CAPITAL ACCUMULATION

Investing is the process of allocating capital. Capital is the result of consuming less than what is produced.

For example, if 10 pounds of corn are produced and 7 pounds of corn are eaten then there are 3 pounds of surplus corn. This 3 pounds of corn is capital that can then be allocated and produce a return.  That return can be measured using financial statements, like an income statement and balance sheet, and an accurate numeraire.

As individuals or society wisely allocate capital that generates a return then the standard of living will increase. For example, enough capital may be stored and then allocated resulting in a the farmer being able to purchase and use a shovel instead of his hands to produce more corn. Now the farmer can spend the same amount of time but produce 2-3x as much corn because of the capital that has been stored and allocated into shovels, plows, tractors, semi-trucks, etc.  This is called increased productivity.

On the other hand, if an individual or society consumes more than they produce then they begin to erode their capital. Generally, this is unwise and will lead to a lower standard of living.  Remember the old advice:  do not eat the seed corn.

Like gravity does not care whether the sentient human or inanimate rock knows their condition as they hurl towards the earth from thousands of feet in the air so likewise economic law does not care whether individuals and society can accurately measure whether their capital is being accumulated or eroded.

VALUE CALCULATION

In this process of investing an individual makes a value calculation about whether to consume or save resources.  The key role interest rates play is in regulating production and consumption over time. Generally, low interest rates encourage consumption while high interest rates encourage saving.

Individuals produce commodities because they add value.  Corn is for food, oil is for fuel, steel is for buildings and water is for drinking.  Commodities are vital to sustain life.  Consequently, accurately measuring the demand for commodities over time is equally important so that the market can provide supply and avoid consequences such as starvation, dehydration, malnutrition, etc.  The Founding Fathers understood these economic principles and with the 1792 Coinage Act answered the question:  What Is A Dollar?

NUMERAIRE

In economics, the numeraire is an item or commodity acting as a measure of value or as a standard for currency exchange.  In accordance with Article 1 Section 8 Clause 5 and Article 10 Section 10 Clause 1 of the United States Constitution the Coinage Act of 1792 provided in Section 9:

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

However, government has strayed with unconstitutional legal tender laws and along with central bank intervention in the gold market the environment is extremely difficult, if not impossible, to accurately perform mental calculations of value. The result is a broken pricing mechanism.

Additionally, most people are completely oblivious to the importance of choosing an accurate numeraire.  More daunting is that for the small percentage of people who measure their financial vital signs few use a precise numeraire to do so.

To assist you in performing these two tasks for an example I have created The Numeraire Spreadsheet.  It functions as an example of how to implement provident living principles using an alternative numeraire.

CONCLUSION

Keeping financial statements such as an income statement and balance sheet takes diligence.  It also takes persistence and diligence to use an accurate numeraire.  But doing so will allow you to view your financial condition with improved clarity and which will likely increase your ability to perform better allocations of capital which will help you multiply your net worth.  For the New Year make it a goal to spend about 15-30 minutes per month to accurately measure and track your financial condition.

If you have an suggestions for The Numeraire Spreadsheet or any stories from using it then please leave a comment.

Related posts:

1. Storage Risk
2. Capital Gains Tax and gold
3. Is Platinum Overvalued

Most of us are not doing God’s work trading credit derivatives at Goldman Sachs. You may be stunned when I tell you this, because I sure as heck was when I found out: the TARP program covers none of our credit card bills. Like, zero. All of that means another tough, tough Christmas, money-wise. The desperate economy calls for desperate measures to economize at Christmas. Here are twelve ways for the twelve days:

1. The first thing to do is to keep doing more of what you’re already doing: bitching and complaining. Cry poor mouth to everyone. Tell everyone you know how tough it is. Make a Bill Clinton face while you share people’s pain and make them feel yours. Next you say, “You know, let’s make it easy this year, you don’t have to buy me anything.” Of course, that means you don’t have an obligation to buy them anything! That works with everyone except your kids.

2. Tell your young kids Santa’s not real. Kids as young as four are old enough to get real in this day and age. In Indonesia and Pakistan kids are out sewing soccer balls to support a family at that age! So just explain to them that it’s all a scam meant to con them into good behavior, tell them how much you know they wouldn’t want to connive in such a fraud, and assure them you know they’ll behave perfectly well without bribery. They’ll thank you. Someday.

