Michael Jackson is dead, likely killed by the pressures of the industry that made him famous. To commemorate him, people are buying his CDs in record quantities. I find this to be a very questionable behavior.

Given all the harm that the industry (and perhaps his family) caused him, perhaps true fans should consider not giving the industry and his family more money. A more sensible way to commemorate him might be to volunteer with a drug treatment program or to help stop loved ones from abusing prescription medications or drugs. Doing that would help solve problems rather than perpetuating them.

It’s nice to help others. It’s bad to do so when the charity harms their ability to help themselves. Imagine you are a poor farmer in a country in which there is a great deal of starvation. You are able to make a small living by selling your grain for one dollar per pound. All of a sudden, a well-intentioned organization offers to end the famine by giving away grain for free! All of a sudden, your hard efforts become for naught. No one is willing to pay you for your grain, as they can now have it for $0 instead of for $1. So, the next year you don’t plant any grain. By donating grain at a below-market price, the well-meaning charity actually reduced the availability of grain in the country rather than increasing it. This problem is not hypothetical. In the following article, evidence is presented that some of the UN’s healthcare programs have had similar, detrimental effects on healthcare systems.

In the last two decades, the world has spent more than $196 billion trying to save people from death and disease in poor countries.

Millions of people are now protected against diseases like yellow fever, sleeping under anti-malaria bed nets and taking AIDS drugs.

But there isn’t much proof that pricey programs led by the United Nations and its partners are responsible, according to two studies published Friday in the medical journal, Lancet.

Trying to show health campaigns actually saved lives is “a very difficult scientific dilemma,” said Tim Evans, a senior World Health Organization official who worked on one of the papers.

In one paper, WHO researchers examined the impact of various global health initiatives during the last 20 years.

Some programs hurt care
They found some benefits, like increased diagnosis of tuberculosis cases and higher vaccination rates. But they also concluded some U.N. programs hurt health care in Africa by disrupting basic services and leading some countries to slash their health spending.

In another paper, Chris Murray of the University of Washington and colleagues tracked how much has been spent in public health in the last two decades — the figure jumped from $5.6 billion in 1990 to $21.8 billion in 2007 — and where it’s gone. Much of that money is from taxpayers in the West. The U.S. government was the biggest donor, contributing more than $10 billion in 2007.

They found countries don’t get more donations even if they’re in worse shape. Ethiopia and Uganda both receive more money than Nigeria, Pakistan or Bangladesh, all of whom have bigger health crises.

Some experts were surprised how long it took simply to consider if the world’s health investment paid off.

Richard Horton, the Lancet’s editor, labeled it “scandalous” and “reckless” health officials haven’t carefully measured how they used the world’s money.

Experts said that in some cases, the U.N. was propping up dysfunctional health systems. “If you’ve got rotten governments, no amount of development aid is going to fix that,” said Elizabeth Pisani, an AIDS expert who once worked for the U.N., citing Zimbabwe as a prime example.

Disproportionate funding
Murray and colleagues also found AIDS gets at least 23 cents of every health dollar going to poor countries. Globally, AIDS causes fewer than 4 percent of deaths.

“Funds in global health tend to go to whichever lobby group shouts the loudest, with AIDS being a case in point,” said Philip Stevens of International Policy Network, a London think tank.

In WHO’s study, researchers admitted whether health campaigns address countries’ most pressing needs “is not known.”

When Cambodia asked for help from 2003-2005, it said less than 10 percent of aid was needed for AIDS. But of the donations Cambodia got, more than 40 percent went to diseases including AIDS.

WHO acknowledged change was necessary, but insisted it needed even more money, warning fewer donations would jeopardize children’s’ lives.

U.N. agencies, universities and others working on public health routinely take from 2 to 50 percent of a donation for “administrative purposes” before it goes to needy countries.

Others said there is little incentive for health officials to commission an independent evaluation to find out what their programs have achieved.

“The public health community has convinced the public the only way to improve poor health in developing countries is by throwing a ton of money at it,” Stevens said. “It is perhaps not coincidental that thousands of highly paid jobs and careers are also dependent on it.”

URL: http://www.msnbc.msn.com/id/31427832/ns/health-infectious_diseases/

Today, Vice Presiden Biden told Meet the Press, that “everyone guessed wrong” on the impact of the stimulus, and that the economy was worse off than anyone thought. He further implied that the (unmeasurable) number of jobs created or saved would be only be 600,000 by the end of the summer, rather than 3.5 million.

