MONEY 37 - ECONOMY/BANKING RIDICULOUS

THIS IS MY 37^TH POST ON UNDERSTANDING MONEY TOOLS

I write these blogs mainly from a constructive point of view to help those who read them.  I am going to re-visit banking with this blog. I am also going through parameters banks have set in conjunction with the US Government and the outcome which is ridiculous and not a pretty picture for the future. I will touch upon the current US economic situation that all ties in together.

As I write this on August 14^th, 2013 the Federal Government is all but shut down because the Republicans and Democrats can’t decide on finances.  Come this Thursday, August 17^th, the US Government may default on its debts.  This is horrible for many reasons and will have a future negative effect on our country and the people, especially the middle class. What are the obvious negative affects?  Some immediate thoughts are interest rates will go up, America’s credibility to pay its debt will go down, the US dollar that has been held as a benchmark to world currencies will go down, and the recovering building industry which happens to be the biggest US industry will slow and perhaps lead us into another strong recession.

First, have we ever defaulted on debts?  The answer is yes.  We did after the War of 1812 in 1814, and again in 1979. As a sidetrack, I will quickly touch upon the financial detriment of war and much of what has lead us into so much debt. After our Revolutionary War we were broke.  World War I and World War II were necessary wars, and left us in debt.  After those wars I am not sure if our involvements in wars had much to do with anything other than top political people deciding to go to war, and the defense contractors making a ton of money.

The Korean “conflict” could have ended in three weeks as we pushed the North Koreans back to the Chinese Border and the Yalu or Amrok River in that amount of time.  Viet Nam was over Communism. Now some of the world’s most capitalistic countries are in Asia, including Viet Nam.  That war was long and financially a disaster except to a few who made millions.  On August 15^th, 1971 we went off the gold standard to a Fiat currency because we couldn’t pay our debts to the French.  On and on, and then the Iraq war and Afghanistan which have both proven to be a failure, and not one 9/11/2001 was from either of these countries.  You get the point, ridiculous decisions, and now we are broke.

Let’s take all my ranting into how it affects you and me.  As you know the US Government in August, 2007 started indicating that our banking system was tanking financially. The US Government started restructuring regulations, and along with the Federal Reserve started assisting certain banks and large corporations. The Federal Reserve started a program called Quantitative Easings, referred to as QE 1, QE2, QE 3, and now QE4.  The total money involved is about $3.4 trillion.  Now, we must know that the Federal Reserve is independent from the US Government, however it’s power is indisputable. “He who has the gold rules!” As we know, the Federal Reserve has been purchasing US bonds to keep the interest rates artificially low.

Okay, so the big boys have been helped; all the major banks, including investment banks on Wall Street, with the exception of certain ones like Lehman Bros. have been assisted with generous amounts of money, and they invest this money for their own profitability. Quite selective! The Q’s were meant to help the economy in general and it did, however the word “trickle down theory” was a part of this. As I’ve stated many times, “trickle down” does not work, and certainly didn’t.  The theory is if you give the big companies, big banks and the wealthy the money, eventually the money will reach the middle class and perhaps a bit for the poorest people.  Unfortunately, the theory didn’t work at all, and never in history has worked. That is one reason labor unions were started many years ago, to bring some equality to hours worked and a decent pay level. The first appearance of labor uniting was as far back as the 1820s, although real strength started around President Lincoln’s time in about 1866.

With new regulations in place for banks and commercial lending what has happened?  Basically, unless you have so much money you don’t need a loan, you can’t get a loan!  The wealthy don’t need loans, and if they do, they have many sources to go to in the US and outside the US.  Of course, poor people can’t get loans.  Now, the middle class is being crushed.

Last Friday, I had meetings with two financial institutions, one being a credit union and the other being a large US bank which I have had accounts with for over 20 years.  The meetings were a test.  Here is how it went and the outcome. I asked if I could get a relatively small loan, $500,000 to start a home building company that I have structured and have ready to go.  This type of loan is considered a business loan and I was told by both institutions that unless I have had a company in business and showing a profit the past three years I could not get a loan.  So…..I went to ask for a personal loan to see if I could get further.  I was told that I could get a loan if I collateralize the loan with liquid assets, like stocks and bonds, for an amount equal to or greater than the loan amount. I also would need to have enough income to support my current living expenses plus the additional interest and principal reduction on the new loan. Why would I want a personal loan if I had sufficient income?  Aren’t you then essentially borrowing your own money?  It is essentially impossible to get a loan other than a small amount on credit cards at high interest rates.  The banks pay approximately 1/4 to 1/2% interest on a short-term deposit.  If you borrow money it is much higher. Years ago, banks were happy with a spread of 2-3% between what they paid out and what their lending interest rates were, not any longer. A lot of credit card debt is 20% or more.

This is crazy, and is leading to the downfall of the middle class and this country unless something is done. Developers now need to have a large percentage of space leased to major corporations as banks know they are not assisting small businesses, and therefore the big public companies need to be able to support and loans. About 9 out of 10 new small businesses go bankrupt in the first 3 years. Many times the reason for small businesses going bankrupt is that they are under-funded and need loans to meet their needs during business cycles.

Wages and incomes are down for middle class people, thus people won’t be able to buy the same goods and services as in the past. We need money circulating and none of this outrageous $3.4 trillion in QE money has reached you or me.  The banks have invested this money, and aren’t lending it out.