3. What about the older kids? They’re all so eco-conscious these days, and that’s an opportunity for the canny cheapskate. Just tell them instead of lame games for Wii and Xbox this year, you’re saving the planet on their behalf by planting a tree with their name on it in the Amazon! You can even work up some kind of authentic-looking certificate on the computer! People in the carbon-credit business are becoming billionaires doing just that, by the way.

4. You still feel you need some real gifts? Well how about re-gifts? You’ve been given things you never opened — herbal soap, crème brûlée mix, thermal bags for keeping wine cold — pass the parcel! Just try to remember not to give it to the person that gave it to you!

5. Books are such a popular item at Christmas. So many books can be had for free! Libraries put out boxes of new, unread, unmarked books that they want to get rid of. These include books about business, money, and investing that are still very attractive and were timely when they were published last year, but are entirely irrelevant under current conditions. Also look for container-loads of books about the Bush and Clinton administrations, and anything by Dick Morris. I don’t normally advocate illegal behavior, but one exception could be Saul Alinsky’s Rules For Radicals. Bookstores are full of this one – it’s the Obama playbook! Somehow it just seems right to go in there and liberate a copy or three, comrade!

6. One of my cheap-ass friends used to always joke, “I wanted to buy you a big plant for Christmas, but GM wouldn’t sell.” What a laff riot, and it got him off the hook for ever buying anything! Of course, now GM desperately wants to sell all its plants, so the 2009 revision of that joke is, “I wanted to buy you a big plant for Christmas, but the Chinese bought them all!” Ha ha! Your friends
will be falling over, and they won’t even notice you didn’t buy a round of drinks!

7. Speaking of drinks, ‘tis the season to bend the elbow, so herewith some recommendations from Chateau Wang. First, drink cheap beer. The cheapest stuff in my local is also the original and greatest . . . it’s Miller at $3.99 a six-pack, compared to $5.29 for Miller Light. That make any sense to you? Me neither, they take stuff out and charge you more? Forget that! Next, drink cheap wine. André’s Cold Duck is back, it’s $4.99, and it’s as good as it was when you were fourteen and sneaked it in the kitchen after the Thanksgiving dinner was cleared away. (You know you did.)

8. As for food, the trick to economizing on food is not to cook any. Instead, head over to your brother’s house and scrounge Christmas dinner there. You need to go unannounced, early in the day, in case they have the same idea of coming over and scrounging from you. If that was the plan and your sister-in-law makes no move to put a turkey in the oven, give her one of your Miller’s and she’ll at least come through with some Dinty Moore. Note: If you were to show up on the doorstep at 7:00 AM, there are secondary benefits – you can reconnect with the Christmases of your childhood, when you punished everyone by getting up too early, and you’ll get breakfast too.

9. Here are the hard liquor recommendations from Chateau Wang. You want to drink cheap, cheap liquor too. The venerable and cheap bourbons and ryes from Old Huckaby, Rebel Heaven, and Elihu Walton lack the sophistication of single-malt Scotch, but they have all of the wallop! Also consider cheap and nasty tequila like Don Cheech and Señor Pepe brand – they mix great with green Gatorade!

10. You don’t feel you can scrounge 100% at your sister-in-law’s house? Try this recipe that will cost about 25 cents: Mix two cups of flour with a quarter teaspoon each of baking power and salt, and add up to two cups of water to make a heavy dough. Add a few raisins if you have any, tie it up in a clean handkerchief, and boil it in water until it’s time to go home. Then discard it. Tell them it’s the dumpling Oliver Twist had in the workhouse at Christmas. Your brother’s family doesn’t read! They won’t know! Ha ha! Give them a copy of Rules For Radicals.

11. Christmas trees are $60 at the VFW, and wreaths are $20. That make any sense to you? Me neither, so here you have many ways to go. You could wait until 4:30 on Christmas Eve, by which time the guy working at VFW will have gone home and abandoned whatever Charlie Brown Christmas trees he has left. Freebie! Option two, you may live in a place where trees are plentiful all around – neighbor’s yards, parks, and so on, if you “catch” my “drift” (wink wink!) Freebie! Another idea, if Border’s Bookstore actually survives far into this Christmas season, you may be able to buy one of the jokey artificial trees they had there last year – these things were some kind of intellectual joke, made with like a few bare wires covered in tinsel; this choice shows a certain post-modern hauteur which goes very well with Dinty Moore and Cold Duck. It’s about $5.99. But you can make it yourself, using wire coat-hangers, spray adhesive, and metallic flock or confetti. That’s a good thing!

