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America’s Lost Decade

This article was written by in Economy. 10 comments.


Larry Summers, former economic adviser to Barack Obama and Treasury secretary under Bill Clinton’s presidency, shared his thoughts on the economy through opinion pieces in the Financial Times and Washington Post. His concern is the possibility that the United States is heading for a “lost decade” similar to Japan’s lost decade in the 1990s. This country has already experienced five years of economic growth under 1 percent annually, and that’s half way to a decade. Summers argues that while changes in policies helped prevent total economic disaster in 2008 and 2009, the economy needs more stimulation right now to prevent the history of one side of the globe from repeating on this side.

He is calling for more infrastructure spending right now. The country’s infrastructure is quickly becoming obsolete, and a stimulus package that focuses on infrastructure maintenance and replacement at a time when financing is cheap would increase the level of employment and grow the economy. When the major stimulus package was developed, it was designed to focus on “shovel-ready projects,” the same type of infrastructure improvement that Summers is calling for now. Obama warned of a lost decade in 2009, when trying to sell Congress and the American public on the first stimulus package. What happened to that first stimulus? I know that stimulus funds supported local road and bridge improvement projects near me — some of which were started years ago and are still far from completion.

It must not have been big enough or agile enough. While the stimulus most likely helped to prevent a larger economic problem, we’re still heading towards a lost decade.

Larry Summers offers these suggestions for moving forward and sparking the economy.

This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies [austerity measures, inflation protection[, no matter how apparently appealing or effective in normal times, will be futile at best…

Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.

Politicians are going to have a tough job convincing the country that more taxpayer money should go to stimulating the economy, the government should continue spending, and more federal debt is acceptable even at these low interest rates. Yet, if the economy struggles for another five years, global investors will lose interest in investing in the United States, and the country could find it difficult to survive economically against other nations’ economies.

Japan also introduced economic stimulus policies to try to recover from that country’s Lost Decade starting in 1991, but that country’s economy still hasn’t found its way. The economy in that region of the world is being fueled by other nations, where labor and parts are cheaper. When we look at Japan, China, Taiwan, and Korea, we may be looking to our own future, regardless of any new stimulus programs. This just might be a new reality, where economic growth comes from emerging nations.

Financial Times, Washington Post, Wall Street Journal

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Open a Yuan Bank Account in New York or Los Angeles

This article was written by in Banking. 26 comments.

If you visit the Bank of China’s branches in New York or Los Angeles and bring two forms of identification and your cash, you have the opportunity to open a savings or money market account denominated in yuan (renminbi), the currency of China. The interest rate you’ll earn is low, but that would not be the main purpose of opening this account.

Holding an account in yuan will expose you to the booming Chinese economy without the risk of playing in the foreign exchange trading market. If China relaxes its hold on the value of its currency, chances are it will increase — perhaps gradually, perhaps quickly. Not only that, but the accounts at the New York branches of the Bank of China are FDIC insured, so you won’t lose your money if the bank fails. That doesn’t protect you from losing money if the value of the currency decreases.

Don’t look at this as a get-rich-quick scheme. It might make sense to hedge your net worth with foreign currency, particularly when the U.S. dollar is falling out of favor with the rest of the world. A reader emailed me earlier today to ask what I thought about this. At first it seemed risky, but the more I think about it, I think it may be a smart move to get started with holdings in yuan, without sacrificing too much of my liquid investments.

Here are some of the drawbacks.

  • Opening the account is more work than what we’ve grown accustomed to. If you live in New York City or Los Angeles, you can get to the branch to open your account easily, but others will have to travel. Currently, there is no way to open an account online.
  • A global war between nations, resulting from the shift of economic power, might put investors in a difficult situation. After World War I, many wealthy Americans invested in the rebuilding of the German economy. Following the money, this capital helped finance Germany’s leaders in World War II. As China becomes closer to being the nation with the most economic power globally, will the United States push back to maintain its position?
  • China is accused of human rights violations and this leads many concerned Americans not to consider doing business or investing with the country. This is a difficult stance, since many of America’s favorite brands are entwined internationally, including relationships with Chinese businesses. Nevertheless, some may want to avoid doing more to actively help the Chinese economy.

