30
Mar
Posted in Moneyisms by Roger, the Amateur Financier |
Welcome back to our week of looking at different financial theories, to see what insight we can gain about the interaction of fiscal policy, political philosophies, and the economy. Yesterday, we looked at Keynesianism, one of the more interventionist money policies, so it’s only fair that we take a look at the policy that’s considered its biggest rival. That’s right, today’s economic theory is
Monetarism
Founded By
Milton Friedman is the founder of the Monetarism school of economics, much as Keynes created the Keynesian school several decades earlier (the two men never met, but Friedman noted that he received two correspondences from Keynes, both rejection letters). In his younger years, Friedman worked for the Federal Government and was an advocate for Keynesian policies.
Another Famous Economist, Another Time Cover
His most important work, A Monetary History of the United States, 1867-1960 (co-written with Anna Schwartz), set forth the principles of monetarism. During the sixties, his ideas came to prominence, winning him a Nobel prize in 1976 and inspiring numerous financial leaders over the past several decades.
The Theory
Monetarism, as you might guess, is primarily concerned with controlling the money supply. In contrast to Keynesian theory, where the government was viewed as having an important job stabilizing the economy, Monetarism tasked the government with simply maintaining the money supply, and allowing the rest of the economy to take care of itself. By controlling prices via the amount of money available, Friedman and other Monetarists maintained that most other aspects of the economy would take care of themselves.
Another major tenant of Monetarism is the need to fight against inflation. Inflation is viewed as a monetary phenomenon, the result of too much money being added to the economic system (frequently the result of attempts by government to increase the productivity of the system). The goal under Monetarism should be to keep the amount of money in the system from growing too fast, leading to inflation and causing a great deal of pain for the economy at large.
For Monetarists, the role of government in economic life should be fairly small. The control of the money supply, the basis for most Monetarist economic influence, should be left to independent central banks (with strict governing their behavior), rather than in government hands. These banks should pump more money into the system in the event of a downturn, to prevent deflation; in this view, the failure to do so in the 1930s was one reason that the Great Depression lasted so long and was so severe.
Criticism of Monetarism
Obviously, most of the principles of Monetarism are in conflict with Keynesian principles, as already mentioned. Keynes and others who followed his economic views downplayed the role of money supply in the economy, encouraged the government to take on deficits to spread money in the event of a downturn, and had a high focus on unemployment and economic growth as opposed to the less interventionist Monetarists. Some Neo-Keynesians have argued that demand for money is intrinsic to the available supply, in contrast to Monetarist principles.
There are also disagreements between Monetarists and followers of the Austrian School regarding several principles. Austrian School economists stress the individual’s subjective valuation of money, and reject the attempts of Monetarists to create an objective valuation of money. This disagreement between the ‘quantity of money’ thinking of the Monetarists and the ‘value of money’ views of the Austrian school provide one source of friction between the two groups.
Since the 1990s, there have been several events in the economic world that have called Monetarist principles into question. The separation of money supply growth from inflation in the 1990s, the economic trouble in Japan during that same period, and the inability of Monetarist policies to revive the economy in the wake of the 2001-2003 all have caused doubt for the once firm believers in Monetarism. Add in differing explanations from a variety of quarters regarding issues like the cause of the Great Depression, and the theory of Monetarism is far from unassailable.
A Brief History
The publication of Friedman and Schwartz’s book didn’t attract much attention at first, but during the 1970′s, it began to draw more attention. When Keynesian economics seemed unable to combat the economic stagnation and high inflation rates that dominated the latter half of that decade, Monetarism was embraced by politicians and economists alike. The message of fighting inflation, not unemployment was widely enacted.
During the Reagan years in the US (and with corresponding action in the UK and Germany), actions were taken to control the impact of inflation, causing inflation levels to drop and leading to other Friedman policies to be passed. Financial markets were allowed to operate more freely and inflation and money growth were slowed.
In the 1990s, as already mentioned, events started to occur that changed the perception of Monetarism, decreasing its popularity. Even among its followers, the monetary policies recommended by Monetarism are difficult to time correctly and put into policy. Add in the recent downturn and the potential link between some Monetarist policies and the downturn, and Monetarism is in considerable decline (as Keynesianism is on the rebound).