12. Finally, we have to get control of this holiday again. Twelve days my wonderful arse! Our Jewish neighbors get by with just eight nights for Hanukkah, and even that is way too much noodle pudding. Let’s do away with this business of Christmas as a 3-month long retail opportunity. The retailers have been unloading container loads of useless crap from Yiwu, China into their Christmas displays since just after Labor Day! With the cheap and nasty Christmas I have outlined here, we can let them know that that is just not the way we want to be living anymore.

Have a happy.

Related posts:

1. Christmas Week Data Points to Rosy 2010
2. US Job Growth Likely By Christmas
3. Merry Christmas In September – Jobs Outlook Continues to Improve

Particularly if you’re under 30, you probably use – and grew up using – a debit card for a lot. It just makes so much sense; less bulk in your wallet, less for a pickpocket to lift, less chance of getting caught at the store five dollars short. Plus, it’s trackable – the money that you spend on a debit card no doubt comes with online banking, allowing you to look back at the end of the month and determine why the grocery money ran out so quickly.

The trouble with this idea that debit cards are more trackable than checks or cash, according to Hong Kong researcher Dilip Soman, has to do with the fact that humans, not computers, have to do most of the work involved in that tracking on a day-to-day basis. According to his research, we have mental “pools” for how much money we’ve spent on broad categories of purchases – housing, food, entertainment, and so on – and each time we complete a transaction, we subtract the transaction price from the appropriate pool, mentally.

Regardless of your mental faculty with basic arithmetic, doing this mental juggling requires that you remember the transaction. As it turns out, debit and credit card transactions leave very little in the way of a mental imprint. If you consider the process of a card transaction, it’s easy to see why: with a card, you swipe, sign a slip, and you’re done – you don’t even have to look at the total. (Today, if the transaction is small enough, you don’t even have to sign, most places; new technology has also removed the physical contact of the swipe, opting instead for touchless systems like PayPass.) If you write a check, on the other hand, you have to take the time to write out the full transaction amount in words and numbers, cementing the exchange in your mind. Cash would seem to provide the lowest imprint – nothing to write, nothing to sign – but with cash, a physical exchange occurs. You can tell how much you’ve spent from moment to moment simply by checking the amount remaining in the wallet.

On top of this, social and behavioral researchers Morewedge, Holtzman, and Epley recently described a broader phenomenon related to card use, called the “accessible account effect.” They suggest that people perceive the sting of a financial transaction as a fraction – the cost of the good being purchased versus the amount they have to spend. If the pool of money is the $100 in your wallet and the season box set of The Wire is $50, that’s half of your money gone. With the increasingly common setup of a debit card linked to the checking account where your paycheck direct deposits, however, the pool of money you have to spend becomes an arbitrarily large number compared to the amount of cash you would reasonably be carrying, so that $50 is a very small fraction of your available funds.

A month later, you’ve spent that $50 ten times over, easy as a wave of the card-hand. All of this stealth spending can add up to one big, painful blow to your finances. Fortunately, the research says you won’t remember it, anyway.

Related posts:

1. How to Raise Your Kids to Become Savers
2. Interesting Paper on Leveraged Buyouts and Private Equity
3. Guilt – The culprit behind lower holiday sales

“No-one seems to be able to give a clear answer due to the sorry state of knowledge about PM’s in Australia but seeing as you work for the Mint, are an accountant, and want to make this site a source of information for Australian gold investing, are you able to make some comment about the capital gains treatment of gold bullion in Australia? Are there any precedent cases in tax law? In particular, is the conversion of unallocated to allocated considered a capital gains event? I know that you are not able to give investment advice but perhaps you could give some hypothetical situations or similar.”

Before I start, let me say that my comments below are general in nature and do not take into account the specific taxation circumstances of each reader. Readers should not rely on what I say and should seek their own independent advice on the taxation implications relevant to their own circumstances before making any investment decision.

The only publicly available information on the tax treatment of precious metals in Australia I know of is that contained in the Product Disclosure Statement (PDS) for our ASX listed product, Perth Mint Gold (PMG). This product is structured as a right to receive gold, so is different to unallocated or allocated, but it does give some pointers as to the likely treatment of physical bullion.

Note that the PMG PDS advice assumes an Australian resident individual taxpayer who acquires PMGs and holds them on capital account, in other words the frequency of your trading would not constitute carrying on a business of trading or dealing in gold.

Firstly, gold is a Capital Gains Tax (CGT) asset. Some gold investors seem to think that gold is a special asset to which the normal tax rules don’t apply. Sorry, it is just like any other real asset, like property. It is taxable.