Here is information on opening the savings account at the Bank of China. You can bring a minimum of $500 and exchange the cash for yuan at the bank. The bank will deposit the yuan. For a certificate of deposit, you’ll need at minimum the equivalent of $1,000. Would you consider opening a bank account based in yuan (RMB)?

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How to Prepare for the Demise of the Dollar

This article was written by in Economy. 11 comments.

Since the middle of the twentieth century, the U.S. dollar has been the currency that has dominated the world. Governments have held dollars in reserve, and borrowed dollars when necessary, because this currency can buy just about anything, anywhere. In particular, dollars can easily buy oil, a commodity currently necessary for the progress of developed societies.

Countries have attempted to reduce their dependence on the dollar. Iraq began pricing its oil in euros rather than dollars in November 2000. It wasn’t long after that the United States invaded the country and took control of oil production, adjusting the pricing back to the dollar. Iran announced it plans to hold its reserve currency in euro, and this might prove to be more successful.

There might be a coalition of countries ready to move away from using the dollar as their reserve currency. I’m not usually drawn into conspiracy theories, but I think, considering the state of the economy in the United States, the strength of the dollar, and the country’s massive governmental debt, there is a strong possibility that several decades in the future the United States will not be the economic superpower it once was.

Here are some details reported by the Independent, but since denied by governments:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars… [This] augurs an extraordinary transition from dollar markets within nine years…

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil -– yet again turning the region’s conflicts into a battle for great power supremacy.

Amplifying the importance of the currencies used for trading oil is the idea that at some point in the future — and there have been many disagreements about when dating back to the 1970s — the earth will no longer provide new sources of oil. Supply will eventually begin to shrink and unless major reforms in energy gain momentum, competition for the commodity and its price will increase.

Prepare for the dollar’s demise

Let’s assume this is true for a moment. If the dollar continues to decline, what are options for individuals who would like their wealth to grow over the course of the next thirty years or more?

Ignore the problem. It is possible that despite these obstacles, the dollar may end up victorious. It would take a lot of political might, and I expect more wars, for this to happen. What would a war with China look like?

There is also a reasonable argument that most of us, confined to little exposure to the world outside of our own country, will continue to build wealth in dollars. The external value of a dollar to other currencies could be irrelevant. I do think that as societies continue to progress, globalization continues and it is more difficult to exist in isolation.

Buy gold. Gold has for a long time been considered “real” currency compared to money issued by governments. In the earlier days of the United States, the government issued paper currency backed by gold reserves, so you could theoretically trade in your dollars for gold. Gold may be used as an interim reserve currency while the world loses confidence in the dollar and governments make other plans.

Gold has already shot up in price compared to the dollar and it probably will continue to do so.

Buy euros. If governments are looking to the euro as the basis for their reserves, perhaps you should as well. One option may be to keep a portion of your savings in CDs denominated in euros. EverBank offers this service but I have not yet tried these products.

Invest in China. Another article from The Independent suggests that for most of the next decade, China’s economy will grow 10 percent a year while the United States’ will grow only 2 percent a year. If true, this might be a good time to invest in China. If you want to take this bet, Vanguard’s best option is their Emerging Markets Stock Index Fund (VEIEX) with an expense ratio of 0.39%. Four of the top ten holdings in this fund are based in China making China the fund’s biggest representative. Over the past year, the China-based holdings increased to account for 18.4% of the entire portfolio from 12.4%.

And since buying the fund in dollars pits the strength of that currency against the others, you’ll benefit from both the dollar’s decline and other currencies’ success.

This is probably one of the riskiest bets of the century, but it may pay off.

Much ado about nothing

Saudi Arabia has denied that there have been “secret meetings” as cited above. The United States might quickly recover from the recession and other countries might relent with a stronger dollar. Recent studies suggest the United States will still be the primary global economic superpower in 2020.