Three Sentence Summary
Monetarism suggests that the most important thing for the government (or rather, a central bank) to do to the affect the economy is to control the money supply. By restricting the growth of available money, the government can keep inflation under control and allow the rest of the economy to fall into place. Although very popular in the late seventies and eighties, the last two decades have raised some major concerns about Monetarist policies, though they still remain quite influential.
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29
Mar
Posted in advanced topics, Moneyisms by Roger, the Amateur Financier |
Welcome to a special week-long series where we take a look at some prominent economic theories. Don’t worry, it won’t be nearly as horrifyingly dull as it sounds; this is still the Amateur Financier, after all. Plus, it’s always good to have a little background when you’re reading about things like ‘monetarism’ or ‘Austrian school economics’, or as in this case,
Keynesiansim
Founded By
John Maynard Keynes was a British economist whose most influential book, The General Theory of Employment, Interest, and Money was written as a response to the Great Depression. He was involved in British politics before and during World War Two, and helped to create the International Monetary Fund and the World Bank before his death in 1946. He was also married to a Russian ballerina, Lydia Lopokova, a fact I mention just in case you ever need to defend the sexiness of economists.
Just Look at That Sexy Mustache
The Theory
Keynes’ major insight was that the government could have a impact on the economy, working to stabilize it. The results of private decisions and private enterprise could be inefficient, due in part to slow response of prices and wages to changes in supply and demand. He also viewed recessions and depressions not as regular parts of the business cycle, but as problems that needed to be solved, most readily via government intervention.
One of the major parts of Keynes’ philosophy is the need for counter-cyclical economic policies, attempts by the government to counteract the excessive lows and the highs in the economic cycle. During recessions, for example, he advocated government spending to help prop up businesses and give a boost to the economy, while during boom times, the government should rein in market extravagances by increasing interest rates or decreasing government spending. In this way, the government would be a counterbalance to the business cycle, helping to stabilize it.
Two of the other ideas that Keynes helped to popularize are the multiplier and the paradox of thrift. The multiplier argument maintained that spending could have a bigger effect than the initial amount spent. If the government provides for $10 million in payments, for example, the benefits to the broader economy can end up being much more than $10 million. The initial recipients of the money will likely spend or invest it, with companies that will in turn spend or invest it, and so on. The initial $10 million may lead to many times the economic benefit, as the money works its way through the system.
The paradox of thrift, on the other hand, maintains that while saving is good for the individual, if done in aggregate, it can be harmful to the economy as a whole. Decreased spending leads to decreased demand, decreased demand can lead to lower economic growth and possible downsizing, potentially decreasing the total amount saved due to anemic growth and lower incomes. The paradox is, while saving is good for the individual, saving too much can be bad for the economy.
Criticism of Keynesianism
One of the major philosophies opposed to Keynesian economics is Monetarism, another school of economic thought (which we’ll cover in more depth tomorrow). Their major criticism has been that governments are, if anything, even worse at responding to fluctuations in the economy than the private sector. By the time the government recognizes the problem, formulates a response, and puts the response into practice, the problem may have become greatly exacerbated, or it may have disappeared. The monetarists lean towards a much less expansive role for government in economic policy, which is counter to the more interventionist Keynesian economic thought.
Keynesian policies also come under attack from Austrian School economists (again, more on them later this week), who denounce the Keynesian focus on the collective group rather than the individual. They maintain that focusing on broad government action rather than micro-economic factors leads to collectivism and mis-spending of capital. They also maintain that programs that start as temporary fixes to counterbalance an economic downturn can turn into permanent, expanding government programs that grow to consume larger and larger portions of government spending.
There’s also historical evidence (as noted below) that Keynesian approaches to boosting the economy are far from sure things. In a deflationary environment, such as during the Great Depression, putting more money into the system (which Keynes recommends), can serve to counteract the forces of deflation and boost the economy. However, in downturns with high inflation, such as the ‘Stagflation’ of the 1970′s, a further increase of money into the system will only aggravate the problem.
A Brief History
Keynes and his theories rose to prominence in the midst of the Great Depression, where the idea of the government ‘priming the pump’ to boost the economy was one already being taken up by Roosevelt, among others. The success of government spending (either in the form of New Deal programs or military spending during World War II) at lifting the economy was considered to be proof of Keynes’ concepts, and they were put into practice in America and elsewhere through most of the forties, fifties, and sixties.
