Thursday, April 19, 2007

Consumer (aka importer) of last resort

Lawrence Summers wonders whether the global economy can rely on the U.S. as the importer of last resort:

It is clear though that the global economy has been relying on the US as an importer of last resort; that the US economy has been relying on the consumer for its primary impetus; and that until now consumers have been encouraged to spend their incomes fully or more than fully by being able to access the wealth in their homes.

Summers notes that the U.S. imports 70% more than it exports.

But the growth syllogism is now in doubt. Recent developments in the subprime sector exacerbate housing’s brake on US economic growth. Foreclosures will bloat the supply overhang of houses. At the same time reductions in capital in the housing finance sector and more rigorous credit standards will reduce the demand for new homes.

Even as these developments reduce housing prices and the construction of new houses, housing finance problems are likely to magnify wealth effects on consumption as consumers face upward resets on their mortgage rates and are unable to refinance as they had planned, and as home equity, car and credit card lending conditions tighten.

If consumer spending declines and interest rates fall or appear likely to fall, there is the real possibility that the foreign lending to the US that has financed imports far in excess of exports will start to dry up, leading to a combination of higher long-term interest rates and a weaker dollar. This would tend to raise inflationary pressures, transmit US weakness to the rest of the world and could, by discouraging foreign demand for US assets, lead to further downward pressure on investment in plant, equipment and commercial real estate.

I wrote about asset attrition earlier, and this is another example of it.

The financial problems, which Summers relates to attrition in assets' financial value, and the real asset attrition, about which I wrote earlier, are related like the chicken and the egg!

Inflation, Interest Rates, Exchange Rates and Housing Prices

Financial Times' Chris Giles and Eoin Callan write about the recent rise is the pound due to UK interest rate expectations:

Richard Jeffrey, an economist at Ingenious Media, saw the trend towards rising prices as a return to normality after a period where Britain was more-or-less alone in experiencing sharply falling goods prices on the high street alongside normal levels of overall inflation.

Interest rate expectations jumped and a May rate rise is now considered a certainty. “People have to get used to higher interest rates than we have seen for much of this decade. I am not sure that house-buyers are taking that into account yet,” said Martin Weale of the British National Institute of Economics and Social Research.

Currency traders anticipate higher pound prices as inflation grows giving rise to an expectation for a rise in interest rates, which will draw currency exchanges into the pound.

Matters exacerbate when the U.S. economy slows down but the European economies don't. Inflation rate in the U.S. slows while it speeds in Europe. This forces interest rate expectations in opposing directions in Europe and in the U.S. causing the currency rate swing we have seen recently.

Alan Ruskin, a currency strategist at RBS, said: “What we are seeing is those investors chasing risk moving to higher yielding currencies. These numbers reinforce an existing trend.

“There had been persistent fears about inflation boxing in the Fed and making it difficult to respond to a slowdown in growth. Now the Fed is less boxed in.”

The Fed still views inflation as a slightly greater threat to the US economy than the uncertain outlook for growth but investors sold dollars on the basis that the inflation slowdown made the Fed more likely to keep interest rates on hold and could give the central bank slightly greater flexibility to consider easing monetary policy in future.

US government debt prices rallied as investors priced in a lower likelihood of US rate cuts, sending the yield on the benchmark 10-year note down to 4.71 per cent from 4.74 per cent.

London experienced the opposite trends in bond markets, again contrasting the current accelerating economic expansion in Europe with the slowing US economy.

Selling without an agent

Financial Times reports of websites that support people who want to sell their property without the involvement of an agent ("Websites log on to the power of private sales").
Large numbers of property sellers are abandoning the traditional services provided by estate agents and marketing their homes directly to house hunters via a growing number of private websites.
Examples are and, and "Flatshare has launched a portal dedicated exclusively to direct property sales,, which has private property listings from a range of websites." The report notes that
Some of the biggest names for private property sales include House Web, House Ladder, The Little House Company and ClickSell and new providers are entering the market all the time.
While the market is crowded, these sites have about a 100 fold less listings and they have trouble placing ads to draw customers.
These “buy from owner” sites have been banned from advertising on, one of the main property portals, as it claimed their presence was damaging advertising revenue from estate agents. also only accepts listings from estate agents.

Wednesday, April 11, 2007

The Tax System in America

David Cay Johnston has an ineresting book on the tax system in America.

