Save and Invest

Comments (Archived):

1. actually the savings rate in the USA has skyrockets since the great recession began about 2 years agoi think it may be up to 7% (even more remarkable, as that is up from negative 3-4%, i believe)and most economist now fret that we are saving way too much — that as our USA economy is 70% consumer spending, if consumers don’t spend, the economy can’t possibly grow and the unemployment rate will stay way too highso its absolutely essential that consumers in the developing world (read: China) start spending vastly more than they have, and start saving vastly less. we in the USA can not address the radical imbalance alone.unfortunately while the Chinese government is taking some small steps in this direction, they are assiduously avoiding the big necessary steps (e.g. float the Chinese currency etc etc)so exhorting USA consumers to save and invest may seem like wise counsel, but absent global; cooperayion and reset of priorities, such advice could have a dnagerous negative blow back — very high unemployment and sluggish if any growth in GDP

   1. i don’t think we should stop saving and investing steveit’s the foundation of sound ecomomic health

      1. I didn’t say thatI said its a lot more complex and interdependent situation than simple advice to “save and invest” suggestsLikewise if people and institutions stop or even radically reduce “borrowing and spending” we are up shits creek

         1. yes, we have to unwind this mess gradually but i think we must unwind it

            1. I think your point is generally right, Fred, but I’d stress the importance of *low-cost* mutual and index funds that more or less just track the market or specific sectors. Otherwise the management fees kill most of your return, (half of the funds don’t even beat the market anyway).

            2. Most funds are also poorly matched to the investors. The book Nudge has a great discussion about why this happens…

            3. and there’s always http://cv.imi'm up about 5% in the past four or five monthsi’m biased of course, because we are investors in covestor which offers thisinvestment service

            4. i don’t think that’s really investing, as i don’t think public markets are a place for real investing (real investing being defined as investing in production, labor, building stuff people actually use, etc). i love CVIM, but the best traders on covestor will simply be those who understand how to gamble, because the feds have turned the stock market into a casino with tehir monetary policy. CVIM however will be great for finding the best gamblers, and to bet with them.

            5. 🙂 yup, bias. But still 🙂

            6. Funny thing, this mess started with Wall Street’s frenzied securitization of mortgages and the development of incomprehensible derivative products while paying absolutely no attention to the adequacy of balance sheets required to shore up the risk of such madness.Who has been the first beneficiary of getting the mess unwound?Wall Street!This year Wall Street will pay the same obscene bonuses that it paid two years ago. Business as usual.

            7. yup. the bonuses being paid this year sure seem to indicate that not muchhas changed on wall streeti’d love to see the bonuses paid in stock not cash

            8. Proving, of course, that cockroaches, rats and Wall Street will live on in the face of any change of the economy or calamity!Proving, on a deadly serious note, that politicians will always be controlled by the moneyed interests and that for enough money any politician can be bought, rented or optioned.

         2. ok:How do you measure money correctly so you know when you are in the right band of saving versus borrowing… (I’m purposely being a pain here)

            1. I am no expertBut my favorite voice on this is Niall FergusonLook him up – easy to check out – many books articles speaking engagements and 2 awesome pbs documentaries

            2. I think Paul Krugman’s critique of Niall Ferguson is on the money – he’s a historian, not an economist. On economics he’s not even wrong, he has no idea what he’s talking about, on a 2nd-year undergrad level. He’s the sort of ‘faith healer’ Summers was warning about.http://business.timesonline…Sound public policy should reward prudent thrift, but Adam Smith seems a propos -“It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense… They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”

            3. try http://www.shadowstats.com/The publisher makes an attempt to recreate M3, a stat the fed abolished some time ago (which opens up a entirely new can of worms – why did the fed abolish it???)

            4. they abolished M3 to hide inflation, of course

            5. exactly. wish everyone was as intuitive. maybe ron paul would stand a chance

            6. Seen it in the past. I was actually talking to someone last night aboutthis issue. No one is quite sure how to measure money at all. Andfactually the way it works is that we give permission for banks to makemoney, which they may or may not do as we’ve figured out…so hidinginflation doesn’t even totally work out either, since we don’t understandmoney anymore???

            7. Treat savings like a “bill”. Pay yourself first. Pay 10% of your gross and then pay your other bills.Today, I would eschew debt of all kinds. I would not even carry a credit card if you could avoid it. Debit cards are OK.Want a car? Buy a used car and pay cash.

            8. Thanks JLM

      2. from 1982 until around 2000 Americans did not save and invest enough, and policies favored investors – so it paid to be a contrarian, through outsize returns as interest rates, tax rates and inflation went down.Overconsumption caught up with Americans, and they are forced to cut back, even as policies attempt to save consumers from the consequences of their actions. Policies that try to stimulate consumption by making it comparatively more attractive than saving are harmful to investors.So the tide has turned and now the environment isn’t very favorable for saving and investing in America, in the face of a future with higher interest rates, tax rates, and inflation (and slower growth and more government intervention).not really blaming responses to crisis by current economic team since they were painted into a corner, but those who have been senior policymakers through this entire period are the ones who failed to see this train wreck coming and prevent it.Larry Summers, a priest, and a backpacker are in a plane when the engine fails. The pilot puts on his parachute and jumps out, telling the others they have 2 more parachutes and they can figure it out. Summers says, I’m the shmartest man in the world, the financial world depends on me, he grabs a pack and jumps out. The priest says, “my son, I have lived a long life, I trust in the Lord, you take the other parachute”. The backpacker says, “No worries padre, we can both jump, the shmartest man in the world just jumped out with my backpack.”Summers is a brilliant guy, he has an answer for everything but he seems to kind of miss the point and lose the plot.

         1. In various decades, the smartest man character in that joke has been Bill Gates and Henry Kissinger, respectively.

         2. good jokei enjoyed ithe may have his weaknesses but he seems pretty smart to me

         3. i’m a summers fan — think he was grossly treated by harvard — but he is/was a key man on the team that created the mess. he should gracefully, and with finality, depart. ditto bernanke, geitner, dodd, frank, rubin, greenspan, paulson, et alits depressing and a little shocking that the same “smartest guys” who pooped in the punch bowl are now tasked with making the next batch of punch

   2. Thanks for adding some extra details to a complicated issue, the flow of wealth through our economy.We want to enrich areas of wealth creation and efficiency in our nation, whilelimiting waste and capital “dead ends”.Glad to see your recognition that global spending must flow into our nation as well.

   3. “most economist now fret that we are saving way too much…”are these the same “economists” who so grossly misunderstood economics that virtually their ENTIRE field completely missed the economic crisis? that is teh equivalent of a meterologist not seeing a hurricane coming across the ocean and into your shores.remember these are the same economists who STILL refuse to understand the causes of the economic crisis. when they are mature enough to understand simple economics (not complicated, largely a matter of psychologically accepting that governemnt is robbing you) and do their job and tell people the truth, then maybe i’ll respect them.

      1. Hi KidMercuryNo. I am not referring to (as you describe) “the same Œeconomists’ who sogrossly misunderstood economics”

         1. you noted “most economists”….i classify “most economists” as the folks who said the economy was great back in 2007, and then again in the first half of 2008…..meanwhile they were mocking and insulting permabears during this time…..the economists who saw this easily foreseeable crisis coming understood a few basic points:1. governemnt and monetary policy is the biggest problem2. you can’t solve a debt induced crisis with more debt, that is a scam offered by bankers3. “saving too much” is not a problem, and is generally a lie to help sell keynesian economics, the dominant economic orthodoxy, which is not even economics, it is straight up bs, that’s what it is, as evidenced by the fact keynesian get everything wrong, always and forever, and their only solution for any problem is for government to get bigger. lol, i’m going to start merconomics where the solution to all problems is to give money to kid mercury so he can shop his way out of the problem. it works, i swear! :Dthe solution to the economy is simple. rebuild household savings. this will hurt and there is no room for bailouts for those serious about having a country that saves. let businesses fail, allow the dollar to strengthen so that prices fall (which also helps savings). the only type of government intervention should be in debt cancellation, as this lowers the debt burden and thus facilitates savings. printing money and giving it to bankers to lend out because “credit is what boosts the economy” is a lie perpetuated by bankers.

            1. i think the issue comes back to incentives…..people keep saying these economists, policy makers, bankers, etc screwed up…..really? …..do they see it that way? …..by what measure?did the vast majority of key decision makers and executives who played the largest role in screwing up the economy face any negative reprecussions? no.did they, their circles of colleagues and friends benefit the most from the past 20 years of ‘pedal to the metal’ economics? yes.did they have to give any of that back? no.are we back to riding the same incentive and bonus system already? yes.without fundamental changes to the underlying incentive system it is 100% guaranteed to happen again. privatize gains + socialize losses = broken incentive system—-agree with the savings point. good old common sense. freedom’s just another word for nothing left to lose. foreign nation debt-holders will turn their position into ‘hard-power’ someday for certain if the trend is not reversed. as many people pointed out though, i think obama is hesitant to create any addtional drag on the economy now…..his horizon is three more years currently and he already has a lot of long-term fires burning.