The problem is that not everyone guessed wrong. In fact, many economists guessed right. Because the government did not listen to them, the nation has incurred a substantial debt with far less to show for it than expected. Before the stimulus was passed, the Cato Institute published a letter of economists stating that “we the undersigned do not believe that more government spending is a way to improve economic performance.” Signers included the Nobel Laureates in Economics James Buchanan, Edward Prescott, and Vernon Smith.

One of the many problems that our country faces today is a disconnect between politicians and economists. Our politicians have made factually untrue economic statements, and have taken actions that would defy reason to any non-Keynesian. The Japanese crash of the 1980s could serve as a valuable history lesson to the United States, but unfortunately it has not. Rather than reinventing the wheel, it would be nice to see more politicians with backgrounds in business and economics in office. Unfortunately, the country is very anti-business at the moment. Hopefully, we will eventually come to our senses, and realize that there are valuable lessons from the past that we can use to guide ourselves through this crisis.

It’s never fun to play games with small children whom lack a sense of fairness. Hearing a kid say, “Heads, I win, tails, you lose!” is one sure way for a competition to become less interesting. Imagine if in the middle of a game of chess, your opponent declared, “All pawns can now move two squares in any direction.” At its surface, this might seem fair, as both of you are bound by the same new rule. Upon further analysis, it is clear that your opponent only declared the rule because he felt it might be to his advantage. He used the turns he had before suggesting the rule to position himself so that he would succeed after implementing it. You, however, have had no time to prepare for the change. A fair game would have used one set of rules throughout.

What does this have to do with our government? The marketplace is a competition, like any other. Legislatively changing the rules of the marketplace is like changing the rules of any other game. While some may feel that there is no need for the competition in the market to be fair, they forget that frequent changes to the rules may cause players to leave the table. When we tilt (or as some say, level) the playing field to favor one group over another, the unfavored group may choose to leave the game.

Why is it bad if strong players leave? If the best players leave due to government harassment, the remaining players will be the weaker, favored players. These weaker players are less able to compete internationally, where they must face competitors not hobbled by our government.

Where will the unfavored players go? They will head to new competitions, either abroad, or in other industries domestically. This is an inefficient outcome, as they would have been in these markets in the first place had they thought it to be in their interest.

To conclude, I feel that the best thing the government can do for industry is to leave it alone as much as possible. While politicians feel pressure to act, sometimes change itself is harmful. When potential entrants see the rules of the game in flux, they may be more hesitant to enter out of fear that changes may not be in their favor. Thus, legislative change itself may be the enemy of any economic activity requiring long-term planning.

The American auto industry has been struggling? Should we care? To answer this question, I would like to explore what the auto industry, or for that matter, any industry provides. Industries provide:
-Jobs
-Taxes
-Products or services

So, what happens to these three benefits when an industry domestically disappears? There are two ways for an industry to disappear. The first way is for the plants and workers of an industry to be bombed out of existence. When this happens, there is a loss of jobs, taxes, products, and services. Unfortunately, this “obliteration” approach is often taken by politicians. Fortunately for all of us, no one is dropping bombs on factories.

Instead, when a firm dies, the consequences are far milder. Although people lose their jobs, they do not necessarily become unemployed. In reality, they likely find less preferable jobs elsewhere. (If the alternatives were better, the employees would have switched without a closure.) Rather than being abandoned, the factories may fall into other uses. Competitors may view them as an inexpensive means for expanding capacity.

If factories are not abandoned and former workers are not unemployed, the tax consequences are far milder than if a bomb had exploded. Although both may be put to a slightly less productive use after the bankruptcy, it is highly likely that both will be put to use.

Finally, a corporate failure results in the loss of products and services. If the American car was so sacred, why weren’t Americans buying enough of them to sustain American automakers? The answer is likely that people like the idea of the American car, but not the act of purchasing one. I do not feel that public money should be used to atone for this sort of hypocritical consumer behavior. If and when the automakers fail, we we will buy the cars we always have; foreign ones.

Sometimes, it is useful to look at a contrarian perspective. Although the New York Times has not been known to be a friend of the captains of industry, it printed a very interesting piece written by MIT alumni Jake DeSantis. After much hard work at A.I.G., Jake was more than a little upset to see his promised payments be taxed away by a highly targeted act of Congress.