As mentioned, though, Keynesianism was unable to cope with the economic stagnation and inflationary climate of the 1970s. From the Reagan administration (and its contemporaries in other countries) until 2008, Keynesian ideas and methods of dealing with the economy were pushed to the side, superceded by monetarism and supply-side ideals. Attempts to use government as a cushion against the rises and drops of the economy were curtailed in favor of a philosophy of letting the economy run with as little government intervention as possible.
However, with the economic downturn of 2008, there’s been a resurgence of Keynes and his approach to economics in public life. The great amount of spending by the US government over the past few years in an attempt to spur on growth is right in line with Keynesian monetary policy. (We’ll have to see how if Keynes is still in fashion when the recession abates and Keynesian economics dictates that the government should cut spending to slow down the economy.)
Three Sentence Summary
Keynesianism stresses the need for government to serve as a counteracting force to the excesses of private economy. The main thrust is that the government can counter the economic excesses of the private sector, spurring on growth when it’s slow and restraining over-zealous government expansion. Recently, such interventionist ideas have become more common, in wake of the economic problems of 2008.
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28
Mar
Posted in Weekly Thoughts by Roger, the Amateur Financier |
Ah, the end of March. Spring is officially here, the snow is (mostly) melted, the birds are coming back, and life is generally coming back all around you. It’s also the time of year when the National Council on Education for the Ceramic Arts (NCECA) has their annual conference, apparently. This year, it’s in Philadelphia, which happens to be just a hop, skip, and a jump away from me and my fiancee (well, relatively speaking; we’re on the opposite side of the state, but Pennsylvania is a fairly smallish state, so it’s still reasonably close).
You may ask why I, a biochemist who couldn’t tell one type of ceramic pottery from another, brings all this up. (I don’t even know enough about ceramics to do a bad joke about how little I know, a la, “I know so little about chemistry, I can’t tell Bohr from Boron.” It’s not any funnier if you’re a chemist, I promise you.) Well, my fiancee Sondra is a Ceramics major (yes, before we started dating, I didn’t know there was such a thing), and so, for the past half year or so, we’ve been making plans to go together. Of course, losing my job put a bit of dark pallor on the trip, but we’d already committed to going, so, off we go! (At least, off we go come Tuesday.)
All of which is my very long-winded way of saying that my access to the Internet (and thus, this blog) might be a little more hit and miss than normal this coming week, so if you email or comment or otherwise try to get in touch with me and don’t get an immediate response, consider this an advanced apology. Anyway, onto the posts from this past week:
Contests and Giveaways
One Up on Wall Street-Book Review and Giveaway – A review of the mini-book version of one of the investing classics, complete with the chance to win the book, all courtesy of YoungandThrifty.
Top 20 Biggest Money Wasters (w/Fun Giveaway) – One of the most interesting contests I’ve seen in a while, you have to find a hiding Kraken (no, really) on Money Funk’s website, and follow the instructions to win. No more help from me; you’ll have to find him on your own 
Win $100 Cash at the Ultimate Money Blog – Nothing like a nice, healthy money prize to motivate people to check out your blog. Just head on over to the Ultimate Money Blog, start commenting, tweeting, and linking back (as I am here, I might note), and you’ll have a chance to win. Good luck!
Other Great Yakezie Posts
Yakezie News Letter #1 – What better way to kick off the good Yakezie posts than with the official Yakezie Newsletter? Bytta of 151 Days Off chronicles some of the accomplishments the group has achieved this far, from the number of members who made the top 100 on the Wisebread list to some of the side ventures from other members (that’s right, some members are so gung ho that they are running blogs, working full time, and STILL have time for other ventures. I’m simply amazed.) It’s one truly dynamic group we have, indeed.
Announcing Our Very First Love Drop – All too often, we forget that as bad as we may have it, there are always people who have it worse off. Luckily, there are ways we can do our best to help them, such as passing along whatever money we can; one way to do that is through the Love Drop, as detailed by J. Money.
A Frugal Middle Class Assessment – It seems just about everyone considers themselves middle class (nobody wants to be considered poor, and if you were rich, shouldn’t you have butlers and stuff), but Money Reasons goes through his finances and proves his middle class cred.
You May Be Invited to a ‘Block Party’ – Now, this is disturbing; apparently, some debt collection agencies have taken to calling family members and neighbors of those in debt, in hopes (I’m guessing) of putting pressure on the debtors. As Stay at Home Mom CFO notes, though, it’s more enraging than effective.