What do you think? Is this the time to start thinking about how you might prepare for an economy decades in the future in which the United States is not the most primary economic superpower in the world? And how do you prepare for this?

The Demise of the Dollar, Robert Fisk, The Independent, October 5, 2009

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People Will Judge You Based on Your Name

This article was written by in Career and Work. 19 comments.

Humans are by nature judgmental, and there are good reasons for this. Even though it is often premature, judging quickly helps people make critical decisions with limited information. That limited information, when combined with prejudices or generalizations, can result in poor decisions.

An interesting article from CNN Money asks if your name can prevent you from getting a job. Absolutely. If you have the “wrong” name — wrong in the eyes or ears of the reviewer — you are less likely to be called for an interview after sending a résumé identical to someone with the “right” name.

The National Bureau of Economic Research conducted a study a few years ago in which the authors responded to 1,300 employment ads, sending out 5,000 résumés. In addition to keeping recruiters and hiring managers busy, they measured that résumés featuring names like Emily Walsh and Greg Baker would receive responses 50% more often than those featuring names like Lakisha Washington or Jamal Jones. When comparing résumés featuring good qualifications with those featuring superb qualifications, the superb applicant has a 30% higher chance of being called if the name on the résumé sounds “white,” whereas superb applicants with a “non-white” name do not see an increased probability.

While this doesn’t measure the likelihood of getting a job after an interview, it does point out the initial judgment due to nothing more than a name. If you feel your name could be an initial detriment to your job search, there are several options, but none of them are very good.

1. Legally change your name. Your name is a symbol of your identity. Decades ago, it was common for immigrants to the Untied States to Americanize their names, and it wasn’t such a bad idea for those looking for a new life in the country. This practice is less common now, whether it is due to pride or the shrinking world. I believe for many people, changing a name to fit in with a prejudicial world is too much of a compromise to make.

2. Take on an Americanized nickname. Interestingly, it is apparently common for people born in China to take an English name but prefer to use their Chinese given name when living in the United States. Taking the opposite approach may help you fight the initial prejudice in the United States. If you feel your name is holding you back when searching for a job, keeping your last name but offering an American nick name might help you get your foot in the door.

3. Use only your first initial on your résumé. It would be interesting to see a study that measures the results of this tactic. It may only provide an advantage if the applicant’s last name doesn’t inspire a judgment.

I agree with the author of the CNN article: focus on the aspects of your image that you can control without sacrificing your identity. But this is only from my perspective as someone with a name that doesn’t sound very foreign. With the unemployment rate in the United States still high, perhaps more people are willing to compromise more for an advantage — or to level the playing field.

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American Companies May Want to Trade on Shanghai Stock Exchange

by Flexo

There is some speculation that Coca-Cola, General Electric, and Wal-Mart are seeking to raise capital by offering stock… in China. The companies have not responded to these rumors, but China seems open to allowing western companies to participate in the country’s stock exchanges once trading resumes. If American companies want to be on the Shanghai ... Continue reading this article…

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The Battle Royale: You Versus Yourself

by Flexo

About the author: Matt Wallaert is a behavioral psychologist and the Lead Scientist at Thrive, a free financial advisory website that helps people organize their finances and plan for the future with personalized feedback from its behavioral advisory engine. Twenty six and addicted to buying suits at Goodwill and geeking out on psychology, he lives ... Continue reading this article…

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Unintended Consequences and Money

by Flexo

Ethanol: a study of unintended consequences As recently as two years ago, ethanol was considered by many to be the solution for this country’s reliance on imported oil. Ethanol can be produced domestically, and it costs no more to make a car that runs on ethanol than it does to make a car that runs ... Continue reading this article…

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This Month in the Archives: Money Gifts, Cyber Monday, and the Season for Giving

by Flexo

For a taste of old-time Consumerism Commentary, peruse these articles from the second half of November in prior years. From November 2006: * Extreme Savers Greg and Tara: We Have Some Things in Common * FreeCreditReport.com is a Scam! * Money-Saving Tips for Shopping Online * Wesabe, Web 2.0 Tool for Tracking Finances: Useful or ... Continue reading this article…

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