            2. “without fundamental changes to the underlying incentive system it is 100% guaranteed to happen again. privatize gains + socialize losses = broken incentive system”i love highlighting simple, inevitable truths that must be dealt with. the broken incentive system is definitely one of those simple truths IMHO

            3. This still gets back to a lot of cutting edge fields of economics and even other social sciences. I was talking to a friend last night about how research keeps getting done in the US, and how they use too many college students that must be native English speakers, and how this automatically create bias problems across the social sciences.Incentives are complicated, particularly in economics, because the entire field tries to atomize people a little too much. The field is starting to come to terms with it (thank you behaviorists, experimentalists, and information theorists) but only because a lot of people are totally pissed.

            4. David Rosenberg must be the economist you’re referring to – he’s great

      2. What always puzzles me is — why do economists live in such ratty houses and drive such crappy cars? LOL

         1. true… you never see a headline like, psychic wins lottery.in their defense, economists predicted they wouldn’t be able to predict anything (or do anything – efficient markets, rational expectations etc.)

            1. Agree completely. My comment was completely tongue in cheek.I continue to be confounded by the fact that as I learn more I am acutely aware of how little I actually know and how complex “simple” things truly are.Nonetheless it seems like the simplest of principles, as an example the notion that income should exceed expenses, are ignored with disastrous outcomes.

2. Most average people save and invest in a regular savings account. With interest rates at about 1% and the government taxing that interest income to boot, there is less incentive to save. The government should lower or eliminate the tax on savings.

   1. good suggestions. and the government should promote the value of mutualfunds and taking a bit more risk (but not too much)

   2. Yeah, “high-interest” savings accounts at online banks have been really unproductive since last year’s meltdown. Hope those interest rates start climbing back up again.

3. Great post..I totally agree with everything that your saying. Our country is made of us people and its about time that we were the ones that got our country back on its feet. We always say that we want the govt to get us out of debt, but our govt is of the people.Let’s start with investing in new businesses, lets start with saving our money instead of getting a new shirt or our hair done. Lets put that money back into the company and watch how much better we all will be.Your 5% forced savings is a great idea. Even if companies started to do this, I think itd make a world of a difference. If every small company put money aside to grow their infrastructure we’d be out of this hole in a second.

4. I think the “saving” part has already started with the general public primarily out of fear. The fear that there is no backup whether public or private. But I agree O needs to get us hyped on saving as a direction for the country and give the reasons why we should be doing this. We slipped into the “mess” over at least the 30-40 years and it will take awhile to get us out of it.The media could help but both sides are incapable of making this type of effort.

5. Fred, this a great point. I have thought for years that banks are letting their customers down by push credit cards and give sways just to get people to spend money. Look at banks/credit card companies on college campuses with there free shirts and trip scams. What if banks actually taught their customers to save money instead of spend it. I agree, we need some banks and forward thinking leaders to help lead us to wealth creation instead of a banking crisis.

   1. i’d like to start a bank that didn’t lend money and didn’t provide creditcards.it simply allowed you to pay bills and save money

      1. Fred, isn’t this technically what investment banks do? Sort of. Otherwise you could end up with a situation where you have a run on the bank as everyone is trying to pay their bills at the same time. And how would it help you save money? How does it make your money grow? I have to ask, how are you going to grow your bank’s capital, since technically an asset to a bank is someone’s else debt. Clearly the ratios and types of capital requirements right now are a mess, and it also shows that no one really understands what is money and how it should be used in a system where the nature of money is changing. But still, some senses of it is not. You do need to grow it, and that requires you to potentially lend it out, or make investments (still a form of lending in a way), or something?So how is this bank going to work. I would like to have a bank that basically allowed me to just save and pay bills (the closest to this to me is a credit union), but I am really just curious…

         1. We have that now. Just go open an account at any bank and don’t accept the 15 credit card offers they send your way. 🙂

            1. Oh when I opened my first checking account (and it was a whole complicated situation when this happened) I made sure to cut off the credit side. I thought the idea of credit-checking was stupid. I’m still glad I did it.

         2. your salary checks get deposited, you pay your bills, and the excess getsinvested by you in safe investmentsnothing more, nothing less

            1. three words: virtual currency revolutionlet us know when zynga opens a bank, we will all literally take it to the bank when that happens!

            2. nothing tastes better than a virtual cup of milk from a virtual cow.

            3. and best of all, it’ll be cheaper for those shopping with a well-managed virtual currency! 😀

            4. LOL

            5. That gave me a chuckle!

            6. I don’t think it should be Zynga. It would create perverse incentives, ala Enron. They who print the money should not be the one in control of its derivatives market, considering that the derivative should be an orthogonal view of what the money is. Zynga becuase it knows more about its money and information about its customers could really screw everyone over if they owned the bank that lent directly to people: Through the derivative market they could cause the Zynga version of what Enron did to California vis a vis Rolling Blackouts. (Enron both owned the markets/was a market maker and owned the plants and managed to time rolling blackouts to the derivative market, Zynga could do that to its currency)The bank needs to be separated.

            7. can’t be worse than the current system, the federal reserve and US govt already know everything about their slaves. the real security though is a free market for virtual currencies, so we can use zynga, 2nd life, mahalo, and whoever else decides to roll up with their own currency…..in this way the central banks compete with each other, and thus are forced to keep it legitimate and compete on who can offer the best monetary policy.

            8. and set the reserve ratio to 80%

            9. Credit risk spread. I mean what makes an investment safe? diversity? How do you create diversity. I’m talking with people here about the credit spectrum, and on some basic level, once you take out government bonds, it’s really of a circular nature: equity instruments are closely related to their debt counterparts in terms of safety if we talk about the company in both microeconomic spaces and microeconomic spaces. They are both closely related and tend to cross impact each other. (I’ll be back to ask more questions)

      2. a bank that didn’t lend money? huh?!fred, you made a great original post above, but please check yourself before you make uninformed comments like this. if the bank allowed you to save money, the bank makes its money by then investing the savings of its customers. if the bank made any of those investments in bonds, that would technically be lending money to the people/companies that issued the bonds. i guess i don’t quite understand what you are getting at – do you want this bank you are proposing to put the depositors’ money in a mattress – or worse yet, in equities?don’t vc’s need to take basic finance / capital markets courses in business school?

         1. please don’t insult mei understand you would like more details.here they are:the bank i am envisioning would be for savers. it would not lend money, yourmoney, and lose it and then need to get bailed outit would handle the basics, getting your salary deposits, allowing you topay bills electronically or by check if necessarythen any excess would be invested by you in whatever you want, mutual funds,money market funds, equitiesthe bank would make money by fees for services instead of providing allthese services for free and making money on spreads

            1. I believe this kind of bank is definitely on its way. I would open an account today if I could find it.

            2. the bank i am envisioning would be for savers. it would not lend money, yourmoney, and lose it and then need to get bailed outTraditional banking is actually not that risky if you follow the “copy book headings”. My bank has been in business for over 120 years. It’s a small bank though, which has expanded to fewer than a dozen branches in that time. This is helps explain why it is so strong though. Banks that grow through mergers have to reassure federal regulators that they are lending enough to poor credit risks. Smaller banks, I think, are better able to stick to prudent underwriting standards.

            3. You’re right, I was being an a**hole. I’m sorry. Thanks for nicely pointing that out. Its just crazy how whenever I post a comment on the internet, I turn into super-a**hole.I now understand where you are going on this. Sounds kind of like a mutual fund company that also does online bill pay. Ultimately, the form of the service / bank will not do much until consumers change their mentality to one of saving rather than one of consuming, in my humble opinion.

            4. People hate fees for service, which is why we moved away from it to money on the spread. They think they can get a free bank, because lots of people aren’t sure how banks work. Even I am not sure, and I made sure to look this up and be very careful in understanding as much as I could. Mostly this had to do with me not understanding tier assets… I at least can’t say that I’m sure what is the correct bank size or type in relation to information liquidity (and we are a hyper-liquid information market that can easily seize up because we have good ways of transmitting the seize up, thanks computers. This puts into consideration that money and price are supposed to reflect that liquidity….) I definitely can’t say that I know or understand how a modern bank is supposed to reflect the computing age and the media age: What money is to me has become very confusing because there are so few situations where I absolutely have to use M1. I really don’t consider my debit card M1 -in theory (and this happens in practice too) all the information that is linked or on it can be wiped and I wouldn’t be able to do a thing. We haven’t adapted to this reality at all. Money in a way has become uncountable and delinked from a certain kind of physical reality.Further, I question (not in a bad way) the idea of no lend: I admit radical understanding of the credit spectrum when it comes companies (not governments). An AA1 bond from a company probably has equally safe equity with good cash flow, whatever that may be (there has got to be a reason it has that sort of rating). In that sense the credit spectrum is closer to a credit circle, despite the fact that a bond is technically a debt obligation. Can I make a bank that only owns other people’s equity as investment capital? Does that make any sense to do if I radicalize this understanding?The next question would be what makes an investment safe- clearly an investment that is all one type of the same thing is not safe (always a problem, we tend to hide that from ourselves) So how do you make sure that your balance sheet is very well flavored with lots of different stuff? And what makes that stuff different now or the same now if we aren’t sure how easily we can link or delink something to a hard asset?Life was definitely easier in certain ways before the internet. Thinking about banks is hard work. (just so you know, this is why I never became an econ student, not because of the work, because I sound like a punk heterodox locally)

            5. Isn’t this paypal?Or getting your check on a Walmart debit card? Or maybe, stretching a bit, a mutual like USAA? All you have to do is move the excess someplace else, but that’s really, really easy these days.

