Economics on the small scale

Friday, March 31, 2006

Coupons are for suckers

Via Kevin Drum, from an LATimes article:
[...]Kathy Makowski, an Irvine grocery maven whose children roll their eyes when she starts talking about coupons. Coupons slice more than $100 a week from the family of four's grocery bill. On one recent shopping expedition, Makowski saved $199.09 through coupons and store promotions.

No wonder the kids roll their eyes: She's probably lying.

Let's assume that Mrs. Makowski, via the magic of coupon doubling saves an average of $1.78 per coupon. To reach $100 savings per week, she would have to buy on average 55 items with coupons (and an unknown number of items for which there are no coupons available), for 21 meals during the week. That means that her family of four is completely consuming at least 2.6 couponed items per meal, with no leftovers. Ever.

Also keep in mind:
Companies are offering more coupons that require a shopper to purchase two or more of the same item to achieve savings

Still, this might possibly be plausible if this woman does no cooking beyond reheating her pre-packaged food, but I don't think it would be a good bargain nutritionally, never mind financially.

The foods which you actually cook with, you might have noticed, don't tend to have coupon offers.

Now, let's be very generous and assume that she's achieving a 20% discount over her entire grocery bill. That means she's buying at least $500 worth of groceries every week. If her discount is less than 20%, then she's spending even more. At (minimum) $17.85 per person per day, that doesn't seem like much of a savings compared to fast food restaurants.

I think she might actually save more money if she put down her coupon-clipping scissors and learned how to cook.

Energy Prices and Personal Finances, then and now

Via The Big Picture, Floyd Norris wrote:
[T]he share for energy use climbed to 6.2 percent of personal consumption expenses. That is the highest in 15 years, but it is far below the peak of 9.3 percent reached in the first quarter of 1981, during the second oil-price shock.

The difference between 1981 and 2006 is that in 1981, the savings rate for the country as a whole was near 11%, while today it is 0%.

Real Income levels have also fallen slightly over the past few years.

Which means that we're in a zero-sum-game type situation: Energy companies can capture more income from consumers, ...but not without some other part of the economy taking a hit.

Also, wasn't 1981 the start of a fairly severe recession ?

Thursday, March 30, 2006

speaking of ARMs

What Calculated Risk said.

How to give yourself an economic depression

I'm not sure I completely agree with Professor Black:

CNN's doing a little bit about the impact of rising interest rates on adjustable rate mortgages. I'm guessing we're hitting the point where a fairly big wave of ARMs are becoming untethered from their initial loocked-in rates. Also, interest rates on variable rate home equity loans are heading up...

Somewhat related, the real danger to the economy going forward is the softening construction market.

I think home builders can afford a temporary slow down in their business while their inventory reduces itself. It's the marginal buyers who loaded up on cheap ARMs who might find themselves needing to unload their money-pitshomes as quickly as possible.

There doesn't need to be many of them, just sufficiently many to cause the Real Estate virtuous cycle to reverse itself a bit. A fire-sale induced price drop in other words. A sufficiently serious price drop could trap a significant number of serial refinancers in their homes; now that the easy refinancing is gone, their only course of action would be selling out and taking a loss (that they can't afford) or staying put and bearing it out until they can break even.

If they can break even. If they give up on breaking even, they may just abandon their homes, as happened in Houston in the 80s. Lather, Rinse, and repeat if banks repossess and hold their own fire sales.

Of course, in this sort of environment new home builders aren't going to be able to reduce their inventory unless they too hold their own fire sales.

That would be an awful lot of new and used home inventory chasing a, hmmm, much diminished group of potential home buyers. Pipeline stuffing will do that to you.

Lather, Rinse, and repeat since as loans start defaulting in earnest, banks are most likely to prop up their revenues from new loans to offset old loan losses. That means higher rates and/or stricter requirements for loans, and that means a smaller potential pool of home buyers.

And, yes, while this is going on the construction and banking industries will be contracting and shedding jobs like mad. And it's not clear into what industries those people should switch to. If there was an up and coming industry people could switch to, our labor force participation rate would have recovered a bit better.

With all this happening, the consumer-drivenstarved economy is not going do well either. which doesn't bode well for the stock market and its companies.

The question is how bad is it gonna get, how quickly?