700 Pennies-How to Stay Motivated and Reach Your Goals – An interesting take on the penny jar: Mike, the Personal Finance Ninja, keeps a jar filled with 700 pennies, one for every month until he reaches 80 years old, and uses them as a visible reminder of his own mortality. It’s a good way to keep motivated, I suppose. (Although, if your kids or significant other every find themselves short on cash, you might find your ‘mortality jar’ was emptied for candy money.)
Dear Ninja – An interesting question; what would you say if you were to write a letter to yourself in the future? Punch Debt in the Face proposed that very thing, and this entry was what he came up with. Not a bad set of suggestions for his future self at all, although the threats if he got fat seemed a bit much.
Personal Time Management – Monevator provides a very substantial post about managing your time and keeping yourself motivated when you don’t have a boss breathing over your shoulder and deadlines. Good advice, particularly for those of us who aren’t in a typical job situation.
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26
Mar
Posted in books by Roger, the Amateur Financier |
Ah, Robert Kiyosaki. You make some excellent points, but also raise more than a few questions in my mind. Your first book in the Rich Dad(R) series, Rich Dad, Poor Dad, was one of the first personal finance books that I ever encountered, both setting me on the path to understanding my finances and making me think I needed a second opinion. The second book, Rich Dad’s Cashflow Quadrant, seems to be an improvement, but was still a far cry from the detailed advice in most other personal finance books.
Which brings us to the third book in the series, Rich Dad’s Guide to Investing
. There’s certainly plenty of ground that could be covered in a book that claims to tell you what the Rich invest in. Does it end the initial trilogy with a bang, or a whimper? We’ll have to read on to find out.
Summary
The book starts with an introduction that brings up the 90/10 rule of money; 90% of the wealth is controlled by 10% of the people in the world. He also explains his belief that in order to invest, you need to know about business. The first phase of the book covers the mental preparation to be an investors. The first chapter covers a story when Kiyosaki returned home from Vietnam, how he wanted to invest with his ‘Rich Dad’, but was unable because he didn’t meet the financial qualifications to do so. He noted that he had much work to do to become an investor, starting with mentally preparing himself to be an investor.
The second chapter covers preparing a foundation of wealth. It sets up the preparation that needs to go into the mental aspect of creating wealth. The next sixteen chapters cover individual lessons an investor needs to learn. These lessons are as follows:
- There are three choices for reasons to invest: to be secure, to be comfortable, or to be rich.
- You can see a world with too much money, if you shift away from thinking of money as scarce.
- Investing is confusing to most people because there are many different goals, different products, and different techniques.
- Investing is a plan, not a particular product; getting attached to a particular investing procedure will only limit your options.
- You can plan to be rich or poor, and your financial plan will determine where you end up.
- Getting Rich is Automatic, if you have a good plan and stick to it.
- Finding the right plan takes some deep thought, careful consideration, and a good financial team.
- Deciding now what you’ll be when you grow up, and keep expanding the goals for your life.
- Whether you want to be secure, comfortable, or rich, your plan will have its own costs and expenses.
- Investing isn’t risky, if you can invest from the inside.
- Which side of the table you sit on, whether you are a business owner or an employee, will determine your level of success.
- There are several basic rules of investing. Knowing the type of income you’re working toward (earned, portfolio, or passive), converting your earned income into passive and portfolio, knowing that you (the investor) are the asset or liability, and having the ability to evaluate risk and reward.
- You can reduce the risk level of your investments by increasing your financial literacy, such as learning to read income statements.
- Some basics of financial literacy include focusing on cash flow, know the government rules (and that they can change), and that it takes two financial statements to see the whole picture (one from the payer, one from the payee).
- Mistakes can lead to good results, if you learn from them.
- There are many ways to become rich, all of which have a price.
Chapter nineteen again covers the 90/10 riddle, how you can acquire money making assets without spending your own money? The answer, as expressed in chapter twenty, is to turn great ideas into profits by creating assets. This is also the first chapter of Phase Two, which asks what type of investor you want to become.