The PMG PDS advice notes that gold does not earn any income and that it is held with the intention of selling it for a capital gain. This affects the treatment of the costs incurred in acquiring and storing gold. Below is a summary of the tax issues for PMG:

* Sale of PMG on ASX [same as sale of gold]: Disposal of PMG is a taxable CGT event. 50% Discount may be available if PMG held for more than 12 months.

* Physical Settlement [same as unallocated conversion to physical]: No CGT event. Costs of acquisition and exercise of PMG become part of cost base of the gold.

* PMG Management Fee [same as storage fee]: Not deductible in the year in which it is incurred. Forms part of the cost base of the PMG. Can be utilised to reduce any capital gain on the disposal or cancellation of the PMG. Does not form part of the reduced costs base of the PMG and so cannot increase any capital loss on disposal or cancellation of a PMG. Not a cost of acquiring or exercising the PMG. Will not become part of the cost base of any physical gold a Holder acquires through exercising the PMG.

I think the sale of gold and storage fees advice for PMG would apply to physical gold. I am not so sure about the unallocated to allocated conversion because the exact advice on Physical Settlement refers to the option nature of PMG: “Under section 134-1 of the 1997 Tax Act, any gain or loss on the exercise of an option is disregarded and any payment made to acquire the option, plus any payment made to exercise the option, will become part of the cost base of the asset acquired on exercise of the option. Therefore, no CGT will arise if the Holder completes an Exercise Notice requesting physical delivery of gold bullion.”

I think it would be important in any unallocated to allocated (or unallocated collection) transaction to ensure that you are only invoiced for fabrication and storage/delivery and that it is not processed as a sale of unallocated, purchase of allocated. Common sense interpretation is that conversion of unallocated to physical is merely a change in form and as you do not give up the gold in exchange for cash, there is no CGT event. But since when does tax law make any sense? Always best to get specific advice from a tax expert.

Related posts:

1. No Massive Institutional Gold Market Change
2. How to Protect Your Privacy and Your Gold
3. Gold and Silver… How Do I Own Thee?

There is no doubt that many were examining their careers this Labor Day. Some were just thankful to have a job. Many were reflecting on changes they’d like to make. And still others have already made those changes and are just now headed into new careers. Over the weekend I read an article by Tony Kindelspire in the Longmont Times-Call about three individuals who have made those changes and currently reaping the benefits.

Eric Olinger, 36, of Longmont, CO had worked in lumber and hardware for most of his life. After being let go several times, Eric decided to take charge and find a recession proof job. His research pointed him at the nursing field. He entered nursing school at a community college and has just recently become a certified nursing assistant. He plans to continue his schooling and move further up the medical profession ladder. Eric bets, “People are still going to need medical care no matter what.”

Joseph Vogel, 52, of Aurora, CO was a certified master technician in the automobile industry. After losing his job at Ford, Vogel also decided to go back to community college to become a radiology technician. “Trying to go back to school at an older age is tough,” he says, “but you can do it. It’s frightening, it’s scary, it’s literally life changing, but you can do it.” This past Tuesday, Vogel cleared a final certification test. His new job awaits at the University of Colorado Hospital.

Laura Woods, of Hygiene, CO has been a real estate broker for the last several years. Her career in real estate wasn’t unsuccessful, but in a round about way taught her that what she really wanted to do was teach. Woods just landed and has started as a full-time fourth grade teacher. When asked if she has any advice for others looking for work or considering a change, Wood says, “Go for it. You only go around the block once, and you’re not going to know what you truly love unless you try different things.”

When I began to reflect on these three individual I thought, how did these folks get the job they wanted even amidst all the gloomsters out there claiming there are no jobs to be had?

Then I stumbled upon a new book, “Get the Job You Want, Even When No One’s Hiring” by Ford Myers. The top Amazon review is quoted below:

There is nothing I dislike more than reading a self-help book that turns out to be filled with re-warmed platitudes and stale ideas. That is definitely not the case with “Get the Job You Want, Even When No One’s Hiring”. Ford R. Myers gets straight to real time solutions, with a step by step approach that gets the job done. Finding yourself unemployed is not a pleasurable circumstance in the best economic times. In today’s environment it can be downright terrifying.

From new graduates to those displaced later in their careers, this book is the best tool in your job search arsenal. So buy it, read it, do the exercises, regain your confidence and get out there, armed with a realistic strategic plan to do what needs to be done to “Get the Job You Want When No One’s Hiring”.

If you were searching for meaningful work on this Labor Day, I truly wish you Good News and Good Fortune.