Reprinted below:

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

Dear Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Sincerely,

Jake DeSantis

During the last quarter of 2008, Like many Americans, I lost a lot of money in the stock market. Sometimes, I wish I had done something else with my money over the past two years. Although hindsight is always 20/20, it sometimes is useful to make a retrospective analysis. While I could have made better choices, I could also have made much worse choices.

-I could have spent the money instead. Then, it would be fully gone!
-I could have held it all in cash (in the short term, this might have been better, but in the long term, the money might .lose value due to inflation)
-I could have bought a house. Then, I would have an asset that is difficult to sell, requires high upkeep, and is prone to depreciation in this market.
-I could have bought a car. Once again, heavy depreciation and difficult resale.
-I could have kept it under my mattress. While I might not have slept as poorly due to financial concerns, the lumpiness of the bills sure would have disturbed me!

Proven scientific facts remain rather invariant over time. While there are occasionally new discoveries which overturn prior findings, if no such discoveries in a field have occurred it is safe to continue to use prior findings. Economics, like chemistry or physics, is a science that works consistently over time. As a result, it is possible to benefit from reading works written long ago.

In 1946, Henry Hazlitt wrote Economics in One Lesson, a clear and easy to read book on free market economics (now available for free online). Many of Hazlitt’s insights both foretold the financial crisis, as well as provided sound means for navigating through it. I feel that there is much that can be learned from reading this book, and have provided several insights from it below.

Hazlitt began the book by providing one lesson: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Hazlitt then proceeded to show several demonstrations of applications of this lesson. I present, in its entirety, his chapter Public Works Mean Taxes:

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient private purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency”.

An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other. We cannot explore that whole network at this point; we shall return to other branches of it later. But we can examine here the mother fallacy that has given birth to this progeny, the main stem of the network.

Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that is can continue to pile up debt without ever paying it off because “we owe it to ourselves.” We shall return to such extraordinary doctrines at a later point. Here I am afraid that we shall have to be dogmatic, and point out that such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation. Here we shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation.

Having put aside for later consideration the network of fallacies which rest on chronic government borrowing and inflation, we shall take it for granted throughout the present chapter that either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works — of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had.

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money had it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer. Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

The same reasoning applies, of course, to every other form of public work. It applies just as well, for example, to the erection, with public funds, of housing for people of low incomes. All that happens is that money is taken away through taxes from families of higher income (and perhaps a little from families of even lower income) to force them to subsidize these selected families with low incomes and enable them to live in better housing for the same rent or for lower rent than previously.

I do not intend to enter here into all the pros and cons of public housing. I am concerned only to point out the error in two of the arguments most frequently put forward in favor of public housing. One is the argument that it “creates employment”; the other that it creates wealth which would not otherwise have been produced. Both of these arguments are false, because they overlook what is lost through taxation. Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and refrigerators, and in lack of innumerable other commodities and services.

And none of this is answered by the sort of reply which points out, for example, that public housing does not have to be financed by a lump sum capital appropriation, but merely by annual rent subsidies. This simply means that the cost to the taxpayers is spread over many years instead of being concentrated into one. Such technicalities are irrelevant to the main point.

The great psychological advantage of the public housing advocates is that men are seen at work on the houses when they are going up, and the houses are seen when they are finished. People live in them, and proudly show their friends through the rooms. The jobs destroyed by the taxes for the housing are not seen, nor are the goods and services that were never made. It takes a concentrated effort of thought, and a new effort each time the houses and the happy people in them are seen, to think of the wealth that was not created instead. Is it surprising that the champions of public housing should dismiss this, if it is brought to their attention, as a world of imagination, as the objections of pure theory, while they point to the public housing that exists? As a character in Bernard Shaw’s Saint Joan replies when told of the theory of Pythagoras that the earth is round and revolves around the sun: “What an utter fool! Couldn’t he use his eyes?”

We must apply the same reasoning, once more, to great projects like the Tennessee Valley Authority. Here, because of sheer size, the danger of optical illusion is greater than ever. Here is a mighty dam, a stupendous arc of steel and concrete, “greater than anything that private capital could have built,” the fetish of photographers, the heaven of socialists, the most often used symbol of the miracles of public construction, ownership and operation. Here are mighty generators and power houses. Here is a whole region, it is said, lifted to a higher economic level, attracting factories and industries that could not otherwise have existed. And it is all presented, in the panegyrics of its partisans, as a net economic gain without offsets.

