The New Economy
The United States faces two major economic challenges: 1) federal deficits remain unacceptably high, and 2) economic growth remains well below potential despite, or perhaps because of, record deficits.
These problems are linked. And until Washington addresses them together, the US can't escape from this high-debt, low-growth trap.
The first step is to recognize what previous administrations, Republican and Democrat, used to acknowledge regularly: The absolute size of the national debt is far less important than our ability to repay what we owe. Put another way, growth matters. If we grow the economy sufficiently, the relative size and importance of the national debt shrinks. As a consequence, federal policies must be evaluated not just by their budget cost, but also their impact on growth.
This dual approach cuts across today's traditional Washington divide. As long as fiscal hawks only want to cut and stimulus proponents only want to spend, we will continue to lurch from crisis to crisis – from government shutdown to fiscal cliff – that ends up costing us money and solving nothing. What can unite these warring sides is an emphasis on growth. Everyone believes in growth. And as any business person knows, when a budget is out of whack, often you need to cut, but often you need to also spend a little to grow a lot. ( Continue… )
In the wake of this week’s plunge on Wall Street and the recent tepid jobs report, it is easy to conclude that our economy is not as strong as we thought and to second guess the Federal Reserve’s recent decision to taper its bond-buying program. Yet the stock market and jobs report are only parts of the picture. Our economy is rising, consumer confidence is up, and the housing market continues to recover. In other words, our economy is definitely improving, just not that evenly.
Taking this into account, the Fed should stay its course, for a taper and the resulting increase in interest rates will actually help our economic recovery rather than hinder it. The reason is that cheap money is a double-edged sword. While on one hand, it encourages the deployment of capital for investment and growth, on the other, it fuels excessive borrowing, reckless spending, and the creation of asset bubbles.
After the frenetic rise and fall of the subprime mortgage market and the economic meltdown that followed it, Americans are painfully familiar with bubbles. Unfortunately, their desire to spend today often outweighs their sense of fiscal responsibility for the future, and so the lessons of the past are being conveniently forgotten.
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Consumer borrowing is trending upwards, rising by $12.8 billion in November to a national total of $3.09 trillion. Auto and student loans are up 8.2 percent from a year ago and credit card debt, although still below its pre-2008 level, is at a three-year high. Disturbingly too, issuances of collateralized loan obligations (one of the infamous securitization vehicles that exacerbated the real estate bubble) surged to $86 billion last year and will likely remain high despite restrictions imposed by the Volcker Rule, and banks are increasingly making auto loans to subprime borrowers as delinquencies fall, possibly fostering another asset bubble and bringing to mind the events leading up to the mortgage crisis. ( Continue… )
After years of controversy, the Volcker Rule finally came into effect at the end of 2013. The aim of the rule is to curtail the risk that banks can take with their own money, and to protect the economy from the impact of Wall Street recklessness.
Unfortunately, the rule contains several loopholes that can blunt its effect, allowing, for example, trades in government debt (think Greece – or Detroit), high-frequency trading, and hedging activities. This last one will actually make it harder for markets to assess the risk of bank portfolios under the Volcker Rule.
Broadly speaking, hedging is the activity of taking market positions to counter the risk of other positions. For example, a bank that has invested in oil-company shares might hedge by investing in airline stocks since a movement in the price of oil would send the prices of those stocks in opposite directions. Seldom, though, are hedges this simple or function this predictably. More often, banks will go long (buy) or short (sell borrowed securities, expecting they can be bought cheaper later) in many different industries at the same time. And they utilize complex financial derivatives in order to account for a variety of factors such as macroeconomic risk, sector dynamics, and individual company risk. In the above example, airlines might well get a boost from falling fuel prices, but new federal regulations could simultaneously depress those same stocks.
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In addition, hedges themselves are often hedged, all leading to an interconnected and delicate web of financial bets that can come apart with a single miscalculation. That, in essence, was what led to the $6 billion London Whale loss for JPMorgan Chase in 2012. ( Continue… )
Nobody’s going to do it for you. You get that now, and you’re ready to start making a serious effort to save for retirement. You just want a solid start and a clear direction on how to proceed. So, here’s the roadmap, straightforward and without an agenda.
1. Start with meeting the 401(k) match
First, contribute to your employer-sponsored 401(k) up to the employer match. You put in a dollar; they match it with their dollar -- bam! You’ve doubled your money. Doesn’t get any sweeter than that.
2. Ramp up an IRA
Now, sign up for a brokerage account and get a Roth individual retirement account. There are certain income restrictions on IRAs (find them here), but if you’re just starting to save for retirement, chances are you’ll qualify. If not, start a traditional IRA.