Related posts:

1. Recession-Proof Jobs – Part 2
2. More on Recession Proof Jobs
3. More Recession Proof Jobs at Wal-Mart

“I have been acquiring Perth Mint silver and gold in the depository scheme and am concerned about confiscation issues in the long term. Probably it will not happen, but again given the mindlessness of recent policy decisions there is no reason why the Australian government could not just decide to tax the gains at a punitive level – ‘because people are making unfair gains from it’ or some other vacuous reason. Seems to me the main risk is not holding bullion, but also the ‘privacy risk’ if you want to call it that, that the government knows that you’ve got it and can therefore either tax it highly or confiscate it. Are you able to make comment about how best to acquire completely private gold and silver (ie no record of the sale therefore no one knows you’ve got it and therefore can’t confiscate it), in quantities of up to 100 oz?”

The scenario you suggest is certainly probable in any country. In an environment where other assets have declined and gold is $5000, the politics of envy may come into play. Classic example of this is the Luxury Car Tax introduced in Australia in 1986. While one can expect that a populist “gold profits tax” would get support, I think it is an open question as to whether it will go down well in Western Australia considering the high profile of gold mining in this state.

As I discuss in Australian Gold Confiscation, secessionism would be “in play” in such an environment. A “gold profits tax” could be considered as an Eastern States Federalist tax grab on Western Australia’s wealth, and could provide yet another reason to secede.

As to Government knowledge of your gold, note that the law only requires Australian bullion dealers to record your identity for purchases above $5000, not report them (unless you give cause for the bullion dealer to believe it is a suspicious transaction).

Therefore for the Government to confiscate, it will first need to personally visit each bullion dealer and go through their sale records. This gives you a bit of time between announcement of confiscation and a knock on your door. It is possible that the data collection will happen in advance of an announcement, but it is likely that rumors would circulate quickly.

In any case, those looking to take possession of physical gold should always consider the privacy implications. The risk here is a thief getting hold of the records of a bullion dealer or courier company. One needs to weigh up the convenience and cost of a telephone or Internet sale (which will leave records) versus a cash and carry purchase from your local bullion dealer.

The only way to protect yourself against this risk is to establish a relationship with your local bullion dealer and buy in cash under the relevant reporting/recording limit ($5000 in Australia). There is nothing illegal about buying a little gold with each pay packet, and most bullion dealers would understand that you are a prudent saver and not a drug dealer. But doing twenty $4990 transactions twenty days in a row would be considered a suspicious transaction and reportable.

For those whose personal circumstances mean the risk of theft is greater than privacy/confiscation considerations and thus choose to store their gold in a facility, just a word of warning not to get tricky with your identification. It needs to be clear to the facility operator who is the beneficial holder of the gold, otherwise you may have trouble establishing title to it (or being impersonated) in the future.

For example, even if there were no account identification requirements for bullion, the Perth Mint Depository would still want photo identification as an additional security measure. It is really the only way we can ensure that the person standing at our doors to collect your metal is you.

By way of example, a couple of years ago we had a call from a person who gave us an account number and account name and wanted to sell. However, he did not have the password, nor was he a signatory, so we could not take his instruction or reveal any details of the account. He gave us details, like purchase dates and amounts, that did correlate exactly with the account, but we couldn’t confirm or deny any of that – because he was not identified on the account. He became extremely agitated, but to no avail.

It turned out that he had the account opened in the name of a company by a broker/agent of his and they were the nominee directors and signatories. This privacy mechanism may have sounded good at the time, and maybe he had some other agreement with the broker to ensure they could not abscond with his metal. However, whatever structure he put in place, he had not considered the scenario where his broker was arrested and put in jail!

Not being keen contact his broker in jail, there was no way for him to get the broker to give us an instruction. He therefore had to wait, unsure if the broker had cleaned out his account. There is a happy ending to the story, as the broker did eventually get out of jail (but it was some months) and put in the sale instruction for him. In some cases, privacy may be too much of a good thing.

Related posts:

1. Capital Gains Tax and gold
2. No Massive Institutional Gold Market Change
3. Gold and Silver… How Do I Own Thee?

The focus of the study is the decade from 1990 to 2000. Even though real per capita GDP in China was 2.8 times higher in 2000 than in 1990, the percentage of Chinese describing themselves as very happy declined from 28 percent to 12 percent and the average life satisfaction rating fell from 7.3 to 6.5 (on the WVS 10 point scale).