            6. Plus USAA is a “mutual” which means the owners (policy subscribers) get the profits back each year and credited to their accounts.USAA recently made a huge bet by expanding their customer base from solely “commissioned officers” and their immediate families to anyone (enlisted, warranted, commissioned) who had ever served.It will be interesting to see how this impacts what is clearly the premiere insurance company of its kind in the world. It all started because Army officers could not get automobile insurance for their privately owned vehicles in post war Germany.

            7. USAA made a mistake when I was in college. Though they insured my parents, they would not insure me.Chubb has my business now and I’m very happy

         2. you tried to diss fred, but it backfired. lol, i love when that happens, thanks for playing along

            1. true dat

            2. it ruins the joke now that you’ve gone polite, but i suppose it’s better this way. though i do mourn the loss of the joke

      3. Yes!

      4. Tongue mildly in cheek —You have received your wish, banks are not lending any money these days! LOL

   2. You should know this: They tried to hit me up in high school as soon as they found out I was taking my college boards and was eligible for credit. Considering I was taking my first college board (SAT2 bio, and I remember that one super distinctly, since I took it on morphine laced tylenol after surgery), in 9th grade, they were hitting me up essentially as soon as I was 16, or about a year to to a year and a half later…Unless they are super independent (and even then trust me also from experience) students do not have the budgeting or life skills without a lot of intervention to know how to use credit and debit effectively. I was taught by an older ex about what a credit report was, not by my parents, not by my school. Checks I did briefly in high school, but practically no one I know really uses an actual check anymore.Budgeting has also gotten more complicated: No one really sits down and says “This is what health and life insurance costs you” and helps you figure it out at age 16. and it is definitely not taught in public nor private schools. I would totally be in favor of it being added to curriculums (and being added to college curriculums) because I’ve explained how mint works to college students at least three times in the past three years. And credit scores.And that is just not good if they are going to hit me up.

6. I had just written a post with the same topic and been tweeting the last few months about – rent, save, build http://howardlindzon.com/20…

   1. great post howard.its interesting that we are thinking alike this morningi left you a comment regarding owning vs renting

      1. Both great posts, and slightly different but complimentary messages of living within our means and investing.

7. Fred, how about taking a step further and say having a community bank that allowed people to save and pay bills. Over time allow good community leaders to pool their savings and buy/build small businesses. As small businesses grow, they can fund other community leaders and businesses..etc.. The bank can also make its money from real investment into the business….

   1. i love this ideasee my reply to another comment in this comment threadthis is the kind of behavior changing business we need in this country

   2. Credit Unions???

      1. Not exactly. I was thinking of a “for profit” bank that existed for the sole purpose of growing small business owners in its community. The bank is governed by the community members (like credit union), but the purpose is to create and invest in small businesses.The savings of community members can be pooled as collateral to build businesses by the community leaders. The return of business can be shared as dividend or invested back in growing more small businesses.

         1. the banking ideas suggested in this thread are fantastic IMHO, but none of that is going to happen in the States unless entrepreneurs are willing to look at the situation realistically. the reality of the situation is that banking and monetary policy are designed by a ruling class specifically to rig the game in their favor. the ideas in this thread are fantastic because they create real value that would help to legitimize the banking industry, but there are powerful forces that will use whatever means necessary to make sure movements do not gain traction. that is why we have not seen it already. i’m a believer we can revolutionize banking and money, but it is going to require a strategy that recognizes who the real opponent is: US government and the banking cartel that owns it.

            1. can we use micro-finance as a model?

            2. i def think so. i think the solution is a bunch of niche communities all rolling up with their own currency. the fed can’t attack them all at once, it’s unfeasible and i don’t think they would even know how to deal with it. especially if virtual currencies are embraced, as that is a MAJOR legal gray area that shows no signs of being cleared up anytime soon, IMHO. the hard part in making a monetary/banking revolution happen is getting people to overcome their fear of the fed and pursue what is an honest and legitimate business opportunity that creates value for all.

         2. What counts as small now? and that still sounds awfully credit union like to me…

   3. The only flaw in your concept is that it is a violation of banking law.Only Bert Lance was able to do such a thing and he had to spend a wee bit of time away from home for his transgressions and he was BFF with a President.Bank charters limit what banks can do. For good reason.

8. But isn’t this what banks do? Money moves through our economy, whether it starts out slow or fast. The money that VCs use to invest is much less individual money today than it was decades ago. CALPERS is driving the train in Silicon Valley on issues because they are “investing” a portion of the “savings” of state employees in venture (along with private equity, government bonds, and all the slices of the public markets). And if that same public employee puts $100 in a savings account at a bank (whether a “community bank” or not), it gets lent out, for a mortgage, a car, a business loan, a line of credit.The argument for “community banking” vs. 7 branches of global banks on a small street in a small suburb outside NYC is that the “community bank” is more inclined to make smaller loans, thus leading to more grassroots business growth rather than billion dollar projects underwriting dams and powerplants around the world. But money plays no favorites, and capital will flow.Where we get into trouble, I think, is more along the lines of making investments based on poor understandings of other people’s behavior. Going back to an easier-to-understand bubble, startup valuations went up more in line with the desire to invest in the sector, the increased availability of capital to venture funds, and the increased availability of startups to soak up the excess dollars. When startups started to become less intrinsically valuable, “features” rather than “companies,” we soon got the correction. Buying houses as investments because other people are bidding them up because of the increased availability of funds is a different problem than “not saving” or “not investing.”Excess spending and debt comes from (and is measured by) overly optimistic expectations of future cash flow. If I think I will continue to get raises, then I can press myself on the debt load today because it will reduce itself over time. This part is no different for people than for companies. Interest coverage matters. The difference is that when companies spend, it’s usually in the service of finding a way to produce increased cashflow (even if that goal is unstated and misunderstood as “growing revenues” or “growing profits” or “growing our brand”); when individuals spend, we’re usually throwing money down the rabbit hole: too much house, too many clothes, too nice of a car. Even our investments can be misguided: too much education is a problem, for example, facing those who attend low-prestige law schools and end up with salaries that are more main street than wall street (http://www.elsblog.org/the_….

   1. you make a lot of good points, but i don’t think it is good enough to allowbig institutions to do all of our saving and investing. we need to do itourselves too.

      1. 100% it just isn’t clear what that should look like.

      2. The only way to do it ourselves is to directly invest in businesses, either by opening our own small businesses or providing debt or equity capital to those businesses *ourselves.*My point here, borrowing from Coase, is that the end result is the same and the likely reason that we have all these institutions is that transaction costs for individual investing get high really fast. If every angel needs the same $30-50k investor-side diligence that funds get, that quickly eliminates the value of a $100k check. When you (in your professional role) aggregate millions of dollars and do a $2m investment for the same $50k of transaction costs, the world is better off, even after factoring in the new transaction costs.We can’t/shouldn’t do it all by ourselves; division of labor tells us it’s better to do it the current way.What we can do ourselves, however, is keep track of our own personal financial statements and apply modest risk management principles to ourselves. How many paychecks away from bankruptcy are you? A lot of people are finding out the answer to that question.

9. 7-10% savings rate in the long run is a good thing, but for next 2 years, if people save anywhere near 10%, US economy will go back to recession and possibly depression. We need people to spend now, increase savings over time as the economy improves

   1. i don’t think so because the government is spending like a drunken sailorwe’ll need to save so we can loan or government the money they need to stayafloat when the chinese stop doing that

      1. no need to loan the govt money, they will take it from you via taxation and inflation when they want, whether you like it or not. so no worries boss! 😀

         1. or you could short the dollar, buy commodities and foreign currencies

            1. you know it! that’s my game plan, the aussie dollar’s my homeboy

         2. Kid, you correctly noted this before but it bears repeating —We all work FOR the government as they get the lion’s share of our labor while alive and then get a second crack at it when we die.Only government can consider death a taxable event.