We need not go here into the merits of the TVA or public projects like it. But this time we need a special effort of the imagination, which few people seem able to make, to look at the debit side of the ledger. If taxes are taken from individuals and corporations, and spent in one particular section of the country, why should it cause surprise, why should it be regarded as a miracle, if that section becomes comparatively richer? Other sections of the country, we should remember, are then comparatively poorer. The thing so great that “private capital could not have built it” has in fact been built by private capital—the capital that was expropriated in taxes (or, if the money was borrowed, that eventually must be expropriated in taxes). Again we must make an effort of the imagination to see the private power plants, the private homes, the typewriters and television sets that were never allowed to come into existence because of the money that was taken from people all over the country to build the photogenic Norris Dam.

Today, I would like to wish the Macintosh computer a happy 25th birthday!

What is amazing about the Macintosh is that it is in a sense a self-promoting product. Sure, Apple invests heavily in advertising. Nonetheless, Apple has benefited greatly from the advertisements that it has not paid for; those of the “Mac evangelists”. While Apple used to have a few paid employees who served as liasons between Apple and other firms in its value chain, Apple also had many unpaid helpers. Through encouraging the development of an enthusiastic user base, Apple was able to get substantial free advertising. Why would people bother? The answer is that there are network externalities in operating systems. Mac users were better off if more people became Mac users, as then they would have more software (and in the past, hardware accessories) available to them. Thus, Mac evangelism was not purely charity, but was instead motivated by users acting in their own self-interest. Why has there not been as much Windows evangelism? Simply, there has not needed to be. Given that Windows has had the dominant market share for the past several decades, users have not had to worry about the size of their networks.

The Mac is not the only self-promoting product I have encountered. Another is Skype. Skype, likewise, has a substantial network effect. People want their friends to join so that they can call them for free. Likewise, people promote craigslist, as the value of craigslist increases as the number of posts on it increases. If I can get all of my friends to use craigslist, and they can get all of their friends to use craigslist, it is more likely I will be able to find the stuff I want on craigslist.

From my observations, I conjecture that if one is creating a product, it is only likely that the user base will promote it if it is in the self-interest of the users to do so. These network externalities can be created deliberately. If Skype had not offered free Skype-to-Skype calling, users might have had less of an incentive to encourage their friends to join. (Paid Skype-to-phone calling does not require any network effect, and thus does not encourage evangelism.)

Although financial instruments have changed a bit over the years, the basic practices needed to make money have not. In 1880, P.T. Barnum wrote The Art of Money Getting: Or The Golden Rules for Making Money. I would highly recommend reading it to anyone who is interested in reading a book on personal finance or entrepreneurship. Barnum provides practical advice to the reader about saving money, establishing a business, and promoting a business. To make matters even better, The Art of Money Getting is available free. Project Gutenberg, a repository of out of copyright books.

Here are some classic quotations from the book:

On misguided economy:

A few years ago, before kerosene oil was discovered or thought of, one might stop overnight at almost any farmer’s house in the agricultural districts and get a very good supper, but after supper he might attempt to read in the sitting-room, and would find it impossible with the inefficient light of one candle. The hostess, seeing his dilemma, would say: “It is rather difficult to read here evenings; the proverb says ‘you must have a ship at sea in order to be able to burn two candles at once;’ we never have an extra candle except on extra occasions.” These extra occasions occur, perhaps, twice a year. In this way the good woman saves five, six, or ten dollars in that time: but the information which might be derived from having the extra light would, of course, far outweigh a ton of candles.

On selecting a career:

Unless a man enters upon the vocation intended for him by nature, and best suited to his peculiar genius, he cannot succeed. I am glad to believe that the majority of persons do find their right vocation. Yet we see many who have mistaken their calling, from the blacksmith up (or down) to the clergyman. You will see, for instance, that extraordinary linguist the “learned blacksmith,” who ought to have been a teacher of languages; and you may have seen lawyers, doctors and clergymen who were better fitted by nature for the anvil or the lapstone.

On saving and the power of compound interest:

I was born in the blue-law State of Connecticut, where the old Puritans had laws so rigid that it was said, “they fined a man for kissing his wife on Sunday.” Yet these rich old Puritans would have thousands of dollars at interest, and on Saturday night would be worth a certain amount; on Sunday they would go to church and perform all the duties of a Christian. On waking up on Monday morning, they would find themselves considerably richer than the Saturday night previous, simply because their money placed at interest had worked faithfully for them all day Sunday, according to law!

