The party never looks as good to a neighbor. And sometimes the neighbor is right. That thought occurred to me as I listened to Chris Sanders, an American who was raised abroad because his parents were with the diplomatic corps. He eventually settled in London, where he is a founder and principal of Sanders Research Associates Ltd., a small economic consulting firm. Its client list is short, but the portfolios managed are very, very large. Over a period of two hours, Sanders carefully laid out an interpretation of the U.S. economy that isn’t popular and that we seldom hear. It’s one in which others look at our expanding private debt, rising stock prices and massive trade deficit, and conclude that trouble is looming. Big trouble. Unfortunately, Sanders’ ideas are also complex and involve international monetary arrangements, so they could be blown off as neurotic preoccupations, the rantings of a poor soul who has yet to receive grace from the Internet. In fact, Sanders’ ideas are more fundamental than the Internet and all the technology that supports it. He talks about the “technology” of money the network of relationships, institutional obligations and broad promises upon which everything rests. If we ignore the technology of money, we do so at our hazard. Here are some of the main ideas gleaned from the interview: The international monetary system has institutionalized inflation. Going back to the Bretton Woods Agreement and the demise of gold-backed currencies, Sanders pointed out that when the dollar was backed by gold, a nation or creditor who accumulated more dollars than it or he wanted could exchange them for gold. Other nations could watch our gold reserves. Now, paper dollars are exchangeable only for more paper dollars. Instead of repatriating trade surpluses in gold, creditor nations are now forced to keep their accumulating dollars in the United States and to buy U.S. assets with them. The alternative is to buy their own currency, driving up its exchange rate and damaging their competitive position. So they buy U.S. bonds, stocks, real estate and make direct investments in companies, bidding up the price of U.S. assets. Call it asset inflation that is invisible because we don’t measure the right things. As long as we measure inflation by the cost of a basket of goods and services only, inflation will appear restrained. But if we measure it on a broader basis and include the price of real estate and financial assets the other things purchased with an expanding supply of dollars the rate of inflation is much higher than generally perceived. Sanders says that using a measure no more arbitrary than the consumer price index, U.S. inflation is closer to 7.8 percent than the reported 2.4 percent. This means the real interest rate the interest rate less inflation is below zero. Needless to say, this isn’t likely to be a popular idea. When home, stock and bond prices rise, we like to call it “wealth” rather than inflation. But if you happen to drop a package of stocks and bonds into the CPI market basket, you get a much higher rate of inflation. Question: When my husband passed away, the $265,000 life insurance policy through his company was not paid directly to me. Instead, the insurance company opened a checking account for me through Cigna. I was given no choice in this. I have received checks with which I can withdraw money, and if I choose to do so, I can write a check and withdraw the full amount. While the money remains in the account, it will be earning about 3 percent interest. I am unable to work and won’t be eligible to receive Social Security for a few more years, so I am living on my bank savings. I have minimal debt and two 401(k) plans totaling $288,000 through both of our former employers. How should I reinvest the insurance money? L.T., Dallas Answer: Think of this as an intelligence test from your insurance company that you passed. If you kept the money in its 3 percent account, the company would know that you were brain-dead. The alternative is to transfer your money to an institution that can provide you with banking and investment services at a reasonable expense. My personal choice would be an account at Fidelity, Schwab or Vanguard. At each you can have a high-yielding money market account that you can use for most checking, a credit or debit card, access to ATMs, and entry to an entire supermarket of mutual funds. In addition, you will also be able to roll your 401(k) accounts into IRA accounts at those institutions. As a result, you’ll have a complete, integrated monthly statement that will give you a good report on your financial situation. Many people are reluctant to create such relationships because they want access to a bank office for getting cash. In fact, access to a bank office may not be necessary. If you examine your spending habits, the first thing you will find is that you are using less and less cash because you are using a credit or debit card more and more. The vast majority of most people’s expenses can be handled with a brokerage-based checking account that includes one check for a credit card payment and one ATM access per month. With mutual fund money market accounts earning nearly 6 percent and typical bank checking accounts earning under 2 percent, the efficient thing to do is get the high interest and minimize your use of ATMs for cash. Moving your money will increase the yield on your cash enough that you should feel comfortable about taking your time to make new investments. When you are ready, I’d start simple and have a large investment in a broad-market index fund. Q: For so many years we heard that a balanced federal budget would result in low interest rates, spurring more economic growth. We now have a supposedly balanced budget, but interest rates keep going up to “slow down the economy.” What gives? Is the Fed keeping rates high to protect its bank’s profits? Why is growth so bad? I was looking forward to securing a 4 percent mortgage. S.S., Dallas A: Weren’t we all! Traditionally, interest rates have been used to cool or revive the economy. In the last year, the assessment at the Federal Reserve has been that our economy is at the edge of overheating. That would result in the return of price inflation. So they’ve been pushing short-term interest rates up. I believe they are as worried about inflation in the financial markets as they are about inflation at the supermarket. What many haven’t noticed is that interest rates haven’t risen across the board. Short-term rates the ones the Fed controls have risen significantly, while long rates have barely budged. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: [email protected].