Chapter twenty-one introduces the five categories of investors according to Rich Dad, which are covered in the next several chapters. The first is the accredited investor, someone who has $200,000 in income ($300,000 for a couple) or a net worth of $1,000,000, and is accredited by the SEC, but may not have any skills or talent at investing. The next is the qualified investor, who understands fundamental and technical investing, has education, and is generally confident. Then, there’s the sophisticated investor, who has knowledge of the different laws and knows about the different types of legal entities. The inside investor is someone who owns at least 10% of the outstanding shares of a company. Finally, there’s the ultimate investor, someone who starts a company, takes it public, and sells shares in it.
Chapter twenty-seven is about how to get rich quick, by taking advantage of the tax laws in the B quadrant. Then is the chapter on keeping your day job and becoming rich, by starting a business part time, emphasizing the need for business skills over needing a great product. Finally in this section, chapter twenty-nine stresses the importance of simply getting started with your business plan.
Phase Three is about building a strong business. First, there are answers to the question of why you should build a business. Chapter thirty suggests that three possible reasons are to generate excess cash flow, to sell it, or to take it public.
Chapter thirty-one introduces the B-I Triangle (that’s business and investing triangle, by the way). The three parts that make up the surrounding area are the mission, team, and leadership, the three elements needed to make functional business. The next several chapters cover the five elements in the middle of the triangle: cash flow management, communication management, systems management, legal management, and product management. Each one (save product management) provides a list of the many sub-elements of that aspect of creating a business.
Phase Four asks, who is a sophisticated investor? Chapter thirty-seven covers how the sophisticated investor thinks, including the ten investor controls. Some of these controls include controls over yourself, over income/expense and asset/liability ratios, over taxes, and over the entity, timing and characteristics of your company. Chapter thirty-seven includes information on analyzing investments, including information on financial ratios and performing due diligence on companies in which you invest.
The ultimate investor makes a reappearance in chapter thirty-nine, with Kiyosaki sharing how he took his company public, and passes on a story of his friend Peter taking a company public on the Canadian Stock exchange. Chapter forty provides some reasons why you would want to take a company public, as well as possible sources of funding before and after going public. Chapter forty-one ends this section with a discussion of how rich people can go bankrupt, pointing out a few problems they might face, from not knowing how to handle their wealth to not having the experience needed to preserve it.
Phase five is about giving it back, and has only one chapter, entitled ‘Are You Ready to Give Back’? The whole thing is the story of Kiyosaki’s encounter with a friend who was convinced that rich people cause problems in the world, but was convinced of how generous the wealthy people can be when it comes to giving money back to charity by the design of Kiyosaki’s game. The book concludes that the world is changing, presenting a great deal more opportunity to those who are prepared.
Pros
-Interesting Perspective: It’s not the normal view of investing, but that’s not necessarily a bad thing. If you’re interested in creating a business as a way of bringing some other income, it’s certainly an interesting book to get some perspective on what is involved.
-Encouraging: As always, Kiyosaki is nothing if not encouraging to his readers. If you are interested in starting a business of your own, reading through this book could be a good way to find inspiration and get some generally good (if overly generalized) advice.
Cons
-Second Verse, Same as the First: If you read the first two Rich Dad books, you’ve already got a pretty good idea of what material is in the first phase of this book (which makes up the first third of the book). The material is still fairly sound, if broadly drawn, but it continues Kiyosaki’s trend of repeating himself in his follow-up books.
-Not Really an Investment Book…But Not Really About Starting a Business, Either: In the minds of most people, starting a business and taking it public (the main ‘investment’ covered in this book) is not actually an investment, at all. But the book doesn’t really provide instructions on how to start and grow a business, either. There’s not even much instruction on how to take your company public, arguably the major thrust of the book.
-General Lack of Detail: Continuing on the last point, there’s not much helpful detail in this book, at all. This is most apparent in the B-I Triangle related chapters; there are lists of things that need to be done to create and build your company, ranging from setting up daily office operations to handling legal issues, but no instruction provided on how to do any of it. If you need something more than a checklist (and if you’re hoping to start a company you can go public with, you will), you’re going to need another book, or more likely, several.
Overall
If you’re looking for a bit of encouragement to start your own business, with plenty of folksy stories along the way, Rich Dad’s Guide to Investing might be a good book for you. However, it’s far from the only book you’re going to need, and frankly, you can do without this book, since there’s little in the way of solid information to be found. Just skip it, unless you’re a huge Kiyosaki fan and have to have all his works.
Related Websites
