Thursday, June 2, 2016

Finding a solution

Caroline Baum tweeted a piece by Greg Ip in the Wall Street Journal today that caught my attention


I replied with a link to my "View from 30,000 feet" piece and a unduly cheeky little jab that in retrospect was crappy and just plain old rude. I had been attempting to have a bit of a discussion a bit earlier in the morning with someone who just rubbed me the wrong way and I unfortunately took out my frustration on Caroline - something I still feel really crappy about as I am better than that and always try to be respectful while talking to people.


Caroline rightly lit me up.. and I realized I came across as a bit of an ass, to which I apologized. 


She then asked me a pretty damned good question - 


I provided a bit of a response (you can see the whole conversation here), but her question rolled around in my head all day. 

So, given I have a little time and it was an exceptionally good question. I thought I'd take a bit of time to lay out SOME of the solutions I would suggest. 

I think the obvious thing to say here is that the "very" best solution to this economic issue is to not allow yourself to get into this position in the first place. It's kind of like asking for a solution to the Titanic's problems AFTER it hit the iceberg.  

The second key thing that I think is important to point out and remind people is that we are still asking for SOLUTIONS today. That means whatever the problem happens to be, it's still here, it's still a problem. In light of that, let's PLEASE dispose of the 'a recovery is just around the corner' stories that follow any and all remotely positive data points. It's been seven years of waiting for the recovery Godot - enough already. 

All of those requests aside - there are a few things that I think could and would truly help get the economy back on track. 

First and foremost, since the consumer makes up a huge part of the US economy, and for reasons I laid out in "The View from 30,000 Feet" - I think the first place to start would be to help the consumer lower their debt loads. While I haven't seen 'official' data lately, I know credit card debt balances are still quite high. NerdWallet did a review for 2016 and here is what they found:


 Average Credit Card Balance in USA - $15,762.00

Average Car loan Balance: $27,141.00

Now, some (but not all) of these cards still are able to charge some pretty mind boggling rates. It's even more amazing when you see where GIC/CD and Bond rates are. 

Creditcards.com  tracks average rates on all credit cards in the US - and here's the number for June 1st..


I don't need to tell you that a rate like that is ridiculous given we still basically exist in a ZIRP world. Yes Banks need to charge a certain level of interest to compensate for the risks and service.. but 15.19% AVERAGE?

I know here in town the rate on some department store credit cards is 28% !

So yes - one solution would be to mandate a cap on rates. TO be fair I'd suggest that the banks are only allowed to charge X% over a certain reference rate. 

Secondly - I'd start up a Federal government loan repayment program whereby a consumer can transfer a certain amount (say $5,000 max) to an account that is held but charges NO interest. The consumer's credit limit is not increased, and they have to make minimum payments on this amount. The details are sketchy yes, but in essence you are enabling consumers to get a bit of shelter and responsibly pay down their debts (rather than just forgive them). Yes bank profits would be impacted - but I think they've done rather well over the years charging 19%.. no? 

Once the $5k is paid off, the consumer can reload the account and do it all over again. The idea is as the consumer works down these debts - the amount of money NOT spoken for in interest payments increases.. which will help boost overall consumption and therefore GDP.

Another program that I will admit is NOT my idea but a dear friend of mine - allow people who can't afford to put money into their RSP accounts to SELL their unused RSP contribution room to someone who can afford to buy it. Some people have literally hundreds of thousands of dollars worth of UNUSED RSP contributions that they will NEVER be able to utilize. Enabling them to be able to sell it 

a) allows them to use the proceeds to pay off debt (ideally)
or 
b) spend it

it allows someone who is well off to expand their tax deferral more than they normally would - but it also suggests the Govt would be able to TAX more than they normally would once the funds are transferred into a RIF.

this would also create a bit of a new industry and trading market - this means jobs, revenue.. etc. 

I see no real downside in this option and while some would say it helps the rich at the expense of the poor.. I'd suggest it's a far more balanced approach than simply ramping the stock market to create a 'wealth effect' - which ONLY helps the wealthy. 

One final idea before I sign out would be to change executive stock compensation so that there is no incentive to focus on boosting stock prices over the short term at the expense of the longer term health of the company. As we all know, much of the 'share buybacks' and earnings shenanigans we are reading about now are being done to keep prices high so executives get fat bonuses. Let's work on figuring out a way to align the board with shareholders.. perhaps naive.. but let's at least give it a try.

Yes - infrastructure is a big one, and there are a million more ideas.. but here are a few for you..

From the consumer side - people just need to be better aware of their budgets - live within their means, and SAVE. The stock market is not going to answer your retirement prayers. Juicy returns in the stock market from 1980's to 2009 convinced people that they didn't need to save much in order to retire comfortably.. this is wrong. 

You don't need to make $300k a year in order to be able to save up enough to retire comfortably.. you just need to live modestly, within your means.. and have a very strict saving discipline. Ask yourself "do I really need this right now, or do I just WANT it.."

that simple little process will make a huge difference over the years. 

anyhow - there are a few ideas off the top of my head.

thanks for getting my brain working this morning Caroline.. and I'm sorry for being a jerk. : (

cheers!
Gubb 






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