at-the-heels apartment complex, a bad Chinese restaurant, and an off-price jewelery store.

Inside, a chaotic toss-up of off-brand food, ill-shaped clothing. And people. All colors, ages, shapes, and sizes of people.

After you've made your way through the maze of aisles and found the diapers, or ink cartridges, or light bulbs, or contact lens solution that you needed, that you knew would be cheaper here than anywhere else -- if they hadn't run out again -- you make your way to the milling, glowering throng at the checkout. The registers are arranged in a manner to make an orderly queue impossible, but eventually you thread your way through, and pay, and at the end of it all, you receive a receipt.


Did I save money? I think so. Am I living better? Hard to tell.

Sometimes a trip to WalMart leaves me emotionally flattened, like it did John:

And really. I should know better. There is a reason I never go to Walmart. There's a reason that, if I am forced to go to this one in particular, I generally need some form of anti-psychotic medication, or at least a stiff drink, by the time I get out barely alive.

Just, I don't know about any of you out there, and the Walmart stores that may be near you. But this Walmart that I went to today? It is literally the place where humanity goes. TO DIE.
...

The woman in the checkout line in front of us was in her late 50s. But was still rocking bleached blond hair, giant "gold" and "diamond" rings on every single finger. And 3-inch fake nails done up in multi-colors with little rhinestones on each nail.

She was buying 4 large bags of beef jerky. Seriously.

And I lost count, after 5, of the number of obviously mentally-ill and/or otherwise not-quite-right individuals wandering about the store. One guy was shuffling along while talking to himself, his hair all disheveled and his pants about 6 inches too short.

Another woman was hitting herself in the head with a mop.

But other times, a visit to WalMart inspires me. WalMart is America, where we take all comers. Rich and poor. Smooth and lumpy. Nobody looks down his nose at you in WalMart. Warped body image issues? Not at WalMart, where everybody, including the models in their advertising, is pleasingly plump.

Maybe WalMart is the village square for the 21st century. A rag-tag lot of sellers with wares from all over the world meet a rag-tag lot of buyers out for their shopping.

WalMart has single-handedly driven the supply chain for household products to the lowest-cost global producers and shippers. And much of those savings are in the hands of consumers. Contrast this with upper-middle market retailers who sell the same cr*p from China, but mark up the price and collect the profits.

WalMart is a reminder that we live in two Americas: A rich one and a poor one. You cannot make poor America disappear by avoiding WalMart. That poor half of our country exists. They live, they die, they shop at WalMart.

Still working on the big WalMart post

It's been kind of hectic around here lately, kids, household, work obligations. Here's a soothing moment from a recent winter hike, though.

I'm working on a long post about WalMart, but I haven't been able to finish it! Here are some other things that I've been reading.

Boston Gal posts a link to this story about a working-class family living in Peabody, Massachusetts (a middle-class town north of Boston).

In the Desmond-Zeuli household, socking away for the future has mostly become a thing of the past. With three children, ages 9, 5, and 4, the bills seem to be adding up to more than the paychecks from Desmond's job as an office administrator in a Wakefield financial services firm and Zeuli's machinist position in Essex.

Grocery shopping has become a hunt for sales, coupons, and generic brands. Gone are most snacks for the kids: melted Monterey Jack cheese over nacho chips, a favorite, is a faded memory. Fruit is bought in bulk because it's cheaper.

The couple is paying $200 a week for day care and after-school programs, while shouldering $300 monthly car payments on Desmond's 2003 Ford Taurus, which has 90,000 miles on it. And then there is health insurance, car insurance, utility bills, and $1,850 rent on a four-bedroom, two-bath apartment, which includes heat. They are struggling to save for a house, let alone for college.

Like most of Boston Gal's commentators I don't think the numbers quite add up. $60K isn't much money for two full-time people to be earning; if he's a competent machinist and she can run a PC, they should be able to find employment that pays more than $30K each. Also, paying $1,850 in rent on a a $5,000 gross monthly income is on the high side ($1,250 would be the recommended 25%). Finally, there is that pesky cable bill.

Still, the article does a good job showing the impact of higher energy costs on working families: You set up a budget that reflects your priorities (a nice house but only one car, for example), and then oil costs blow a hole right in the side of it.

Of course leave it to the New York Times to tell you just how bad things really are, and how much worse they are going to get:

“The question is, Are you going to get the bad news week after week for 10 years?” he asked. “Or are you going to get the bad news right this year and then you’ll learn to live with the reality that your home is not worth what it was?”

Oh well.

Finally, I've been ruminating on the question of rich or poor. On the one hand, our just-barely-cracking-six-figures household income puts us at about the 85th percentile of US households. On the other hand, we make less than half what the typical family in our town does. We run a pretty tight ship, financially, and we benefit from a pro-family, fairly progressive tax system, but keeping a family of four going on $100,000 a year isn't simple. More about this topic to come.