Wednesday, March 29, 2006


If you're not sure if that Email from your financial institution is legit or not,
then wait a day or so. If you then get the same Email a dozen more times, it probably isn't legitimate.

actually, a better way to detect phishing is by putting your mouse cursor over the link without clicking. If the URL displayed below the horizontal scroll bar shows the name of the financial institution at the end of the URL rather than at the beginning of the URL, then it's probably Phishing. For example, this URL:

isn't really from Citibank.
But the link below should take you to an actual Citibank Website.

See the difference ?

Note: I have no affiliation with Citibank, this is strictly an example.

How to Save For an Emergency:

Jonathan [Pond] via Andrew Tobias writes:
Worst advice from your parents: ‘The first thing you should do when you start your first job is to put a year’s worth of income in a savings account in case of a financial emergency.’ An obedient child then spent the next 14 years adding savings to the emergency account, all the while earning 2%. Best advice from your parents (probably given when you were an adolescent): ‘For one moment’s pleasure, you could end up paying for the rest of your life.’ While at the time you may have thought they were talking about something else, they were actually talking about credit cards.”

I like the 'Best advice' quip, but I don't think he's entirely correct about savings accounts.

It's much easier to save when you can put money in a separate account from your main bill-paying account.

And while I ditched my savings account a long time ago in favor of a Money Market Account, a Money Market Account requires a substantial minimum balance. A savings account's minimum balance is usually a magnitude smaller if there's one at all.

A Savings account is really just a staging place to accumulate enough money to buy 3 month CDs (Certificates of Deposit). CDs are where you should park your Emergency money.

I have three 3 month CDs; each maturing one month after the other. If I have a financial emergency, I'm likely to have one that I can withdraw penalty-free. If I need to tap all three, the penalty (forfeiting interest earned since last maturity) isn't all that large.

You're not going to get rich stashing Emergency Money in CDs; but the slightly higher interest you earn on CDs helps keep your Emergency fund constant on an after-inflation basis.

As to the amount you stash away -forever, hopefully- A year's worth of income is ridiculous. Base it on your likely emergency expenses such as replacing your car or paying your bills while out of work for a few months.

From Jeanne D'arc:

While we were talking, Fox News was running on a tv bolted to the wall. It was too noisy to hear anything, but we saw pictures of crowds waving Mexican and American flags. A man sitting across from us grumbled at the television -- something about people breaking the law and now demanding rights.

My neighbor, who I have heard make innumberable negative comments about unions, illegal immigrants, and liberals, looked up at the tv. Oh damn. I was about to ask how his granddaughter was doing, quick, before the subject could turn to politics, when he said, quietly, almost the way my mother spoke the uncomfortable truth about people who didn't like Roosevelt, "I can't blame them. They just want to work."

I swiped the finish of a very fine essay; read the whole thing.

Monday, March 27, 2006

You are not as Financially secure as you think you are, Part III

From Professor Warren:

Many in the middle class are the future poor. Careful analysis of the PSID by Professors Mark Rank and Thomas Hirschl show that, from ages 25 to 75, 51% of all Americans have spent at least a year in poverty. The data from Professor Jacob Hacker on the increase in income volatility and my work on the growing risks facing families suggest that the number plunging into poverty may rise in the future.

Economic migration and citizenship

Thanks to circumstances beyond my control I am a citizen of two countries. I have two passports and the right to work in 26 countries. My Wife has the right to three passports. My 3month-old Niece has the right to 4 passports and presumably the right to work on three continents.

Citizenship is a meaningless concept in a world where studying abroad is a middle-class rite of passage and foreign vacations a part of the middle-class lifestyle, not just in the U.S., but Europe, Japan, Canada, even Mexico (the girlfriends).

Citizenship should have no bearing on one's right to work. Your employers should not be given a holiday from labor protection laws just because of where you happen to have been born.

Everybody of European descent in the United States- bar none- is the product of economic migration. To deny that right, that necessity, to others is simply contemptuous and loathesome.

Archetypes of the Rich and Famous

Daniel Gross wrote a fluffy but amusing article at Slate about the different flavors of Rich Folk you might come across.

But you don't have to be a millionaire to be "generally insecure [..] thirsting for privacy and exclusivity, and [...] a lifestyle [which serves as] a constant reminder of status and success.", or to be a "Practical, unassuming type [...] Who hate[s] to spend money unnecessarily, but 'willing to splurge for things that matter to [you]'" or "[someone who] view[s] life in holistic terms[;] willing to splurge to make sure [you] look good, feel healthy, and stay in good shape", or any of the 5 Archetypes.

And you certainly don't have to be a billionaire to have more than one of these archetypes as part of your personality.