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The difference between the two? With a Roth, you’re putting in money you’ve already paid tax on, so you don’t get a deduction for your contribution when filling your taxes. But you won’t pay taxes when you make withdrawals from a Roth IRA, like you do with a “regular” IRA. Tax-free growth is good, very good.
For folks just starting to put money away for life after work, the Roth is usually a solid choice. But a case could be made either way: Roth or regular. If you want to take a deep dive into the best choice for you, ask a financial adviser to weigh in.
NerdWallet Inside Tip: Here’s one thing that sometimes tips the scales in favor of a Roth IRA, especially if you have a long way to go to retirement. You can withdraw your contributions (not the earnings) from a Roth without paying a penalty, or taxes. That can add a bit of flexibility when you may need it most. Of course, it’s always best to build a giant “no trespassing” wall around your retirement nest egg – but if something bad happens and you really need to access the assets, at least you will be able to do it without incurring a tax penalty.
3. Now max-out the 401(k)
Now that you’ve made your maximum annual contribution to an IRA, head back to the workplace 401(k). You can start kicking-up your contributions until you reach the maximum allowed deferral for the year. In 2014, that’s $17,500 – plus another $5,500 if you are 50 or older.
This is how the road to retirement leads to Easy Street. Maxing out your 401(k) and IRA contributions each year is the smooth, fast-track autobahn less traveled by most investors. But you’ll have the inside lane, especially when we tell you our next tip.
4. Concentrate on your investment mix
If you were to make a list of what investors saving for retirement do wrong, this would be right on top. We saved it for last because, in fact, it’s a very short list. People get caught up in investing fads when the basics matter most.??
To get on track, you only need two strategies.?? First, max out your tax-advantaged savings accounts. We’ve done that in the three preceding steps. And second, invest wisely. It’s easier than the experts would have you believe.
Decide how much risk you are comfortable with, invest accordingly, adjust annually. That’s it. And to think people write big, thick complicated books on this stuff!
For example, if you’re just starting out and decide to put 70 percent of your investments in stocks and 30 percent in bonds, just make sure to reset your mix back to that starting point when they get out of whack. Once a year is usually enough.
It’s only complicated if you want it to be
Saving for retirement is only difficult if you let it get out of hand. Like waiting too long to start. Saving too little. Or, making crazy bets with your investment choices. Those are the things that can add a little, or a lot, of drama to your retirement strategy.
Make these four money moves now and leave the drama to reality TV, not retirement.
– Hal M. Bundrick is a certified financial planner and former financial adviser and senior investment specialist for Wall Street firms. He writes about retirement accounts and personal finance for NerdWallet. Follow him on Twitter: @HalMBundrick
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It’s been cold this week. So cold, in fact, that the polar vortex that subjected many parts of the United States to record low temperatures could have an impact beyond prompting you to reach for an extra pair of socks.
Cold weather (along with irregular weather of any kind) can have measurable economic implications. The recent, widespread run of South-pole like conditions forced millions of Americans to forego trips to spend money at the movies, restaurants, and grocery stores. Some 6,000 flights were canceled Monday and Tuesday, and thousands more were delayed. Furthermore, commute conditions that ranged from unpleasant to downright dangerous compelled many workers to stay at home, which hampers productivity. All told, the US economy could lose up to $5 billion from the cold snap, according to Planalytics, a research firm based in Berwyn, Pa., and London that tracks weather’s impact on various industries.
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So, should worry about the cold extend past frozen pipes and numb fingers? Not much, because most of the financial loss is just a matter of timing, says David Berson, chief US economist at Nationwide Financial, a financial advisory service of Nationwide Mutual Insurance in Columbus, Ohio. “Yes, people put off some spending, but it’s spending that they will resume later on,” he notes. “People aren’t going out to see that movie they planned on seeing, or they’re reaching for that jar of peanut butter in the back of the pantry instead of going to the grocery store. But they’ll have to get groceries eventually, and that movie will probably still be in theaters. If you needed to buy underwear but you couldn’t get to JCPenney’s this week, you probably still need to buy underwear.”
“Of course, there will be some [permanent] loss,” he adds. “Maybe a shipment of milk goes bad because not enough people go to the supermarket. There will be perishable items that will be lost, but that won’t be a huge amount.”
Plus, some sectors of the economy will actually benefit. Utility companies, for one, should see gains without any timing factor to even things out – people won’t stop heating their homes later in the winter because they were heating them more than usual earlier. And winter retail items, like road salt and space heaters, should get a boost.
The segment facing the largest potential negative impact could be agriculture, where weird winter weather can affect crops for the entire year. The citrus industry in California already endured a damaging cold snap in December, though both California and Florida citrus growers managed to avoid damage this week. In the Midwest, winter wheat, which relies on snow to insulate it from low temperatures, could face damage.