      2. The Chinese are in the same trap.They want oil. Oil trades in dollars.They can only grow through export.We are the largest market for Chinese exports.Exports are paid for in dollars which in turn provide dollars for Chinese purchases of oil which in turn fuels Chinese growth.Which in turn provides employment for the Chinese. The Chinese have a huge supply of Chinamen who are moving from an agrarian economy to a manufacturing economy, huge population growth and lots of kids getting out of college.Growth fuels employment. Oil is necessary to fuel growth. Growth can only be accomplished by increasing exports. Exports create dollar based cash flows. Dollars pay for oil.We could learn a thing or two about creating jobs from the Chinese but that would entail a growth bias which would require a growth inititive which would require lower taxes as an incentive to invest and grow which would allow somebody to make a buck WHICH IS NOT CONSISTENT WITH THE GOVERNING PHILOSOPHY OF THIS ADMINISTRATION.

10. There is a way for nearly everybody to automatically contribute to an investment account — use electronic bill pay to send a chunk of money each month to your brokerage account.

    1. it’s a good suggestionmore people should do this

       1. Consumer spending is 70% of US economy, current government spending is not nearly enough to replace that. Until we lower that number dramatically, too much saving too soon by consumers is not optimal. According to Professor Alan Blinder of Princeton, former Fed vice chairman, if consumer savings rate stay around 4%, GDP would only grow 3% next two years, at 6%, there will be no growth at all, 10% savings now would be a total disaster.

          1. that is the fed’s phony logic, which conveniently benefits them and their handlers. in reality, high savings rate would decrease consumer demand, this pushes prices down (and helps to eliminate unnecessary jobs). lower prices means greater consumption AND greater savings. we saw a bit of this in the 2nd half of 2008, but then the bailout frenzy began, and we lost the benefits of the collapse (lower prices/stronger currency). once prices are pushed down and unnecessary jobs have been eliminated due to the market’s self-correcting nature, the savings that have been accumulated during this time can be used to launch new businesses that serve real consumer needs. this boosts business demand, and creates jobs, which boosts consumer demand….next thing you know you are back rockin’ and rollin’ with a healthy economy!that is the way the story is supposed to go. too bad govt has a different idea.

             1. people need to understand that creative destruction is a good thing. unwillingness to change is one of the most deplorable qualities a society can have.

       2. Many of us do, to Papa Fidelity: the 401k.

11. Agree that saving and investing is important and fundamental–thanks, Fred.What about the role of the Federal Reserve in all this? They’ve been holding interest rates very low for a long time. That discourages saving and encourages borrowing.

    1. they are doing that to stimulate the economy but i don’t think they’ll bedoing that for too much longermaybe another six monthsat some point, they’ll need to start supporting the dollar

       1. Thank you for openly saying that, I keep wanting to say that aloud but I keep thinking someone will make fun of me as a college student…

    2. Keeping interest rates low is primarily designed to help banks make money “naturally” i.e. using the shape of the yield curve –> the hope is that with the curve being not too flat they can do their job of transforming deposit taking into long term assets and make money in the process whilst managing their risk intelligently. If they don’t allow banks including commercial banks to recover then lending activity stops which makes matters worse (bankruptices lead to job loss lead to …)

       1. I think many banks are well on their way to recovery here in the US and don’t need a lot more cheap money

          1. The FDIC is slowly, surely and very quietly rooting out marginal banks. They are in stealth closure mode.Failures by year —2007 — 32008 — 252009 YTD — 130 with the latest being AmTrust a $12BN bank formed in 18892010 estimated — 400 ???Of course, the FDIC is broke and is now requiring the pre-payment of 3 years of FDIC insurance premiums.The head of the FDIC, Sheila M Blair, will be moving on shortly because she refuses to play ball with Sec Geitner and Pres Obama who desperately want to avoid any attention to the continuing contraction of the banking system.Do we really need anywhere near the total number of banks which currently exist? America is so overbanked as to be absurd. There are almost as many branch banks in the US as there are fast food restaurants.You cannot swing a cat without hitting a branch bank these days and the policies are universally centralized and the banks have begun to offer “products” rather than personal service.

12. L. Summers “Unlock” comment actually disturbs me. it speaks a lot about the changing nature of work. It also speaks a lot about how difficult it is to measure GDP now, and what we should/should not measure. And perhpas one the reasons we are in a recession is the fact is that there is a shifting nature to the question of labor work and time.GDP may in fact unlock if you work in service and time to service and payment all becomes kind of unclear…..when you are working and its value can’t so be precisely measured, and that will detach labor from GDP pretty quickly…

13. Managing your money is an essential life skill – how come it’s not taught to everyone in school from an early age? People seem to first pay attention to this stuff in their mid 20s, once they’ve already accumulated loads of college and credit card debt.

    1. agreed. I am definitely a saver, and this definitely came from watching how my parents dealt with their finances.

    2. agreed. kids should know how to drive, swim, and save by the time they getout of high schoolgothamgal wrote a post about this a while back

       1. Any highschool that has the resources to offer driver’s ed should offer personal finance ed too

          1. I’m not sure why there hasn’t been a huge push to make economics/finance mandatory in all high schools across the nation. hopefully it’s coming.

             1. Credit card companies and banks would probably oppose it. More educated people mean less profits for them.

             2. couldn’t have said it better myself. However, they say never waste a good crisis – maybe this is a point in time when we could actually defeat the banks/politicians and implement something that empowers main street!

       2. Can we repost the best of the “advice on money and your life” from this thread into a wiki? That would be useful to a lot of people especially if we tweet it out en mass?

       3. right on, history and english are great, but i would argue that having an understanding of basic finance would do a great deal fro democracy and income/human capital inequality

14. While saving (bank) helps fight inflationary forces it doesn’t promote economic growth.But if no one is moving capital around, it’s not working. Investing in developing companies in the US helps build jobs locally. We need to build many smaller leaner businesses to stabilize our unemployment slide.Investing globally can yield much higher returns due to faster world growth versus US.But we need those outside investments to result in global folks buying back from the us.I’m certainly not wise enough to see an easy/simple solution. But I know actively building businesses in a sustainable way will help us get financially healthy.

    1. if the savers invested in money markets, mutual funds, equities, etc, theyare investing in the economy

       1. I still want to know why a corporate bond does not count in this list even though it is a debt instrument.

15. Fred -I personally agree with the notion of “saving over spending” and fiscal responsibility on an individual level. As a few commenters have noted in various ways, though, that the US economy is currently a consumer driven economy – that’s no secret.If we attempt to change our cultural approach to debt/credit/savings then we need to directly address the effects that has on local and global business. Its great to say, for example, that we could have a system that focuses on saving and helping small businesses grow but if we “stop buying the extra t-shirt or getting our hair done” then how are our small business t-shirt retailers and hair salons going to thrive?This is a fascinating topic and we certainly won’t come up with the answer overnight – I would like to know how the US economy can convert to a new economic model when consumerism is entrenched not only in our psyche but our local and national infrastructure. What would that look like and how would we get there?

    1. that’s the export part of the equation that i mentioned but did not addressdirectly

    2. seems like there is a secular shift going on that will take years and years, but it’s coming – a focus on technology, energy, efficiency/logisitcs/productivity which the U.S. can then export, and away from consumer oriented businesses. Hopefully we can teach the hairdresser how to write code!!

       1. re: the hairdresserhttp://fredwilson.vc/post/2…

16. Isn’t social security a forced savings plan? The problem with social security being that our *government* can’t save and I’m unlikely to get back what I put in by the time I retire (well after the baby boomers).

    1. The problem is that it is a truly lousy savings plan. I have been working and paying SS since age 12 — not a lot but some.For some considerable time I have paid the maximum amount mandated by law. I will be 70 in 12 years and will attain the highest possible SS payment at that time. The calculated rate of return is abysmal.I just received my annual SS statement — filled with a different set of errors than last year’s — and I would have been able to receive 4 x the payment if I had invested it myself and made 7% compounded over the time period of the report and lived to be 90.FOUR FREAKIN’ TIMES and it was MY money. Worse still, it will ultimately be means tested and I will likely receive NOTHING.I do not want the government managing either my money or my health. They are not very good at it.Sheesh!

17. As a non-consumer myself, I cannot relate to the ‘hoarding of stuff’ American mentality. I hate living in a consumer based economy–how can we change this? There has got to be a way to shift away from spending, and over spending, and the whole nonsensical addictive frenzy around such activity. Can the internet can save our economy and the planet.Let’s be leaders in something other than consuming!

    1. We should keep spending but spend on the right things: life experiences, family, connections.

       1. This is the most essential truth in this webpage.

       2. and things that increase productivity – so you have more time to allocate to those things most important! to wit – a good smartphone could be the wisest purchase a consumer can make these days!

       3. I would be willing to be that if you catalogued the most satisfying discrete experiences or hours in your life in the last year they would likely be focused entirely either on family, friends or nature.I would bet that they aroused in you the emotions of love, awe or family pride.I would bet they were almost all universally inexpensive.

