How the Toxic Asset Plan Helps Me

Well, the new plan is out. The goverment will buy up toxic assets from troubled banks. After doing this they will sell them at discounted prices in an auction format. How will this toxic asset plan help me and you? It's quite simple.

The new plan will be put into motion with tax payers dollars, so all Americans will be paying for the solution (However the tax might not be as big as we all think, since these bad assets still have good value). You won't see any immediate effects, but it certainly will help the banks. I know, I know. This isn't what you want to hear. However, the way I see it is that it really is the only solution. We will all see results in the future. It will be easier to obtain loans. We will be able to get mortgages at lower rates. We will be able to refinance our mortgages at lower rates. Entrepreneurs will find it easier to obtain business loans at low interest rates.

With the increase in loans being made, the country becomes more productive. The Stock market will increase, there will be more jobs, and real estate values will start to inch their ways back up.

The negatives of this plan?
- Increase in taxes (pehaps only a small amount).
- Increase in inflation as the economy begins to pick up.

All in all, I feel this is a good move on the part of the government that should and will work.

90% Tax on AIG Bonuses

Well this is just in.  The House has approved a 90% tax on bonuses issued to AIG executives with a househouse income over $250,000 a year.  I like this move.  It's not taking back the bonuses, but taxing it to recover the taxes the rest of the American People have paid to bail them out.  

The bill passed is 328-93.

Seems like both Republicans and Democrats agree with this bill that does not only cover AIG but other corporations that received tax payers bailout money.

Nice work!

When Fear Reaches it's Highest Point, Invest

I truly believe that when the nation is the most fearful, is when the economy (particularly the stock market) will begin to turn around. When everyone feels one way about the economy, you should try and feel the opposite of the trend.

The latest poll shows that 45% of people believe that the economy will fall into a depression. Come on. Do we still believe that this economy that has seen the DOW increase 6 of the past 8 days is going to fall into a depression? This same economy that has seen new building of homes increase 22% in the last month. People on Talkgold.com are all saying how terrible they think the economy will continue to be for years to come (Thoughts on Economy). We aren't falling into a depression. The economy is just about to start a recovery if it hasn't already.

If you recall, right before the housing collapse, the majority of the experts were saying that the housing boom will continue. People were still buying houses, stock etc. Employers were hiring like crazy to expand their businesses. Then BOOM! It all changed.

The same thing will happen with the turn around this current economic situation. It will turn around while experts and the general consensus of the economy is still negative. You watch and see.

Just a little bit of my input.

How We Can Predict When the Economy will Turn Up

In my previous blog entry I discussed how the unemployment rate is considered a lagging market indicator basically meaning it can not tell the future. However there are other indicators called "Leading Indicators" that predict the future of the economy. While the leading indicators are not a tell all predictor of the economy, they have infact predicted the past 7 recessions. Also noteworthy, the fact that these leading indicators have also predicted 5 recessions that have not occurred.

So what are these indicators? Here are the 10 that make up the Index of Leading Indicators:
- The Average number of hours worked by workers in the manufacturing sector.
- The Average number of people initially applying for collection of unemployment.
- Consumer sentiment
- The difference between the short term and long term interest rates
- The amount of new orders of consumer goods and materials in the manufacturing sector
- The Money Supply (inflation adjusted)
- The S&P 500 stocks
- That amount of new permits for the building of residential property.
- The Speed in the delivery of new merchandise from the suppliers to the vendors
- The amount of new orders for capital goods that are not related to defense.

There you have it. The 10 leading economic indicators that are used to predict the direction the economy is going in. In the last update on February 19, 2009 the Leading Indicator Index has actually increased as it did in January. Does this mean that the economy will rebound immediately? Absolutely not. However it does mean that things should begin to look up.

Globalization of the World Economies: Is it avoidable?

There has been a lot of talk recently about Globalization and whether it is helping or hurting the economy in the United States. People asking this question, and especially those who have been criticizing America's steps towards globalization need to take a step back and look at things from afar.

We are living in the age of "information". Anyone can communicate with people accross the world instantly through emails, instant messages, or video conferencing. For those of you who believe that we should try and prevent the spread of globalization, please explain to me exactly how you do this? Do we prohibit emails? Do we shut down international trade? Do we close the door to overseas innovation? Do we disallow internet access to everyone in the country? Do we ban the use of Online E-currencies and Payment Processors? Absolutely not. Without doing this, globalization will continue to spread and there is nothing we can do about it.

The United States is based on Democracy, not Communism. We are allowed to invest our money internationally if we believe certain foreign companies are good investments. Globalization is here to stay whether you like it or not, so live with it.

Why The Economy will Bounce Back Quickly

"We're having another great depression!"  "The stock market is going to collapse!"  "The entire country will fall into poverty!"  

These are just a few of the things that we have heard in the past few months coming from everyone from the homeless man on the side of the road to expert economists.  Sure it's a scary thing to hear especially for those of you who are close to retirement, or have a large sum of money tucked away into the stock market.  However, none of these things are true.  The economy won't fall into another great depression, the stock market will not collapse, and the entire country is far from falling below the poverty line.

The DOW is in the $6700 range right now.  That's lower then it has been since 1997.  This means that if you put money into a mutual fund that covered the entire DOW in 1997 you would actually have not made any money.  In fact you would have less value today when factoring inflation.  

Job cuts have been extraordinary.  It seems like every day there is another handful of corporations announcing layoffs in the thousands.  The unemployment rate in some areas of the country are in double digits.  There are banks requiring major bailouts from Washington.  These surely are frightning.  However, this is not the end of the world.