For the overall economy, however, even a potential $5 billion loss is just a drop in the bucket, representing just 0.3 percent of a $16.9 trillion economy as measured by gross domestic product. “It’s small enough that it’s not even noticeable,” at the end of the year, Mr. Berson says.
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Looking back at 2013, while the food movement made progress in certain areas (such as school food and GMO labeling), when it comes to exploitative food marketing to children meaningful change remains elusive. Let’s Move director and White House chef Sam Kass recently acknowledged the obvious when he said this issue was “really tough” given how much money is at stake for industry.
All we seem to hear from the major food corporations about marketing to children are self-serving promises and announcements of future changes. As public health lawyers, that got us wondering, who’s making sure even these minimal commitments are being kept? The question is worth exploring if we want to actually improve children’s diets—not just create positive PR buzz for Big Food. With reports of adults ever-deteriorating eating habits in 2013 coupled with concerns over teen health, the stakes are too high to just wait for the food industry to do the right thing.
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Following on past years, 2013 brought a steady-stream of failed voluntary efforts to protect children’s health:
- A study comparing children’s fast food ads to adult-aimed ads found that McDonald’s and Burger King crafted messages targeting children with a focus on toy premiums and entertainment tie-ins. Such practices were in obvious violation of the companies’ pledges to follow the Children’s Advertising Review Unit’s (CARU) marketing guidelines, and occurred despite numerous CARU enforcement actions.
- Ninety-one percent of ads for sugary cereals viewed by children were found to violate CARU’s guideline not to exploit children’s imaginations or mislead children about the benefits of using a product by associating sugary cereals with adventure, emotional appeals, play and fun.
As 2013 draws to a close, analysts across the United States are drawing up economic predictions for 2014. The precise facts and figures may vary, but there are a few general trends economists mostly agree on for the coming year:
1. The economy will grow faster:
US gross domestic product (GDP) expanded slowly in 2013, probably growing a paltry 1.9 percent or so when the final figures come in. Economists expect that to increase roughly a percentage point in 2014, as the fiscal drag from fiscal policies like the sequester lifts and improvement continues to be made in strengthening sectors like housing and consumer spending. IHS Global Insight's chief economist, Nariman Behravesh, forecasts 2.6 percent GDP growth; analyst David Berson at Nationwide Economics predicts 2.7 percent growth. “Stronger growth will come from lower oil prices, improved international growth, rising household net worth, and less fiscal drag,” Mr. Berson writes in an e-mailed report.
“The US recovery lost steam in 2013 because of massive fiscal tightening,” Mr. Behravesh writes in his own e-mailed release. “The drag from fiscal policy will probably be far less over the coming year – especially in light of the budget deal made by US Congress. This will allow the underlying strengths of the economy to become more visible.”
Though growth will be faster in 2014, it's still expected to be below the long-term trend of about 3 percent.
2. Unemployment rate will fall to near 6.5 percent:
The Federal Reserve recently lowered its US unemployment forecast for the year, projecting it to fall as low as 6.3 percent. As late as September, the Fed was projecting between 6.4 and 6.8 percent. Influenced by that rosier outlook, the Fed took its first step toward trimming its monetary stimulus efforts, cutting back on bond purchases by $10 billion. ( Continue… )
Beyoncé continues to rewrite the book on how to sell music.
On Friday night, the pop star walked through a Wal-Mart store in Tewksbury, Mass., pushing a cart like any other shopper before stopping to announce that everyone there would get a $50 gift card. The store manager told Us Magazine that she gave out 750 cards totally $37,500.
Clearly, Beyoncé was sending Target and Amazon.com a message: Boycott my new album and I'll give my love and dollars to a competitor.
The controversy surrounding the release of Beyoncé's latest album, "XO," illustrates how the music business is changing.
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On Dec. 13, Beyoncé surprised fans and brick-and-mortar retailers with the sudden release of the album only at Apple's iTunes store. The 14-track, 17-video digital album was priced at $15.99. The album became an overnight bestseller, and more than 1 million copies have sold so far.
But some retailers, such as Target and Amazon, were not amused by her one-week exclusive deal with Apple.
Target released a statement explaining that Beyoncé's fifth studio album would not be carried by its stores.
"While there are many aspects that contribute to our approach and we have appreciated partnering with Beyoncé in the past, we are primarily focused on offering CDs that will be available in a physical format at the same time as all other formats. At this time, Target will not be carrying Beyonce’s new self-titled album ‘Beyonce.’”
Amazon, in protest, also decided not to sell the physical album. Amazon is selling, but not promoting, the digital download version of "XO." Part of the Beyoncé surprise release plan included a ban on pre-sales of the album, normally an effective way to build sales.
