Archives For September 2009

How Do We Exit The Bailout?

September 22, 2009

I read this in The Economist:

ECONOMIC policymakers across the rich world face two delicate balancing acts over the new few years. The first, involving monetary policy, is being widely discussed and carefully planned by teams of technocrats. Central bankers must keep their balance-sheets big and interest rates low for long enough to prevent deflation setting in, but they also have to be prepared to change things quickly to prevent inflation taking off. The second balancing act, involving fiscal policy, depends on politicians rather than specialists—and has, so far, been shamefully ill-planned.

A couple of paragraphs later we get the meat (emphasis mine)…

To be fair to the politicians, this fiscal balancing act is far harder than the central bankers’ task, for two reasons. First, politicians must not only get the timing of fiscal tightening right, but must also decide on the best ways to cut spending and increase taxes, and the right mix between the two. These decisions involve more goals, more tools and more politics than stabilising prices. Second, politicians lack the credibility that central bankers have built up after two decades of low inflation. The first of these differences is inevitable: decisions about the size of government and its priorities are profoundly political and politicians must answer to voters for their choices. But politicians could go a long way towards building credibility for their fiscal decisions by copying more of the tricks of modern monetary policy.

If we leave the stimulus money out there too long, it will lead to inflation (too many dollars chasing too few goods). If we pull it out too soon, we could go back into decline (not enough dollars to spur growth).

Interesting conundrum…

The article states that these decisions should be made by an independent group and NOT by politicians. I agree. Politicians pander because they want to get re-elected. Politicians (all politicians) don’t want to make the tough decisions.

The History of Inflation

September 21, 2009

Here is something for all you chart and graphics lovers.

I took the information available from this’s CPI page and made a couple of graphics.

This first one shows the percent change in the yearly CPI beginning in 1920:

History of CPI

What’s really interesting is this line graph, which tracks the CPI in dollar terms (assuming $1.00 at the beginning of 1920):

History of CPI (Chart)

Notice how the CPI really turns up around the mid-70s. That’s the bad thing about compounding. Just as interest on a bank account compounds (growth on top of growth), so does inflation. Couple that with the high inflation rates of the 70s and you can see why the chart took such a drastic turn upward beginning in the 70s. Prior to the 70s, inflation was relatively flat.

Okay, here is an updated version of a post I did a couple of years ago where I took the returns for the S&P and analyzed them by various rolling-periods (5-years, 10-years, and 20-years). Today, I want to look at 20-year rolling-period returns. Check out the graphic I prepared (you can click on the graphic to see a larger version):

S&P Index 20-Year Rolling Period Returns (2008)

It’s incredible just how skewed results can become due to one bad or good year. Notice how 2008’s -37% return dropped the average annual return over the last 20 years to 5.60% (note that these returns include inflation).

Here are some other interesting findings:

0 The number of 20-year periods that had a negative return.

64 The number of periods that had a positive return.

403.02% The average TOTAL return of all the 20-year periods.

$50,302 The average amount (after inflation) that $10,000 grew to over each 20-year period.

$130,946 The most $10,000 would have grown to during a 20-year period.

$11,082 The smallest amount that $10,000 would have become over each 20-year period.

Happy Friday!

This morning was the “Me Parade” for my daughter’s Kindergarten class. The Me Parade is when the kids march around the campus, holding flags that they created that are supposed to be all about them. It’s a really cute deal The only problem is that our daughter didn’t want to say goodbye and started crying a pleading with us to take her home.

After that, my wife and I went and had a nice breakfast at Cracker Barrel. It’s nice to be without kids every now and again.

Something I’d like to try to start doing on Fridays is a sort of roundup on things I have found around the internet. Stuff that I want to mention but don’t want to dedicate an entire post too. Some will be related to personal finance and others many not.

Anyway, here are this week’s picks:

My cousins sent me a link to this article: What You Need to Know About Social Security.

Then I saw that the mayor of San Francisco wants to penalize retailers that sell sugared drinks. What I found interesting were the stats at the end of the article:

$41 billion Amount spent treating obesity in California each year.

41 percent Kids ages 2-11 who drink at least one soda every day.

62 percent Adolescents 12-17 who drink at least one soda every day.

39 pounds Amount of sugar consumed over one year if you drink one soda a day.

17 teaspoons Amount of sugar in a 20-ounce serving of soda.

278 calories Increased number Americans consume each day compared with 30 years ago.

43 percent Share of new calories attributable to soda.

Source: “Bubbling Over: Soda Consumption and Its Link to Obesity in California” by UCLA Center for Health Policy Research and the California Center for Public Health Advocacy

Here are 10 Things Your Bank Won’t Tell You.

Stacey sent me a link to an article detailing some of the changes coming to college financial aid.

Lastly, we have The New Math Behind FICO Scores.

NOTE: if you find an article that you think is worth a look, feel free to send it my way (JLP – at – PLEASE…NO SPAM!

I was on the Kiplinger Recovery Index page today and notice that they checked off another economic indicator, existing home sales:

Kiplinger's Recovery Index (09-15-2009)

So, two out of the six indicators they follow are now on the positive side. Also, notice how the boxes are shaded from green to red. The more green you see, the closer that indicator is to turning positive. I hadn’t noticed that before.

For reference sake, here’s what the index looked like back when I first hear about it in a June 11, 2009 email:

Kiplinger's Recovery Index

I have a feeling it’s going to be awhile jobless claims indicator turns green.

For explanations of each of the indicators, click here.

I was checking my wife’s 401(k) balance last night and noticed a couple of interesting things:

1. The balance is just a few thousand shy of its previous high-water mark. Yes, that number includes contributions but it’s still shows drastic improvement from the low.

2. Last year’s personal rate of return was somewhere around -40%. This year’s is currently at 29.3%. Remember, the personal rate of return takes into account contributions.

I don’t know where the economy/market is headed but I’m content to stay the course and believe it will pay off in the long run. I have tweaked our 401(k) investment selections a bit but haven’t moved money from asset class to asset class. We are still 100% equities, divided evenly between large-cap, midcap, smallcap, and international. NOTE: I’m NOT recommending this allocation for anyone. I’m just telling you how we are investing our 401(k) account.

Good Morning, lovely readers. I just wanted to let you know that I’m working on updating the rolling-period returns for the S&P 500 Index (including inflation).

The results should be reported later today.

Stay tuned…