How to Recognize Funds for Tax Efficiency

Jaclyn Badal of The Wall Street Journal has a story on recognizing mutual funds for tax efficiencies. She concludes her story in this way:

Good indicators of a tax-efficient fund strategy are low annual turnover -- below about 30% -- and a potential capital-gains exposure, or the percent of a fund's assets that represent gains, of less than 25%. Both figures can be found for free at

Note that some funds' after-tax returns may be attractive partly because they have used losses harvested during the bear market of 2000-2002. Funds have up to eight years to use past losses to reduce capital gains. Morningstar factors relevant past losses into its calculation of capital-gains exposure.

Reading on Annuities

The Wall Street Journal has published a list of readings on annuities. The comments in the list are by Dr. Moshe A. Milevsky, a finance professor at York University in Toronto:

"Getting Started in Annuities," By Gordon K. Williamson
If you're a beginner, a good (if somewhat dated) introductory book on the different types of annuities. For those who are hesitant to purchase anything with the word "dummy" in the title.

"The Annuity Handbook," By Darlene K. Chandler
"The Variable Annuity Handbook," By Gary H. Snouffer
Both published by National Underwriter Co. Good sources of information, specifically on variable annuities, with detailed explanation of products and terminology written by sunny and optimistic industry insiders.

"Investing with Variable Annuities," By John P. Huggard
Focused specifically on the tax aspects of buying variable annuities versus mutual funds, this book—written by a practicing attorney—provides a long list of debatable reasons for saving and investing only in variable annuities.

"Equity-Indexed Annuities: The Smart Consumer's Guide," By Jay Adkisson
A brief (92 pages) introduction to this important subcategory of fixed annuities, in which the author tries to bring clarity to the genre and echo his warnings to the novice.

"Guaranteed Income for Life: How Variable Annuities can Cut Your Taxes, Pay You Every Year of Your Life, and Bring You Financial Peace of Mind," By Michael F. Lane
A dated but still readable book that explains with personal case studies and examples how variable annuities can be used to create a sustainable, predictable and tax-efficient retirement income.

"The Handbook of Variable Income Annuities," By Jeffrey K. Dellinger
An encyclopedia of detail on the actuarial and insurance minutiae of variable income annuities, from reserving requirements to asset-allocation dynamics.

"Retirement Income Redesigned: Master Plans for Distribution," Edited by Harold Evensky and Deena B. Katz
A collection of independent articles by well-known authors and practitioners in the field, many of which provide the intellectual foundation on how to integrate and use - or ways to avoid - annuity income at retirement.

Securities and Exchange Commission,
Important consumer information on what to look out for when buying variable annuities.

National Association of Variable Annuities,,
These industry sites provide educational material.

Insurance Information Institute,
Information on all aspects of the insurance industry, including annuities.,
A source of product and industry information for individuals considering purchasing income annuities. A simple calculator allows the user to estimate income he or she may receive from such a product.

Annuity Nexus,
Tracks the trends and statistics for the fixed annuity market and offers various educational articles about the product.

Advantage Compendium,
Offers educational and sales-trend information, as well as an overview of currently offered rates for index annuities.

National Association for Fixed Annuities,
An industry site that offers educational resources for agents as well as customers.

Tuesday, April 10, 2007

English and Business

English may be the language of business today but many know that there are no guarantees it will remain the language of business tomorrow. In fact, more business was conducted among nations (per capita) prior to World War I, when there was no uniform business language, than around the late 1990s, at the height of the .com boom and when English was the lingua franca of business. (See Robert Barro's Getting It Right: Markets and Choices in a Free Society.)

Taxes and War

Note: A friend just forwarded this message.

Hang Up on War: Get a Tax Refund

By Amy Goodman, King Features Syndicate.

Posted April 5, 2007.

If you are upset that Congress won't defund the war in Iraq, there's something you can do: Take the IRS up on its offer for a war tax refund.

If you are upset that Congress won't defund the war in Iraq, there's something you can do: Stop paying a tax. Legally.

The Internal Revenue Service is giving a rebate this year on a telephone war tax. This is one of those line items at the bottom of your phone bill. The tax was instituted in 1898 to help the United States pay for the Spanish-American War. Individuals and businesses have one chance to obtain a refund on this telephone war tax, by asking for it in their 2006 income tax returns.

Remarkably, the Internal Revenue Service has made it easy to request the refund, yet IRS Commissioner Mark Everson says that many taxpayers are overlooking it. Obtaining the refund is easy. But first, a little history.