    2. A bit of what you say is simply the issue of “knowing ones self” rather than attempting to be what advertising suggests you be. Simplifying one’s existence in such a manner that the complications of living do not create stress.How many damn pairs of shoes can one person own? Wear?I do not think a pair of khakis, jeans or a polo shirt has even begun to feel comfortable until it has been washed about 100 times and been owned for 5 years.Today we buy garments that are pre-aged because we are so lazy. LOLWe are not comfortable in our own skins and we have lost the realization that while we are free to “pursue” happiness sometimes we actually catch it. When you catch it, stop pursuing.When I was 8 years old it was body surfing and now 50 years later it is still body surfing. Of course, I am a true simpleton and easily satisfied. But I am a happy simpleton.We live to impress others while we should, in fact, live to relate to others and to do well by others. If another person cannot relate to you unless you are wearing a trendy watch, then you need to start hanging around a better class of folks.At last resort, try “normal”. Normal is good. Normal is simple.

18. Summers is saying the right things, but the Obama Administration is doing different things. As I mentioned in a comment on your blog earlier in the week and also in a comment on Bijan’s blog earlier this week, the economic policies enacted this year seem to have been more “hair of the dog” than ones designed to address the imbalances Summers talked about. To help address these imbalances, we need policies designed to make America a more attractive place to start or expand high margin manufacturing businesses. I don’t pretend to have all the answers, but I mentioned some ideas along those lines on your blog a while back.

19. Cash for Clunkers – don’t count on it

20. The new status symbol isn’t a new Mercedes 500 series but a paid off mortgage.Never have debt on a depreciating asset.There are three ways the avg person makes money: their income, the stock market (investment), and their home. Understanding this, I’d like to see more savings and investing. However, I’d prefer to see more investing. We don’t need to spend what little we have to spur the economy, it’ll create more debt, nor should we save what little we have and continue to stall out. I’d like to see investment take top priority.Traditionally investing has been something associated with the rich. I’d like to see it something more of the average, middle class engage in. There should be more pre-tax investment options. I’d also like to see no capital gains tax for anyone whose total income is less than 250k.We need to get more money into the system and the more we can get money moving and invested the more jobs will be created. More jobs improves incomes.Increasing the awareness of assets and asset appreciation with in the middle class is something our society could benefit from. It took me years and lots of mistakes to learn. There has been a tremendous cost due to the lack of financial literacy in the county.We need to fix this.

    1. Reg the stock markets: the common rule was that for the long term, stock markets are fine. But now we face a rather new phenomenon: Emerging production for high-tech high-end products in India, China, that is not necessarily needed there: they export. Thus the demand in the US brings growth elsewhere, and i wonder what will be the long term effect on Wall Street.

    2. Right on. That’s kind of what I was saying with my post

    3. Residential real estate has been the focus of public policy for years whether through the interest deduction for mortgages or the recent incentives for first time and move up buyers.Residential real estate is the most important savings vehicle for most “normal” people because they must have shelter, it captures the impact of inflation, one can build a huge font of equity by slowly paying off the mortgage, it has an orderly financial market, it has an excellent market for transfer, it is often protected from bankruptcy creditors and as you get older you require less of it just when you may want to downsize and simultaneously tap the equity value.It is also a mindless and transparent asset which does not require constant investment monitoring.It also captures the whimsy and important memories of life.

    4. Many of our economic competitors have an effective ZERO capital gains tax rate. Why should American investors in American enterprises be taxed at rates substantially higher than those economies with which we have direct competition?Why should “after tax income” — your pay check which has been wrung through Federal, state and payroll taxes — be taxed again when it is invested in a financial instrument.How many times should the same income be taxed?Capital gains tax rates should be ZERO. At every instance in the history of the US, when capital gains rates were reduced net receipts of capital gains taxes by the Treasury went UP!This is a policy which should be adopted immediately by the Obama administration. Just a bit of reality — who the heck is going to have a capital GAIN for the next 5 years? Everybody has capital gains tax loss carry forwards!

21. what is the point of doing a post on savings when monetary policy and the federal reserve are not discussed at all. it is obvious that that is the problem. if the fed/monetary policy is constantly devaluing hte currency, and thus creating higher prices, they make it harder to save. if the currency is being devalued via excessive expansion of the money/credit supply, that is going to create asset bubbles. if this occurs in important consumer areas — agricultural commodities, oil, real estate — the consumer is especially screwed by the bubble as it will significantly increase their cost of living. all of this is a result of govt’s criminal monetary policy.anyway, consistent with my tendency to repeat the same simple truths over and over again, restoring a sound economy (the foundation for which is savings) begins with reform of monetary policy. campaign for liberty, audit the fed. if we all did this, the problem would be solved quickly. most people have no idea how great the world would be if there was sound money. it would be so great i might not have any bad news to talk about!!!

    1. like (almost) everything in life, devalued dollar is good and bad, it depends how it is used. It can encourage US export and production – a good thing, and unfortunately it can also encourage a flood of easy money that perpetuates bubbles.

       1. like most of modern economic orthodoxy the export thing is a bit backwards. it’s like saying, “being poor is good because then you will be more desperate and sell your labor at a lower price which is good for the economy.” lol, i guess that makes sense, sorta.anyway you slice it, if your currency is losing value, you are getting poorer, and thus are being robbed via inflation. it is not coincidence that the dollar was a strong currency up until now (in fact still strong compared to many others) and that the US economy was very robust during this strong currency time period.

          1. 🙂 for the example. Anyway, if you want higher interest rates that encourage real growth (and not only forex traders) , you need people who think they can make high enough profits to return it. This means business that will not suffer from the immediate decline in demand due to the same higher interest rate – this is impossible in a pure consumption/shopping environment.And BTW, export is not totally screwed. A little thought about export could help GM a little.

             1. i don’t necessarily want high interest rates. i want the market to determine interest rates, not the federal reserve. more important than rates, though, is a reduction in govt spending. all govt spending is taxation, either directly or via inflation — whether this inflation is exported to china or when it inevitably comes back home and americans will pay the rather steep price of ignorance.there is no quick fix or magic cure, the only solution is to liquidate malinvestments and let the market run its course.

             2. agreed. markets should determine (however, stronger currency is higher interest rates). It’s the red pill or the blue pill: the red pill hurts, and the Fed is definitely trying to avoid it at least since the first Internet bubble collapse.

             3. The market does determine interest rates. The fed can impact them of course. But certainly long term rates are mostly market determined

             4. the fed can impact rates way too much, they have way too much control and are busy granting themselves even more authority. with the fed controlling rates and congress controlling where money is allocated, we basically live in a centrally planned economy, that is the simple problem.

             5. At the short end of the curve, yes, but not at the long end

             6. lol, true, at least for now, though they can sort of affect the long end too, now that they are buying up all sorts of assets (mortgage backed securities, treasury bonds, who knows what else…after all there are trillions missing from the pentagon and the fed is still not audited…) and thus merrily going about distorting the price of everything. but even if we assume the impact of such behavior on the long end is minimal, that is still like saying, “they only chop off your left arm, not both your legs.” lol, i have to give you credit though boss, you’re always looking for the bright side of things! 😀

             7. One of the troubling circumstances today is that short term interest rates are so low that the Treasury is funding and re-funding at the short term end of the yield curve which will have disastrous results if and when interest rates increase to capture the impact of impending inflation.This is a very, very serious issue.

             8. I remember that so distinctly when Lehman and Bear Sterns fell. I remember reading the newspapers and the money just sticking despite the low interest rates. Total market determination. I was so scared and so angry because people in the neighborhood I grew up in worked there. Plus there were all the normal main street jobs in my neighborhood, plus I was a student. I still know of one guy who never got a Job on Wall Street again after that.I still don’t know if I will get over that fact. I believe the market should determine, but I still want to change finance and business for people on Main Street and Wall Street because what happened was miserable. Something’s got to give, and the fact is both the ridiculous amounts of loans and people working all hours on wall street for the money is not working for anyone. I would work all hours just to see parts of that stop: It’s not worth it. I don’t know how shook up some of my classmate were/are, but still…

             9. Yes and no.The Fed controls the Discount Rate in an almost arbitrary manner which is intended to “manage” the economy and, in particular, inflation. But it is also the key rate that banks look to to finance their short term and overnight liabilities. It is like the wholesale price of oil.Banks control the Prime Rate or LIBOR in a seemingly similar arbitrary manner. In fact, they are trying to balance their cost of loanable capital and the risk adjusted return they can make on loans given a certain targeted ratio between deposits and loans. It is like the retail price of oil.The banks then risk adjust the cost of money through their product selection, underwriting processes and the credit quality of their borrowers. This is like the retail pump price of gasoline. <<< This is where interest rates evolve from wholesale to retail.Creditworthy borrowers may conduct an auction to “discover” the price at which they may borrow money from any and all sources of funding whether directly by visiting with a number of banks or by selling commercial paper, bonds or other simple or complex financial obligations. This is like the specialized retail market for diesel or jet fuel.The final cost of money — the interest rate — is also impacted by the 5 Cs — cash flow, capital, collateral, character, conditions — as well as the planned use of the money and the term of the obligation.Retail consumers can also impact the cost of money by their credit rating and their willingness to shop around for a good deal.I would say that the market sets rates only after the arbitrary behavior of the Fed and the banks sets the wholesale cost of money.