The authors consider three possible explanations: anomie (powerlessness), political disaffection (declining trust in government) and relative deprivation (frustration because increased income inequality resulted in a higher proportion of the population with below average incomes). Anomie is measured by survey data on the lack of a feeling of free choice and control over the way you live your life. Political disaffection is measured by survey data on lack of trust in the government and parliament. Survey data on financial dissatisfaction (dissatisfaction with the financial situation of your household) is used as a proxy for relative deprivation.

To cut a long story short, the authors conclude that relative deprivation provides the best explanation because the decline in life satisfaction is strongly associated with a decline in financial satisfaction. (A fuller summary of the article is available on Psyblog )

The main problem I have with this conclusion is that data presented in the article suggests that average life satisfaction of high income earners declined along with the life satisfaction of those on lower incomes. There was no reason for the high income earners to feel relative deprivation.

When I look closely at the data it seems to me that the main puzzle is not why average life satisfaction in China was lower in 2000 than in 1990, but why such a high proportion of Chinese were recorded as satisfied with life in 1990. This figure, 68 percent, was higher than in such high income countries as Austria, France, Germany and Japan.

When you look at average life satisfaction of people in different age groups (Fig. 1) older people seem to have been much happier than young people in 1990 and the situation has been partially reversed since then. A comparison of Figure 1 and Figure 2 shows similar patterns for life satisfaction and financial satisfaction. This suggests to me that the apparent decline in average life satisfaction between 1990 and 2000 might possibly be attributable to perceptions by older people that their financial security had declined for some reason e.g. concerns that as a result of social changes young people might be less likely to support them in their old age.

Even if we disregard the 1990 data, however, it is apparent from the Figures that we are still left with the problem of explaining why average life satisfaction and financial satisfaction has not increased since the mid 1990s. The decline in consumption as a percentage of GDP from about 50 percent around 1980 to about 32 percent in recent years cannot provide a complete explanation, because this has not prevented real per capita consumption from increasing substantially.

My guess is that the failure of average life satisfaction to rise in China is associated with a change in the benchmarks that people use to assess their current well-being. In 1990 many people in China may have been using past living standards as the benchmark in assessing their current satisfaction with life. Since then, however, their aspirations have probably risen as they have come to view the living standards enjoyed in high income countries as attainable in the foreseeable future. If I am right most Chinese people would probably agree that “they have never had it so good”, to borrow an unsuccessful political slogan. But those old enough to remember what life was like 30 years ago would probably rather forget about that.

Note: The subjective well-being data referred to above is from the World Values Survey. Gallup data also shows no increase in subjective well-being in China. See: http://www.gallup.com/poll/14548/chinese-far-wealthier-than-decade-ago-they-happier.aspx

Join the forum discussion on this post - (1) Posts

Related posts:

1. Is Economic Growth Causing the Chinese to Become Discontented or Just More Optimistic?
2. Does ‘Unhappy Growth’ Explain Failure to Adopt Economic Reforms?
3. Where are People Most Satisfied With Efforts to Preserve the Environment?

Of course, the answer is unique to every individual based on their utility calculation but I think it is important to understand the different forces at work in the finance universe, have tools to measure your own financial vital signs and then build solid, healthy and strong personal financial statements as you enjoy the quality of life you desire.  Important principles to understand are (1) opposites, (2) self-sufficiency for survivalism in the suburbs and (3) preparation.

The American consumer has begun to strengthen their financial statements with a tremendous increase in the savings rate.  While this is good for the American consumer it will continue to weigh on revenue, earnings and the general economy because of the nature of the debt-based monetary system.

YIN AND YANG

At the heart of many branches of classical Chinese philosophy and science is the concept of yin and yang.  The yin and yang is used to describe how seemingly disjunct or opposing forces are interconnected and interdependent in the natural world and give rise to each other in turn.  According to the philosophy yin and yang are complementary opposites within a greater whole. Everything has both yin and yang aspects which constantly interact and never exist in absolute stasis.  An excellent example in Western culture is Star Wars with the Jedi among the Light side of the Force and the Sith among the Dark side of the Force.

So likewise in finance this principle of opposites is present:

FINANCIAL VITAL SIGNS

In financial accounting there are a few basic ratios that are used to analyze financial health.  Applying the principles behind these ratios to your personal situation can be extremely helpful in measuring your financial health.

Of course, this presumes you keep financial statements which I doubt the vast majority of Americans do, in written format, which is a primary reason they are in their current situation.  One of the reasons the American consumer based economy has been shattered to pieces is because of the weakness of their balance sheets.  Even worse is that most American’s neither know nor understand the true state of their financial health.