The Spanish-American War lasted from April to August of 1898 and was predicated on a U.S. government demand that Spain abandon its colony in Cuba, which the U.S. subsequently occupied. By the end of 1898, the United States had also taken over the Philippines, Guam and Puerto Rico.

The war was also used as an official pretext to take over Hawaii. The Senate debated over the annexation in secret, some arguing for total annexation, others for just Pearl Harbor. Sen. Richard Pettigrew of South Dakota derided the annexation plan as money "thrown away in the interest of a few sugar planters and adventurers in Hawaii." Military bases and raw materials -- sound familiar?

The telephone tax was instituted as part of the War Revenue Bill, which expanded the government's ability to collect taxes, ostensibly to pay for the war. As with the myriad controversial "pork" items added to the recent Iraq war funding authorization, the 1898 bill was the subject of scores of amendments that benefited big business. These included tax breaks for powerful industries like the insurance companies and tobacco dealers.

The telephone tax of 1 cent per call targeted the wealthy, who were generally the only ones who had telephone access in 1898. After the war, the tax was eventually raised to 3 percent. Since the Vietnam War, it has been the target of war tax resisters, people who refuse to pay taxes because they do not want to fund war.

Tax resistance has a long history. Henry David Thoreau promoted it in his essay "Civil Disobedience" to fight slavery: "If a thousand men were not to pay their tax bills this year, that would not be a violent and bloody measure, as it would be to pay them, and enable the State to commit violence and shed innocent blood."

The IRS has vigorously targeted full-fledged tax resisters -- ranging from those refusing to pay the Pentagon's percentage of their taxes, to those who outright refuse to pay anything to the government -- making an example of them by garnishing wages, sending them to prison for tax evasion and confiscating their homes.

Tax resisters figured out that they could protest the telephone tax simply by writing their checks to the phone company, withholding the amount of the tax. The IRS deemed the collection of the tax too expensive, relative to the small amount of the tax itself.

According to the National War Tax Resistance Coordinating Committee, early collection efforts by the IRS included the auctioning of Jim Glock's bicycle for $22 in 1973 and of George and Lillian Willoughby's VW Bug in 1971 for $123 (in 2004, Lillian, at 89, with the support of her husband, George, 94, was jailed for protesting the Iraq war).

Court losses convinced the IRS to dump the telephone war tax in 2006 and to offer the retroactive rebate for phone taxes paid between March 1, 2003, and July 31, 2006. Typical refunds will be between $30 and $60. Ironically, while the IRS has dropped the tax on long-distance and "bundled" services, like high-speed Internet, the tax remains for older, standard local phone services and rental of equipment that enables the disabled to use phones.

Thus, this tax on the rich is now a tax on the poor. Congressman John Lewis, D-Ga., has submitted a bill to permanently wipe this remnant clean. Two-thirds of the bill's co-sponsors are anti-tax Republicans, so Democrats might be leery about passing it.

The website,, lists step-by-step instructions on how to recoup the telephone tax rebate, and recommends donating it to charity.

While Congress and President Bush trade barbs over war funding, with a simple check mark on your tax return you can help to defund the war. Claim your telephone tax rebate. Let the Pentagon hold a bake sale.

Amy Goodman is the host of the nationally syndicated radio news program, Democracy Now!

Monday, April 09, 2007

Inflation, Imports and Currency Exchange Rates

In his letter ("Importing Inflation," WSJ, April 9, 2007; Page A11) in response to the Wall Street Journal opinion piece, "The New Inflation Equation," by Richard W. Fisher and W. Michael Cox (editorial page, April 6), Tom Willoughby, a reader from Columbus, Ohio, observes:

The writers appear to omit the importance of exchange rate: "A country that consumes only imports will find inflation responds to foreign GDP growth alone." Countries with negative export/import balances eventually see their currency decline, resulting in domestic price increases, or inflation, for imported goods and services. We have not felt much of the impact of this because capital flows have counterbalanced the flow of goods temporarily boosting the dollar. In, time, if the imbalance remains, we will import inflation as our currency declines.

Saturday, April 07, 2007

Economics of Open Source Software

Lots of people have said lots of things about open source communities.

Among the books I have seen on shelves and articles in books and online, I've been wanting to read Steven Weber's 2004 book The Success of Open Source but time has never allowed.

Finally, I've been able to start and finish the first 15 pages of Weber's book, and I can tell you that it has all the right elements and sources for its analysis of the political economy of open source communities. Mancur Olson's work, transaction cost economists', Chester Barnard's and others' are weaved together beautifully in those pages.