             10. i would agree with that statement

             11. That is so helpful….

    2. what he said.

22. In the last decades we lived in a world where growth=consumption. Unfortunately, consumption achieved by steroids instead of muscles:1. The prices of everything do not include the real economic price of goods, which must include the environmental price: When you drink an imported cola can for 2$ it does not include the environmental price of producing the metal, the factory pollution, trucks delivery, overseas shipment – all for a five minutes 330cc drink – and than disposal of the garbage (the same is true for the cost of flights burning tons of gas etc). This is why buying a new washing machine is easier than fixing the old one.Once the real price is incurred everything will be much more expensive, and people will be forced to save.2. Consumption is the king. This is why everybody is obsessed with advertising, which is the major tool to shove consumption behavior. Like the fight against smoking, without ads cut (regulation or taxes) it will be hard to lower consumption.3. Investment should go to real growth: energy, food, clean tech, information. Things that make real returns to society for generations to come. Financial investments should be used only as a channel to those investments. No derivatives.4. Real long term “change”, if you will excuse me the word, will happen only when the marginal utility of saving is higher than in consumption. This means, in daily life, that “I can not buy this, so i better save this dollar”. This means unhappy voters…

    1. I agree completely with your thesis. Herein lies the problem.The current administration is committed to simply “redistributing” the income and wealth from the most productive elements of our society to the least productive elements of our society thereby quenching the frustration and unhappiness of the bottom 50%.Think how absurd our currently tax policy truly is. Not only do the top 5% pay virtually ALL of the taxes in America. The bottom 25% GET A CHECK from the government in the form of an “earned income tax credit”!!!The government not only does not want the bottom 50% to pay any taxes, they want the top 5% to send a check to the bottom 25% via Washington in order to create a political dependency thereby perpetuating their own power.In the face of this, the current Congress and administration and President thinks even this silly scheme is not sufficient redistribution and wants to send the bill for healthcare and the wars directly to the top 5% in the form of additional targeted taxes and surcharges.And, oh yes, while paying confiscatory taxes, would you 5%ers please get off your butts and create some damn jobs? LOL

       1. Ok, I get the Ayn Rand Objectvist sentiment in this post, but I’d like to make two points:1. Some of the wealthy got wealthy by creating ridiculous and non-value add products (see CDOs). How do you account for this?2. The big boys need mainstreet to have some $$$ so they can buy their products. If you left it up to the greedy profiteers, they would just try to increase margins to the point 90% would be unemployed and ultimately unable to buy the very products they sell (ok admittedly a bit of an exaggeration, but you get the point).If there were some way to classify investments as “value add” vs. “non value add”, this entire conversation might be moot. But I don’t see any claw backs taking place for those who created CDOs and are sipping mojitos on a tropical island, laughing at this very post!

          1. I am a committed capitalist who got to the game a few years late having been a professional soldier during my 20s. I liked soldiering and thought it a noble profession. Everything I ever needed to know about business I learned when I was a platoon leader. I only point this out to say that I was old enough and experienced enough to know better when I first got into business.Wall Street is a cess pool in which money lords over everything else. It is probably a necessary evil for the smooth functioning of capitalism but like a lot of things it takes it too damn far. Many of the obscure derivatives which created the recent woes should never have been created.If you cannot bite it and leave an impression of your teeth or you cannot foreclose upon it and collect against the collateral, then the regulatory environment should have shut it down. Just like the insanity of naked short selling, cancelling the uptick rule and short selling in general.So, I guess the only thing we can really do is to learn from them as we did from the reign of the robber barons? That is if I cannot be turned loose to hunt them down and execute them all?The solution may lie in the form of capital gains tax relief in which the very definition of capital gains provides incentive for investors to fund companies which will actually create jobs, real jobs, in real companies which generate profits which fuel the economy and thereby create more jobs.In defining capital gains, it may be necessary to simultaneously legislate against obscene salaries and bonuses — in the form of progressive ordinary income tax rates but not in a confiscatory manner and certainly not in a manner which pays folks not to work to their potential.This could be done by simply not allowing a business expense deduction for compensation above a certain amount and mandating that Wall St types take their bonuses in the form of stock/equity which is subjected to a vesting period.The guys with mojitos? Let’s poison their mojitos.

             1. “Wall Street is a cess pool in which money lords over everything else. It is probably a necessary evil for the smooth functioning of capitalism but like a lot of things it takes it too damn far.”I agree that it might be a necessary evil. The problem is that the market isn’t allowed to fully complete the creative destruction cycle once governement steps in at the tail end. I wouldn’t have a problem with the excessive risk taking if the full brunt of the negative outcome was borne by its creator.

             2. I could not possibly agree more with you.When I say that WS is a necessary evil, I am talking about the “prostate exam” kind of necessity wherein you do things with educated folks that you are reluctant to even tell your wife or kids about.To not allow for the creative destruction of failed enterprises is to disavow the regenerative power of capitalism. Failure is necessary to the cycle of life.WS partnerships should expose the entire net worth of their partners to the risks and costs of failure.Take a stand and risk the consequences.If the people who make the decisions have to suffer the consequences of their decisions, they will begin to make better decisions.

23. personal finance classes should be mandatory in high school and colleges. even if you can’t save 5%, $50/mo can go a long way… think about compounding interest!

    1. Private schools in particular should follow this program of instruction if for no other reason than to educate their graduates about the concept of “stewardship”.They will be pursuing these graduates for the rest of their lives for contributions to fund the school and when they had complete control of these folks they could have educated them in such a manner that they planted the seed of the necessity for stewardship of privately funded institutions.

24. When the effective cost of borrowing is essentially zero, you’ll never see real material change here.This needs to start with rational monetary policy. Absent Volker, we haven’t seen that for almost 40 years

    1. You and ‘the kid’ are on the same page andy

       1. it’s the simple and obvious truth, that’s why there is no rebuttal for it.

    2. amen the playing field is just so unlevel after 40 years of this.

25. I am not American but I love the US and think its problems extend to other countries dear to my heart, such as the UK; hence allow me to comment.I think we should to a certain extent stop looking at the fed / the government but spend more time considering our share of responsibility in making leverage a global issue, and therefore I applaud this post. I lived in London for 11 years where basically everybody used real estate as a means to get richer and the home cinema was the height of chic, leading to unsustainable level of personal borrowing that had to be channelled somewhere (meaning … too many mortgages on banks balance sheet that need to be securitised and sold off to harder-to-find investors who are increasingly less adept at managing the risk and so on…. ).I moved recently to Switzerland and it’s been eye opening to see how this society thinks about money.The Swiss (who have many shortcomings but offer some things to learn) do not believe in get rich quick. They typically do not own their house. When they do, leverage is no more than 60% in most cases. The lending banks are incredibly conservative both in the leverage they allow but also in the haircut they take to the appraised value, as well as to the assumptions they make about maintenance. In other words, they are conservative about what might go wrong with home ownership, including from a market standpoint. So home ownership is tough, is considered a responsibility and a burden, and most people seem quite happy to rent. The savings rate, needless to say, is quite high.The whole society does not believe in get rick quick schemes. Pension assets are often self directed investments but the risk you can take is limited (although if you are young you can put it all in equities). There is a widespread notion that whilst you can be a great entrepreneur and create vast wealth, almost no-one should be arrogant enough to think themselves a Warren Buffet and waste their money on day trading.I am a firm believer that we need to get back to some simple truths, such as making money is tough to do, wealth is built over time, and wealth is best not spent on stupid items that provide no lasting value or happiness such as 90% of consumables. It is also foolish to think that you can sustainably buy cheaply produced goods in China whilst borrowing endlessly based on your own assets (e.g. your house) and think this game does not end. Were it not for Walmart, its chinese sourcing and the Mighty USD, the game would have stopped a while ago.There is nothing wrong with a 2,000 sq foot home and a car that you keep for 8 years, and a bit more saving and investing, as Fred rightly says. Let’s get back to basics, and spend more time and less money doing things that may actually make us happy.