Amazon was miffed that the album distributor, Sony Music Entertainment, had prevented pre-sales, according to Billboard magazine.
Amazon is reportedly still steaming that Sony Music Entertainment handed down an edict that Amazon, or any other retailer for that matter, couldn't pre-sell the Beyonce title. Pre-sales of new titles has proven to be an effective marketing tool and the Sony edict was interpreted as further protecting the iTunes exclusive window.
According to sources, Amazon may be considering further reprisals against Sony Music Entertainment and Columbia down the line, although conversations are said to be still ongoing between the label and the merchant.
The Beyoncé album sales strategy reflects the major shifts underway within the music industry. According to Motley Fool, in 2013, physically packaged music sales will total about $13 billion – only half the sales of six years ago. Meanwhile, digital music sales have now reached $10 billion annually.
Who are the big players? Billboard reports that iTunes has 41 percent of today's retail music market. Wal-Mart has 10 percent, Amazon has 9 percent, and Target comes in at 5 percent.
While Beyoncé challenged the traditional brick-and-mortal retailers with this album release, she also challenged the business model of digital music vendors, including iTunes, by refusing to sell single-tracks of her new CD. The "XO" songs can only be purchased as a complete album.
Beyoncé's husband, the rapper Jay-Z, also has a creative flair when it comes to challenging traditional marketing models. The first 1 million copies of "Magna Carta Holy Grail" album were initially only available on a free app by Samsung. Jay-Z reportedly sold Samsung the initial exclusive rights for $5 million.
Jay-Z has described the music business today as the "Wild West." If so, keep your eye on this pair of gunslingers. You can expect to see more creative marketing plays from this power couple.
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In an effort to curb abusive lending practices, the US government has finally issued guidelines – long overdue – on short-term bank loans tied to consumers’ income. The new federal limits will help to protect consumers and, surprisingly, the banks who make such loans.
The benefit for consumers is obvious. These deposit advance loans (which are really just payday loans offered by legitimate banks rather than shady neighborhood dealers or online outlets) hit consumers with a myriad of expensive fees and charge up to 120 percent in interest. The new guidelines, issued last month by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., rein in the interest rates that banks can charge and the balloon payments they require.
Here is how the loans work: A bank advances money to existing customers against their paycheck, Social Security, or other benefit that is due to be deposited into their accounts. When the expected deposit hits, the bank withdraws its principal plus interest directly from the account.
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So far, such an advance could be construed as a valuable service for cash-strapped consumers. Deposit advance lending exists because some people cannot meet their near-term financial obligations and need a little extra time to round up the necessary funds. ( Continue… )
Cyber Monday, the Monday after Thanksgiving, has become one of the biggest sales days for online retailers. This year, a group of independent bricks-and-mortar stores in New England are fighting back with "Cider Monday."
"How many millions of dollars are spent on Cyber Monday? We thought it would be fun to play on the words, and have Cider Monday be the day when people would go into their local store. We're all offering cider!" says Willard Williams, owner of the Toadstool Bookshops in western New Hampshire and the originator of "Cider Monday."
"People are seeing the 'Cider Monday' and coming right in," says Kenny Brechner, owner of DDG Booksellers in Farmington, Maine. "The turnout has been amazing, especially considering the snowy weather."
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“We are confident that 'Cider Monday' will very quickly overtake 'Cyber Monday' as the shopping event of the year,” says Mr. Williams.
"Our servers aren't going to crash – and might even smile. And we can promise no bugs in the cider," he laughs, referring to the crashing network servers and 'buggy' software that can plague digital retailers.
Williams shared the Cider Monday idea with a network of bookstore owners, who then spread it to other locally owned businesses in their communities. Today over 100 businesses are taking part, according to local estimates.
"I took one look at it and said, 'That's a great idea,' and then printed something up and walked around town," says Mr. Brechner. He first heard the idea last Monday and started drumming up interest immediately. By Friday, 10 other shop owners in the small town had signed on.
"I 'seeded' it throughout the community," puns Brechner. "I think the idea all along was to make it more of a widespread 'Shop Local' idea, not just focus on individual bookstores," he says. "It's just that we were the ringleaders."
Profits from locally owned stores stay and re-circulate in the area, notes Williams.
"I'm a big believer in the buy-local movement, and I think it's making a difference," he says. He points to recent reports from the American Booksellers Association showing that, since May 2010, one or two new bookstores have opened every week.
He credits growing public awareness of the link between the arrival of big-box stores and the closing of locally owned stores. "People start worrying that their local bookstore is going to close. They mention that to other people, and it builds a community of bookbuyers who want to support their local stores," he says.
"That's ultimately what we're trying to do with Cider Monday," says Williams. "Thank the people who have decided to spend their money locally."
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