If any of you have taken Economics 101, you would have learned about something called the business cycle.  The business cycle explains that the economy consistantly moves up and down.  There are times when it is very productive.  Gross Domestic Product is high, unemployment is low, and the stock market is soaring.  On the contrary, there are times of recession when the stock market is extremely bearish, there is a decrease in new home sales, and it seems like everyone is being layed off.  This is a recession that we are in currently.  It's just larger then any recession we have seen in a long time.  It was created by the unresponsibility of lenders, and borrowers as well as the lack of regulation from our government.  This recession isn't all that different then any other recession when looking at the large picture.  It's just magnified a bit more.  Just like in any other recession, the economy always recovers according to history.

Let's look at what would happen if the government were not to bail out the banks, and the federal reserve could not adjust the interest rates to their liking.  Please note that during the great depression, the fed had no ability to control the interest rate.

The first thing that would happen would be that there would be foreclosures similar to what we are seeing now.  However banks would not be able to cover their losses without help from Washington.  A large amount of financial institutions would fail.  Anyone with less than $250,000 in their bank accounts would get their money returned to them because of the FDIC.  Anyone with over $250,000 in a bank account would lose the money they had over that amount.  With the loss of money by the rich, the amount invested into the stock market would fall considerably causing the market to drop even more.  Unemployment would increase rapidly because large companies would see their revenues decrease.  The economy would be in worse shape then it is now, but something would evenutually happen.  There would be a recovery. 

Without government intervention, and not the ability for the fed to decrease interest rates, the recovery time would take several years, if not a whole decade.  However there would be a recovery.  Entrepreneurs would start up their own businesses.  Many would fail because the interest rates on loans would be extremely high (since there would be no federal reserve intervention).  However many would be successful, and these successful companies would need to hire workers.  This would cause the unemployment rate to slowly decrease, and the stocks of these companies would gain value as more and more people would be able to earn an income to spend.  With the increase in income, and spending, the stock market would become bullish, banks would be more willing to lend, and people would begin buying homes again.  The interest rate would drop as banks become more confident in borrowers and the economy.  Everything would slowly recover.

With all of this said, the recovery would not come without a whole bunch of pain and agony.  This is where the bailout plan and significant decrease in the fed rate comes into hand.  The increase in government spending, bailout of banks, and lowering of the interest rate will quickly stimulate the economy.  Once the recovery begins it should happen quickly because of the enormous amount of money being added to the market.  Those who buy stocks when the market is low are the ones who make the most gains.  The bottom can not be too far off and when it is hit, I expect a quick recovery.  

You can find a lot of information pertaining to the economy at Talkgold.com's Investing Forum

Let's hear your comments and opinions.

Higher Taxes for Wealthy is Not Democracy

America.

Home of the free? Yes.

Home of the brave? Yes.  

Home of Democracy? Not really

Here's why.  Democracy was created to allow people to try and achieve the American Dream.  Democracy should mean that no matter how successful you become, you should not have to pay a larger percentage of taxes then anyone else.  Democracy is supposed to encourage entrepreneurship, not discourage it.  Obama's new ideas of taxing the richer people in the United States at a higher percentage then the middle and lower classes is surely not democracy.  

If John makes $50,000 a year, he should pay the same percentage of his income to Uncle Sam as Todd who makes $300,000 a year.  Why should he pay a higher percentage?  At a 15% income tax, John would be paying $7500, while Todd would have to hand over $45,000 to the IRS.  Why should Todd have to pay a higher percentage when he already is paying a huge amount more every year?  This is against everything that democracy stands for.  Whether you are rich or poor you should still have to hand over the same percentage of income as one another, unless you are below the poverty line.  Why should we punish those Americans who have worked their butts off educating themselves, just to help those who were lazy and had no desire to make anything of themselves?  Sure, there are those of you who will say that the rich are rich simply because they have had greater means of educating themselves.  This is true in many cases.  However it is totally false in the majority of cases.  

There are solutions to raising tax revenue without taxing the rich's income.  It is called "Sales Tax".  Currently the national average sales tax is around 6%.  If we raised this amount to 23%, we could effectively eliminate income taxes all together.  This would in turn put a greater tax burden on the rich who spend more money, and reduce the burden on the poor who have less to spend.  This would be a solution, but is it a practical one?

Sales taxes to replace income taxes is of great debate among polititians today.  On the Political side of things, it seems all fine and dandy.  However on the economic side, it has the potential to be a huge disaster.  Once you stop taxing income and only taxing the purchase of goods and services, the amount of spending nationwide should see a large decrease.  With the large decrease in spending, there comes a large increase in savings.  This would harm the economy especially in a time of recession.  

There are economies in this world that have achieved eliminating income taxes in favor of a larger sales tax.  It can work, but are the politicians and economist in Washington smart enough to make it work?  Probably not.

Multiple Ponzi Schemes Getting Away with Stealing

Over the past few months, it seems as though there have been a handful of multi million dollar (or even several billion dollar) ponzi schemes busted.  We have seen Madoff's scheme get busted for apparently taking $50 billion in investors funds.  The latest scam, Stanford Financial Group, isn't accused of being a Ponzi Scheme but was an investment scam that allegedly had millions invested in Madoff's Ponzi Scheme.  

There will always be Ponzi Scheme running, and there will always be people willing to put a large chunk of their life savings into these programs.  For example, Philadelphia Phillies' Relief Pitcher Scott Eyre had literally all of his liquid cash in the Stanford Financial Group when it was shut down.  Most people get involved in these schemes through referrals from friends, family members and even business partners.  

For those of you who are considering investing in a lucrative investment that was suggested to you by a friend or family member, ask yourself this;  "Does this investment seem too good to be true?"  If you answer yes then it most likely is.  All investors should always use one rule in deciding where and how much to invest.  The greater the return promised on your investment, the greater the risk is to you in losing your money.  This is true 99.9% of the time whether investing in Stocks, Bonds, Forex, Real Estate, or an investment scheme.