    1. Great comment fred. The swiss can teach us a thing or two

       1. But first we should learn a few things about the Swiss —In WWII, the Swiss were “neutral” — well, they said they were neutral, but they did not quite act neutral.The Swiss were the bankers for the Third Reich providing treasury and credit functions whereby the Nazis were able to deposit the looted gold of sovereign nations complete with the national mark of their victims and the Swiss blindly took this gold as collateral knowing that it was the fruits of the conquering of, in many instances, neutral countries.The Nazis deposited French, Belgian, Danish, Polish, Norweigan, Czech, Austrian gold and obtained credits from the Swiss who then applied those credits to the sale of armaments and ammunition to the German Army. These armaments and ammunition were produced by Swiss companies.The Swiss were instrumental in providing smelting services to the Nazis to melt down the gold from Jewish concentration camp victims and recasting it into ingots. This was both jeweler’s gold and dental gold.The Swiss allowed the Nazis to transport troops and armaments through their country enroute to fight against the Allies in Italy.They similiarly provided R & R centers for wounded Wehrmacht troops and officers.The Swiss banks cooperated with the Nazis in the identification, seizure and liquidation of Jewish owned businesses in Germany and numbered accounts held by Jews of all nationalities.When you do business with Bally Shoes — guess what? They were part of the cabal which seized German Jew footware factories and moved the equipment to other countries. Of course, they did not pay for any of this.When UBS applied for an American banking license, the capital which underpinned their obligations in this country was in part made up of the blood money they stole from the Jewish accounts they failed to account for at the end of WW II and which they have continued to deny have existed.UBS to this day does not recognize the difference between tax avoidance and tax evasion and facilitates Americans to avoid the payment of US taxes believing that tax evasion is perfectly legal. UBS operates from offshore banking havens and routinely sends its private bankers to this country to solicit illegal accounts. When Holocaust survivors were able to identify discreet accounts, Swiss banks demanded “death certificates” of the original holders. Of course, they were not giving out death certificates at Buchenwald, Dachau and Auschwitz.Read the excellent book, Hitler’s Bankers, for more information.I would not even eat Swiss cheese.Fred, sorry about the rant.

          1. JLM,I am Swiss and like most Swiss citizens, I am not proud of some of the chapters of our history, especially the one related to the first part of WW II.It has been 60 years since the end of the war, and just like Germany or Japan, Switzerland changed a lot during that lap of time. America also has part of if its history (slavery, massacre of American native) that does not make many of my American friends proud, but, (hopefully) we all learn not to repeat the mistakes of our ancestors.I invite you to visit Switzerland (as well as Germany and Japan) to verify by yourself how peace loving, welcoming and friendly the people are (just like they are in your country).I assure you that can eat Swiss cheese (and chocolate), sushi and frankfurters (just like I eat pancakes and hamburgers) with peace of mind 😉

             1. When it comes to horrific national policies, no country stands above another. The American history of slavery and stealing the country from the Indians [teaching point; be careful who you invite to Thanksgiving dinner] are world class transgressions. Shame on the US.Further, no individual is directly responsible for the policies of their government and it is only reasonable that individuals may disagree with their government and still be citizens.As much as slavery and our treatment of the Indians stands out as a horrific chapter in our Nation’s history, I often wonder what I would have done were I a citizen of those times. I suspect it would have been easier to do the right thing in regard to slavery but I suspect I would have fallen into the trap in regard to the Indians.The real challenge today is what are we doing to resolve these sometimes still unresolved matters. I continue to be personally interested in the saga of the Dakota based indians and their inability to get an accounting from our own Dept of the Interior as to oil production on tribal lands. It is a modern legal travesty.The Swiss failure to account for Jewish numbered accounts from WWII and the failure to identify and return confiscated Jewish assets (confiscated in conspiracy with the Nazis) is an ongoing crime that has been cynically left to simply waiting out the attention of history as these beneficiaries and their heirs simply die.The Swiss involvement and, in fact, leadership in empowering US citizens to avoid US income taxes is totally unacceptable. No Swiss bank should be allowed to transact business in the US until this government sanctioned attack on the tax laws of a sovereign nation is stopped.I have been to Switzerland and Germany many times having lived in Germany as a child and having been stationed there in the Army. I like the people. I myself am of German ancestry.I was only kidding before about the Swiss cheese (because it is of course made in the US) but I am now going to boycott all Swiss products in solidarity until the Swiss government makes right the Jewish accounts and stops facilitating American tax cheats.

             2. JLM,I am amazed by your ability to deliver so many detailed posts and answers on so many subjects…Very impressive.Your positions on slavery and American natives honour you. I believe it is easy to fall in a trap when you grow up in an environment where even the unbearable is considered as the norm, but, you are right, when we do realize that what we committed or was committed was wrong, reparation has to take place.The Clinton administration and the World Jewish Congress did put a lot of pressure during the 90s on Switzerland to account for Jewish numbered accounts from WWII and return confiscated Jewish assets. Two commissions were set and a settlement was achieved in 2000 (for more details http://en.wikipedia.org/wik…. I thought that this settlement did bring reparation and the WJC was satisfied with the outcome. Do you have any additional information that I could be missing on this?I, also, agree with you on the tax evasion subject, it is unacceptable. Fortunately, early this year, the EU and USA did push the Swiss government to exchange information on tax evasion for their respective citizens. Switzerland agreed to adopt the standard on the exchange of information set out in Article 26 of the OECD’s Model Tax Convention, Switzerland will now extend administrative assistance to cover all tax offenses, including tax evasion.Regarding the UBS case, a deal was reached between UBS and the US government over tax evasion dispute http://www.guardian.co.uk/b….There are probably things that I am missing here, but, I have the feeling things are moving the right direction. Looks like, on the other hand we are not very good at protecting our trademarks. I noticed, when I used to leave in California, that the Swiss cheese, i was buying, was made in New York State.. I know you were joking 😉

          2. As I said, some things to learn. Not suggesting we emulate a country that just banned minarets in all that they do. But there is a touch of the “sustainable” that we should borrow from the people who live there (most of which are not bankers).IMHO bankers tend to focus on banking and seem to have limited interest in politics. Funding wars they do routinely, whether called Rothschilds or Pictet. It’s ideologies that drive the real horrors.

             1. In Switzerland, the banks control the government and no politician would ever cross the Swiss Banking Federation. Some think that the SBF is more powerful than the government as it is truly national and the government is more coalition based.What is not widely known is that the Swiss Banking Federation has been America’s best ally in providing intelligence on the movement of terrorist linked funds in apparent violation of all Swiss law. Suspicious minds suspect this is an attempt to divert attention from the issues of accounting for Jewish accounts and the current UBS American tax evasion schemes.The OSS had offices in Switzerland and much of what was learned about the Swiss involvement in supporting the Nazi regime was provided by mid-level Swiss bank officials who provided enormous amounts of information, at great peril to their own lives, to the OSS who provided it, in turn, to American Treasury Sec Morgenthau who mapped out the entire Nazi financial relationship with the German government, the Nazis and high level individual Nazis.Unfortunately, at the end of the war, the Swiss were unable to be held accountable as England and France so desperately needed the help of the Swiss to rebuild their countries and America simply lost interest.

             2. Learnt something today; thanks for uberqualitative commenting !

             3. JLM rocks

             4. It surprises me when you say that the SBF is more powerful than the government and that no politician would ever cross the Swiss Banking Federation… If banks are a major lobby in Switzerland and have many politicians supporting their cause in the parliament and the senate, many politicians (some that i personally know) are extremely critical toward them (especially on the left parties). Can you share your source on this?

    2. what he said too. Fantastic thoughts. Great

    3. This would require a radical restructuring of the world economy and the US admitting it is getting into its adult years as a Western Economy. I think a lot of people here would dislike that. We’re the type who seems to think we can play weekend warrior forever, even if it is not the case.You may have the right gospel, or at least parts of it, but you are going to have to find better ways to preach the message..

       1. Let’s work on getting this across ! Open to how better to communicate and refine, but do think we need reinvention here too

    4. Swiss conservatism may seem great when it comes to home ownership and saving culture, but, it has its drawback, very little entrepreneur culture, nearly no venture capitalists and banks that are extremely conservative to lend businesses… I guess there is no perfect world.

26. Fred – Great post”It’s been more fashionable to be a borrower and spender.”Excessive consumption, keeping up with the Smiths.When we discuss saving for retirement, I’d love to see a DCF of jobs with a defined benefit pension vs. normal private sector jobs with defined contribution programs. I would guess that most people would be shocked at the real value of those pensions. It’s forced savings, maybe a lower current income, but it’s forced.The rest without a defined benefit plan are not saving nearly enough for retirement. It would be interesting to see if the retirement plans for even allow us to replicate a definied benefit if we max out our contributions.We also need to see some serious action for the rights of investors – John Bogle’s book, “The Battle for the Soul of Capitalism” lays out some of the structural changes which strip away returns and transparency for every single investor.

27. As usual another thought provoking blog and one which has attracted much interesting commentary and debate. I would like to make a tightly focused comment on the use of debt in business. Not consumer debt or personal debt but commercial debt.NOW IS THE TIME TO LOAD UP EVERY SINGLE DOLLAR OF DEBT YOU CAN POSSIBLY ACCESS. Cram it onto your balance sheet showing the cash asset and the attendant liability. Borrow a lot and borrow it long and borrow it at fixed rates.Debt is so cheap today as to make equity completely irrelevant.Again, remember I am not talking about personal or consumer debt. No home loans, no car loans, no boat loans. Business loans only.Of course, you have to know how to borrow money. It’s a skill.You have to have some collateral other than the cash as you will want to deploy it in your business.You have to have an alternative way of repaying the loan such as a going concern which generates cash. That is why my comment only pertains to commercial credit.You have to have liquidity sufficient to keep the bankers happy if you should hit a bad patch.The most important thing is that you must be able to ultimately earn a rate of return on invested equity which is superior to the cost of the money. With the Prime Rate @ 3.25% that is not exactly the high hurdles.Many private banking groups (B of A private banking, Wells Fargo private banking) have loan programs which provide incredible pricing (e.g. P minus 1% for their best customers).If you can immediately deploy it in your core business and can earn a hurdle rate of 3-6 x the cost of the money, then go for it. Otherwise lay in the weeds and let an opportunity come to you.This is not a strategy for a young person just starting out but if you are a fat cat with a lot of assets or you own a business now is the time to back the truck up and get as much cheap money as you can.Put it to work and create some meaningful positive leverage.