I have read that many middle class people are now cashing in their retirement accounts to start small businesses as banks won’t loan.  This means people are desperate to get some money to start something that will possibly bring in cash to live on.  Fundamentally and economically this is not good. First, you are taking away retirement security, and secondly this will catch up with America down the road. Middle Americans will have no retirement money to live on and join the poor. When you take money out of your retirement account you have the penalty of 10%, and federal and state income tax on top of that, so in most states it amounts to about half your withdrawn money.

This situation has also forced people to seek capital from private lenders. Many private parties who have money to lend want outrageous rates like 20-25% plus collateral for the loan, or a healthy portion of the business.

Enough said.  Bottom line, unless we change banking regulations and get money into the system, available and at low rates to help the middle class start new companies it does not bode well for the future.

MONEY 36 - HEALTH CARE

THIS IS MY 36^TH POST ON UNDERSTANDING MONEY TOOLS

There has been so much talk in the past couple of years about health care in the United States.  I am especially referring to the so called “Obama Care”. Out of frustration I thought I would do a blog on it.

First, “Obama Care” and the Affordable Care Act are the same, but many people don’t know this fact.  They hate both, but don’t understand the basics of the Act or why we as a country need to do something about health care.  I can’t say I understand a lot about it myself but will try to say a few things about the facts I do know to help you.  I have heard the entire Act has about 2300 pages to it, and contains a lot of “pork” on both sides of the political isle.

Let’s trace back 50-60 years of health care in this country.  It has come a long way in certain respects, but also continuing on it’s current course will not be financially sustainable.  After WWII a doctor made a modest income and became a doctor because he wanted to help people with their health needs, not necessarily a profession to make a lot of money.  Outside the hospital the doctor made house calls and then you paid him a nominal fee for that service. Today, there are no house calls in the US.  Hospitals such as the Mayo Clinics and other fine hospitals are like staying at the Ritz Hotels.

The whole industry is quite complex.  In the US we spend about 18-20% of our Gross Domestic Product on the industry. 50 years ago this figure was about 5%. The inflation of health care is far greater than our overall inflation rate in other things. We rate overall very poor in the world in health care, about 34^th, and yet we spend so much more and have some of the best doctors in the world.  All the world’s top countries have a national health care program except for the US. The top socialized countries in Europe and Scandinavia spend about 10-12% of GDP on health care.

It is conclusive that if it is the Affordable Care Act or something else, drastic changes need to be made. We need to look at all aspects, and cuts will need to be made to general costs, drugs, employment and other areas. It was on 60 Minutes some time ago about robots in the manufacturing/industry and hospitals transporting items, taking the place of humans. The people in the US need to get healthier and in better shape, that is a great portion of our problem. People in other countries are healthier; they walk, they eat less fast food, and they are more physically mobile.  Hypertension, high blood pressure, diabetes, obesity are some of our biggest health problems. A good majority of the people who have these issues need to help themselves with exercise and better diet. About 30% of Americans are obese, and almost 70% are somewhat overweight.  We are killing ourselves and running to the doctors and hospitals for every reason. The ratio between the number of ill people and total costs is alarming. Pretty dysfunctional. 

America is getting older. Medicare and Medicaid account for over 50% of our health care expenditures.

Reality! Drug companies that push through much of their costs for research and development to insurance companies are going to have to cut back, doctors are going to have to take less and will have set payments for procedures, medical staffs will be cut and less qualified individuals will be taking on work that perhaps a physician’s assistant does now. Hospitals will need to figure out how to operate on budgets perhaps 25-30% less than today.

With a national care program we may add 40 million people to insurance of some sort for medical care. There are several good things about a national care program, and that program may have to have several layers; one layer for the wealthy, one for the common man and one for less financially fortunate, as we have Medicaid today. In general here are some benefits:

-       With a pre-existing illness you won’t be excluded from health insurance and care.  In the past, if you switched from one insurance company to another, or didn’t work for a company that provided insurance you might not have been able to get insurance. I had a couple of Basel cell cancers removed year’s back, however no insurance company would take me without a total exemption from all cancers. Today the greatest reason for bankruptcies with older people is medical costs. The costs overall should be lower and more shared equally, in theory.

-       Uninsured people won’t need to run to the emergency rooms for everything as they tend to do now.

-       The corporate games played now to avoid paying for insurance perhaps will be changed. An example of this that I personally know is a friend’s wife who was pregnant would not be employed by a new company until 6 months after giving birth.

On the negative side to a national health care program are:

     -   Total costs are going up because many more people are added.

-   We will sacrifice in places like number of attendants per patient 

and the experience level of professionals.    

-       Will younger people pay and sign up?  The young say, “I’m never    sick, not hurt, I’ll take my chances, and sign up if anything happens”. Costs may be higher per month than anticipated by government. A person may be eligible to sing up at certain dates.

-       The younger people who this Act is counting on for financial support may take the penalty for not signing up instead of signing up.  From what I understand the government will rely on the IRS to hold back overpayment in taxes for this penalty. If a person isn’t owed money back on taxes they won’t pay a penalty. This comes from a financial advisor friend of mine.

Some of the successful European countries that have national health care have commonalities that we don’t have; these being smaller populations, common cultures, common languages, common focus for the good of the country and it’s people.

The Affordable Care Act is far from perfect and needs to be worked on, however it is my feeling that something major needs to be done as an overhaul to the health care industry in this country and this is a first step.

I hope this gives a simple overview of the some aspects of the health care system.