Companies usually issue annual financial statements and therefore assets and liabilities are generally divided into current or long-term.  To distinguish current from long-term the standard is whether the transaction comes due within one year.  Three important ratios are:

1. Net worth which is assets minus liabilities.

2. Current ratio which is current assets divided by current liabilities.

3. Debt-to-equity ratio which is total liabilities divided by stockholder’s equity.

Because most individuals go through monthly financial cycles, such as paychecks, rent, mortgages, cell phone, cable, insurance, etc. I recommend shortening the standard for distinguishing current assets and liabilities from long-term; perhaps use 1, 3 or 6 months as the standard instead of a year.

The use of these ratios for financial vital signs will give a quick snapshot of your overall net worth, liquidity and leverage.  You can quickly build a spreadsheet using Google Docs and have most of this automatically calculated.

IMPORTANCE OF GOLD AND SILVER

The FRN$ has no definition, is an illusion and merely a figment of people’s imagination.  Do you know the answer to what is a dollar?  The owner’s of FRN$ are guaranteed no purchasing power.

By contrast, an ounce of silver or half of a gram of platinum will purchase approximately 2-4 gallons of gasoline or a nice steak dinner and with tools like GoldMoney you can even pay for the good or service with the physical bullion as the currency.  I recommend gold as the unit of account for the most accurate mental calculation of value.  Also, you will need to determine your own gold standard.

EARNED VERSUS PASSIVE INCOME

Work is a wonderful activity which can lead to personal development.  Sometimes work can interfere with one’s satisfaction, happiness and lifestyle balance.

When designing one’s lifestyle there are many risks that responsible people plan for by using instruments such as life or fire insurance.  The failure to plan can lead to financial destruction.  So likewise it is wise to plan one’s financial situation to include not only earned income but also passive or residual income.

Passive or residual income are earnings an individual derives from a rental property, dividends, interest payments, limited partnership and etc. in which he or she is not actively involved.  If part of your income is derived from passive or residual sources then should you become incapacitated through injury or disease, decide to take a cruise around the world, etc. then your income would not cease.

Therefore, I think it is important to distinguish between earned and passive income when measuring one’s financial vital signs.

NET WEALTH

You can buy gold with time through your labor but you cannot use your gold to buy time because time moves on wings of lightening never to be returned.  Likewise as Randy Pausch observed in his Last Lecture, “We do not beat the Reaper by living long but by living well.”  When your financial condition is extremely solid then you can pursue those hobbies, activities, etc. that will bring you the fulfillment you seek.

Net wealth is a function of three variables, (1) number of months, (2) standard of living and (3) without ‘working’.  To determine your ’standard of living’ you need to examine your current expenses to determine your total monthly expenses.  Once your passive income or passive cash-flow exceeds your expenses then your net wealth can approach infinite but keep in mind that managing your financial condition will always require some of your time and attention.

PERSONAL APPLICATION

Every individual will need to determine whether they want to measure their financial vital signs and what values they want to seek.  As with our physical vital signs there is no one that cares as much about them as ourselves and each of us intuitively knows the true state of our condition.

Being fairly conservative, extremely debt adverse and having an affinity towards sound money, cash-flow investments and self-sufficiency my ratios may be different than others who may have less financial responsibility.  I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months.  Achieving these type of financial vital signs may require significant discipline but it is possible.

There are many benefits such as the freedom to live location independent, protecting your financial privacy and personal privacy, having control over who, when and where you interact with others, etc.  You also will have much more margin for error and not be in the financial condition of many Americans of being two paychecks away from insolvency.  How stressful!

The issue is not whether working 100 hours a week as an investment banker is better than doing yoga, scuba diving in exotic caves or playing with grandchildren.  Everyone has their own preferences.  The issue is having the personal freedom and financial soundness to be able to do what you want, when you want, with whom you want and where you want.

CONCLUSION

The American consumer increasingly stressed over monetary matters and the economy.  This is changing behaviors as evidenced by the rising savings rate will slow GDP and may turn into habits which last for years if not decades.  A teenager whose parents get evicted will likely be permanently affected by the experience.

In your case I would recommend keeping financial statements and calculating ratios to track your financial vital signs.  For those that want to have an extremely solid financial condition I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months.  Then you will be in better financial condition to weather The Great Credit Contraction.

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In order to keep the wheels moving, every single person in even the not so developed countries, has been fed the fallacy of success. Years ago, success was living the ‘American Dream’. Nowadays, when so many people are well off, they are required to achieve more and more. In fact, they are required to achieve the impossible.