28. Invest from the front page, keep track of your investments from the business page. Keep it simple. Keep it focused.The easiest thing is to pick the countries and industries which will ultimately — over the next 20 years — create huge values. ETFs are great for this.Look at the charts for Brazil (EWW), China (FXI) and Mexico (EWW) as well as the Internet (HHH). Take a look before and after the March inflection point.It’s like shooting fish in a rain barrel.

29. I wanted to comment on “Save & Invest.” I agreed with 90% of what Dr. Summers said about saving & investing and how Obama could convince Americans. What Dr. Summers said was all good up until the part where he suggested we invest in mutual fund indexes. Hey! Why give our hard-earned money and savings-investment AGAIN to big corporations whether domestic or international. “I just gave at the office” in my 401K; when I went grocery shopping; purchased gasoline; rented a video for my kid at Blockbuster or CoinStar kiosk, etc. And especially WHY give it to a mutual fund broker-trader. That’s who got us into the 1st recession in the first half of this decade and more recently with Madoff.What about people in the U.S. saving and investing right here in startups. Why can’t there be a SEC-registered mutual fund index (by sector) consisting of 250 startup companies. Every startup company can register to participate for $50. If interested Americans invested money into such a mutual fund, then these startups could get their companies to serious launch stage and even further. Add a little VC follow-on from a VC/PE firm. This seed capital mutual fund + VC/PE follow-on could stimulate local job creation right here in good’ ol USA. Which is what I intend to do if I get my first tranche of $750K on $2M.Today’s big corporations have to be “compelled” to start hiring especially if they received TARP. They are just stuffing all that net-margin into the mattress in spite of Obama, and thinking they can ride the recession/depression out. They’re wrong. We are approaching a breaking point for Americans in the next 12-18 months; a point of no return for traditional consumer-purchase behavior. You are going to start seeing this manifests shortly if American companies do not recommit that TARP profit back into creating “meaningful” jobs.This circles us back to the beginning of your blog. It is kind a like a successful diet. At some point, the human body/mind says to itself, I can do without the extra calories. I can save, save, save, and be so biochemically efficient that I won’t even support my local QSR, or fast-casual restaurant. I’ll drink tap water and not buy another Pepsi/Coke. I will grow a Grizzly Adams beard and not buy another Gillette razor. Since I am not working, I don’t have to wash my clothes as frequently and purchase a box of Tide. Heck, I can wear my boxer-briefs & bras for 3 years and not buy another pair of Haynes! Etc. The only customers for the few remaining American corporations will be export markets. And they may just continue to say nope! Buy BRIC-only! We don’t want American made products. We’ll starve American companies into bankruptcy. Then America is irreversibly toast!

30. I refer to this period we are in now as a social correction. Recessions are simply part of a larger social correction and some are larger and more prolonged than others in our history. And while we may be a global economy these things tend to relate to societies individually. I also believe few people would argue with the importance of saving and investing. The velocity of money in our system has slowed dramatically and focusing gov’t actions on that dynamic is a pathway away from saving and investing because only more credit can replace the lost velocity. So this period will be drawn out until we collectively learn what really matters.Here’s the problem: Our government and media are reflections of our values yesterday so having our reflection lead us out of a mess is problematic at best. It seems like it may have worked in the past but government is reflecting old values now by spending to create more credit (bc the economy won’t by itself) and that has to change. Media enterprises too are reflecting values that seemed to make it great in decades past and is not looking forward unless something seems to promise massive impressions and paydays. The primary agent of change is generational turnover and the new values that come with successive generations. We see this not in technology but how technology is adopted and how it evolves. This site is a perfect place to combine these thoughts because relying on a government with a lagging set of value to “fix us” is a mistake being made now. We must look forward and not just see the younger generations different values as flawed or innocent. Interestingly, I believe the evolution of social networking happening right now is a pathway to more effective decision making (in small groups) if we allow it to be. So while everyone looks for the profitable business model, and I certainly respect that, the evolution of social networks toward being a crucial part of social decision making is essential. There is a book worth of how’s and what next(?) in this thought but the soundbite culture of old media must give way to better discussion and workouts of issues that really matter to all of us. Congress won’t get there using their old sets of values where money buys influence. We have to collectively step back and really give time to “what really matters?”. Saving and investing is just one component of good citizenship. Actions that agree with words is maybe the most basic place to begin. If we really listen to the tools kids have led us toward in the digital universe then we might just notice that it is more than playful stuff that money can be made from. (No doubt this audience gets that point!) Saving and investing is critical…..but maybe more important is that we tune into to the changing values that will help us get where we need to go collectively. That means listening to the younger generations and their values. This isn’t soft and squishy stuff if you really think about it.

    1. I agree with you philosophy. I see the core problem being that there is simply no cost to being an American.Oh, sure, one has to pay taxes.There is no sense of universal service. No sense of contribution to the good of the Nation.We are an entire Nation on the make. The rich want to get richer — a bit piggy but not necessarily a bad thing. The poor — at the urging of the current administration — think they are entitled ENTITLED to some of whatever the rich have. The government believes it can arbitrarily engage in wealth redistribution because….well because….Barack Obama thinks they should.There is not one iota of evidence that socialism creates long term prosperity. If there were, people would be swimming to Cuba.

       1. JLM, thanks for your thoughts. If I suggested in any way that socialism is good let me stop that train in its tracks. Generation Y is in their 20’s now; their disposition, initially anyway, seems like it is both pragmatic and leaning toward meritocracy as a role model. Urges toward entitlement and get rich quick ideas are a by products of the good parts of our system and the bad. But to dial back to the investment and saving theme of this thread, consider the example of a well run business that goes public and sells shares. The 50% gross margin they had upon going public is steady and competition is evolved in the industry so over time, in order to grow the public company they have to climb a steeper hill than a private enterprise. The broadcast industry was mature upon going public and ate away their margins to maintain valuations for as long as they could. Instead of rolling over revenues into innovations (of any kind) they simply bled the industry. In the same way the values of businesses mirror those in a society, you have companies of every stripe asking for handouts now. The real question is which of our shared values will revive a sense of a better way to do things? Entitlements are a social culdesac….in any way they are directed. Great ideas but they inspire the qualities that are weighing us down right now. Saving and investing, in whatever part of society that you look at, must be encouraged in a manner that focuses on longer time horizons lest we borrow endlessly from tomorrow and end up exactly where we are right now both socially and in many businesses in the headlines these days.

          1. What a well reasoned thought. Beautifully expressed. Thank you.As my 24-year recent college graduate son says — how am I going to maintain the life style I have become accustomed to? LOLI always tell him — after 20 years, you will become an overnight success.The time horizons for which we plan, manage and ultimately reap the benefits are simply too short. Time and compound interest cure many things.

31. Why would anyone want to save their money in dollars when the government is driving the dollar down compared to every other currency in the world? This is textbook inflation and it will be followed by price increases, another good reason to buy something, anything, instead of saving. If the government stops the all-out assault on the dollar’s value then people will save automatically, without having to be sweet-talked into it.

    1. One thing is for sure — there is absolutely nothing that is “textbook” about what is happening right now. If it were textbook, somebody would actually know what to do. We are the blind following the blind and we still do not have the smartest leading just yet.The 17 year olds have just discovered sex and they are well into their second Big Chief tablet inventing all the rules. Hang on.Real estate, a beaten down asset class, is always a good thing to buy in times of inflation.

32. +1 for save and invest. In CNBC columbia school QnA with Bill Gates and Warren Buffett, answering a question about ethics Warren Buffet said that ethics are best taught at home. I see a similar solution for ‘Save and Invest’ philosophy, it has to be taught at home and school. It will help the next generation. Educating the budding ‘earners’ is as important as educating the current ‘earners’.

    1. We teach save and invest at home but we only have three kids. I’d like to be more impactful than that

33. At the core of our borrow and spend culture is an increasing unhappiness in large parts of the population. While high-end jobs have become more satisfying and better paid, middle and low end jobs moved in the opposite direction. Too many don’t see anymore how they can create the lives they want for themselves. It is not by accident that we have such terrible health outcomes although we spend twice the average of industrialized countries.How can we change this: a vastly improved education system. And outspoken positive role models. The President can certainly help set the tone in many ways. A good start would be eliminating waste in government and curbing the deficit.