Sunday, March 26, 2006

I just did my in-laws income taxes this weekend. My dear but financially illiterate Mother-in-Law was a bit in shock about the money owed and complained about that 'they take out too much'.

Well, thanks to my Father-in-Law's attempt to itemize everything, I have a good picture of their total tax picture. Between sales tax, property tax, state tax, and federal taxes, the total is...under 30% of their income. (Income comfortably above the median, I might add. )

I believe that 30% of income going to taxes is actually on the low side compared to other industrialized countries.

You are not as financially secure as you think you are, Parts I and II

From Just a Bump in the Beltway, quoting Louise Uchitelle:
JO GOODRUM, a thin, energetic woman older than her audience of aircraft mechanics — old enough, perhaps, to be their mother — got their attention with a single, unexpected sentence, which she inserted early in her presentation. Her husband, she said, had been laid off six times since the late 1980's. And yet here she was, standing before them, in one piece, cheerful, apparently O.K., giving survival instructions to the mechanics, who would be laid off themselves in 10 days.
Melanie adds:
Nearly all of the pernicious myths about the meaning of work are deconstructed in this column. The idea that a job which offers a reasonable amount of dignity at a living wage is somehow a gift that has to be earned by personal virtue is quintessentially American and perverse. It should be seen as a human right.

I think Melanie does not go far enough. The purpose of civilization is to ensure mutual survival by co-operation. If you are denied the ability to work to provide for yourself and your family, then society is corrupt and it has no legitimacy for you. Instead of benefiting from society, you are in competition with it for your survival.

If you want a modern parable, think about the movie Office Space. The company's (upper-class) management is obviously exploiting its workers. Facing lay-off pressure, the cocky (middle-class) programmers finally act on their frustration and try to steal back from the company but are soon guilt-racked and panicky. In the end, the company gets torched by someone the management held in such complete contempt they moved his cubicle to an unlit basement with the mice and cockroaches and then simply stopped paying him.

Don't look now, but our government may finally be pushing our Miltons too far:

(spotted via Steve's News Blog)

Saturday, March 25, 2006

You may already be a millionaire...
Well, not really, but if you have a job paying at least $30,000 a year you essentially have the same income as someone with a million dollars in a bank account earning 3%.

Another way to think of it is: A good job is worth a million dollars as long as it lasts.

But back to the million dollars in a bank paying a safe 3%. A million dollars does not make you rich unless you're willing to eat into your capital (or put it at risk), in which case you may not stay rich for very long.

So which would you rather have: a million dollars in the bank or a good job ?

Friday, March 24, 2006

Stock Picking strategies

Other than a dozen shares in my employer, I don't own stock outright, so take this with a grain of salt. But If I were to start, the first batch of companies that I would look to invest in are those to whom I regularly fork over money.

Or you could try this strategy that I gleaned from a Peter Lynch book: Markets are the most efficient mechanism for allocating economic resources, but if you want to above-market returns, invest in monopolies.

Speaking of financial Disaster prevention...

Barry has a couple of cautionary tales.

The secret for financial success, I'm convinced, is to prepare for financial failure.

Worried about your car breaking down ? Start socking away money for car repairs.
Worried about your Christmas credit card bill ? save for it over the rest of the year.
Worried about losing your Job ? save, save, save until you have a 3-6 month deep rainy-day fund.

If you anticipate the worst that can happen to you financially and prepare for it ahead of time, you'll be better able to cope because of it. Even if you're still building your rainy-day fund, you'll be much better off than if you didn't have one.

And if the worst doesn't come to pass, you'll have the resources at hand to take advantage of financial opportunities when they occur.

I'm usually the pays-bill-in-full type of deadbeat customer rather than the doesn't-pay deadbeat. But last month, I missed a payment. So my Credit Card company sent me this month's statement with this little love note:

We did not receive your payment by the payment due date. As a result, the promotional rate will no longer be in effect after the closing date show on this statement for Category A.

Category A is for Balance Transfers and Checks. I don't have another credit card to transfer a balance from, and the last time I used one of their checks was a dozen years ago. So I generally don't care what my Category A rate is, but this note was the first I'd heard of a promotional rate.

My Category A rate had been 18.24% (APR) last month, and they hadn't mentioned anything about a promotional rate. This month it's now 0.99%. Next month, it will presumably be back up to usurious levels.

So what exactly was the point here? Where they trying to scare me into making a balance transfer before the rate went back up?