Image Credit: RobW_

What is this ‘Impossible’ achievement? Short Answer – Success. Success, as portrayed by every bill board, and TV advertisement refers to a state of wealth, good looks, career satisfaction, and loads of free time. Take the average billboard advert depicting a successful man. He invariably has the following characteristics regardless of what is being sold:

1. Good Looking
2. Rich, or drawing a huge salary
3. Well Dressed
4. Lots of women falling for him
5. Lots of free time (Either Golfing, or Yachting, or just loafing generally)
6. Young
7. Physically fit
8. Talented
9. Knows what he is doing, and is confident

This image is so compelling, that most don’t take the time to look at it carefully, and realize it’s stupidity. First of all, it is practically impossible for a man to be so naturally good looking, and fit. Second, it portrays a lie, in the sense that, in real life, successful people are overworked, and rarely have the luxury to focus on anything other than their work. Third, the attributes that are displayed often have nothing to do with the product that is being advertised.

There are so many things wrong with this picture, that the deeper one looks at it, the more ridiculous it seems. It is wrong to assume that all this is obvious. People are fed this lie, and most people aspire to be like that. And when they can’t, they feel inferior to something that they can never achieve. To feed this complex, they are driven more and more into buying themselves items that they feel will push them towards that ideal.

The ideal depicted above, is just one sort of ideal. There are others like a father with his kids, having a great life because he has Life Insurance! Anyone reading this, will understand what I’m talking about.

These lies go unchallenged by our “Commonsense”, because they engage our emotions instead of our rational thought. If people were to logically decide whether or not they need something, they would be able to make an objective assessment, that would frequently lead them to reject the item being pitched. By engaging the emotional cravings people have, marketeers bypass their logic, and go straight to that part of their nature that is illogical by definition.

This is why I say we are slaves. Thinking ourselves free, we are manipulated by ‘the system’, of which, the corporates who feed us these lies, are unwitting tools. It is not to be supposed that they have any choice in the matter. They are doing what they are being forced to do by the economic system. Which is why it is so difficult, if not impossible to lay the ‘blame’.

I feel that human society, just like a single person, has stages of maturity. These stages can last for hundreds of years. It is my hope, that one day, we will all see the lie for what it is. I have faith in man. This cannot last forever. And what will we do when the lie is exposed? I cannot even imagine.

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- Jobs that Protect Life and Property – Jobs like firefighters, paramedics, police officers, 9-1-1 dispatchers, and other security staff are always in demand. In state and local budgets, these personnel are likely the last to be cut in the case of staff reductions.

- Health Services – Nurses, doctors, psychologists and psychotherapists are always in high demand. Additional caregivers and medical assistants, particularly home health assistants are growing in demand.

- Legal Jobs – The legal services sector seems to always be strong. Lawyers and paralegals in the claims and compensation sectors, or those dealing with bankruptcies, and contractual disputes usually see more work during recessions.

- Repair Techs – Skilled service techs like plumbers, electricians and auto mechanics typically do not lose their jobs during recessions. When new houses are not being built or new cars not bought, emergency home and auto repairs become vital. As homes and cars age they need to be servicing with greater incidence.

- Personal Care Professionals – Barbers, hair stylists, and cosmetologists typically are not effected during economic down drafts.

- Energy Jobs – The real boost in these jobs will come from federal and state government commitments to a more efficient energy systems. Power plant operators with vocational training, insulation works with secondary education and electrical power-line installers and repairers are likely to have jobs as energy demands continue to increase.

- Green Jobs – With nationwide push to make homes and office buildings more energy-efficient and the drive to develop alternative energy sources (solar, wind, nuclear) as well as fuel cell technology, any job involved with wind power, either the design or related products, will likely be recession proof. Environmental scientists, environmental engineers and hydrologists are all great choices.

- Sales and Marketing – Businesses need to market more aggressively in hard times. Skilled marketing and salespeople working on commission pay basis always keep their jobs even during the recession days.

- Education – The need for trained educators and their support personnel are frequently highly sought after even during economic dips. A review of the professions listed above yields the need for training in these recession proof occupations. As job seekers look to transition to other careers, demand for teaching professionals increases dramatically.

For more specifics on 150 careers, their average salaries, and the growth potential of each, have a look at the Time article titled, “The 150 Best Recession-Proof Jobs Overall” or the excellent book, “150 Best Recession-Proof Jobs.”

You may also remember that these 28 national firms are offering over 50,000 jobs. And these firms say, “No Layoffs – Ever!“

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