One solution that has been suggested for ending the economic crisis has been increasing income taxes on the wealthy. While doing so can increase the amount of money raised, it is in my opinion unlikely to solve the problem we are facing. The problem is that the wealthy are suffering from the economic crisis as well. As bonuses are being slashed, even people with highly-demanded skills are earning less income. As a result, raising income taxes on the wealthy may not provide the added revenue needed.

For instance, imagine that Martin the Millionaire made $1 million in 2008, and also received a $1 million bonus, for total compensation of $2 million. In 2009, the going gets rough, and Martin only receives a $500,000 bonus, for total compensation of $2 million. In 2008, the highest tax bracket was 35%, and applied to all income earned by a single individual or a married couple filing jointly over $357,701. Needless to say, Marvin the Millionaire is so well compensated that his entire bonus currently falls in the 35% tax bracket. So, in 2008, his bonus provided the nation with $350,000 in tax revenues. This may sound like stating the obvious, but to raise the same amount of revenues from Marvin’s bonus in 2009 (when Marvin received half the bonus), we’d have to substantially raise Marvin’s taxes. How high?

$2,000,000 – $357,701 = $1,642,299 of income taxed at the 35% level in 2008, for $574,805 generated from Marvin from this bracket in 2008.

In 2009, the threshold for the highest tax bracket slightly increased to $372,951 for single individuals and married couples filing jointly. Marvin’s taxable income in the highest bracket for 2009 is:

$1,500,000 – $372,951 = $1,127,049.

(I will ignore the fact that the switch in the bracket cut-offs has now made $15,250 more of Marvin’s income taxed at the 33% level. In the scheme of things, I don’t think it will affect this calculation much.)

So, to raise $574,805 of taxes from Marvin’s money in the highest tax bracket, the rate would now have to be around 50%. But, if we truly want to tax high earners to make up for revenue short-falls in other parts of the economy, we would have to raise the marginal tax rate to even higher than that. After all, we’ve had a budget deficit for nearly the entire last decade, and back then we were still collecting Marvin’s taxes. So, if Marvin is really going to make any difference, he’d have to face a substantial tax increase. Governor Paterson (D-NY) realized that this would be a serious issue and as a result decided to call for a broad range of taxes affecting people in all segments of the economy. While the rich can potentially pitch in, they will likely need a lot of help from everyone else.

2008 is coming to a close, and many of us (myself included) have lost a lot of money in the stock market. Although our shares remain, that money is gone. Gone.

The Problem

Unfortunately, most online stock tracking applications remind us of our losses every day. Rather than just reporting how much we have, they tend to report our gains or losses. That is, they report the difference between the present price and the purchase price of our investments. Going forward, the purchase price of an investment is irrelevant.  All that matters is where a stock is going, not where it has been. But, we see that XYZ was once worth $50/share, so we wait, hoping that it will some day return to $50/share, as if $50/share is somehow related to the true value of XYZ. The problem is that it isn’t. XYZ might have been over-valued then, and it might be under-valued now. Who knows. But, simply knowing that XYZ was worth $50/share at some point in 2006 is not a piece of information that can be used to make a sensible investment decision.

Going Forward

What I would like to suggest that people do is to create a second portfolio in their online stock trackers. In this portfolio, enter every share you own as if you purchased it today. (However, keep your original portfolio handy so that you will know how old stocks truly are when it comes to figuring out whether you will be subject to short-term capital gains tax.) Looking at your new portfolio, you can ask yourself, “How much do I have now?” and “What do I think about these stocks going forward?” Ideally, you would perform this exercise on a regular basis. After all, all you own is the stocks at their present value, and not their history. By eliminating the history of your stocks, you may be better able to de-anchor yourself from their historical performance, and instead assess them for their present merits.

I have a lot of different accounts with financial institutions:

• A local savings account for ATM transactions (yields no interest, but saves me from paying ATM fees)
• An online savings account for larger cash savings (yields interest)
• A regular online brokerage account for investing
• An online brokerage account for my IRA
• A credit card
• A merchant charge card

Needless to say, each of these accounts has its own username and password, and it is hard to keep track of them all. Fortunately, Mint.com has arrived at a solution. Using Mint’s secure website, you simply enter all of your usernames and passwords, and then Mint aggregates your data and presents it to you. You can see the performance of all your stocks, a detailed breakdown of your spending, your current savings, and your current debts. To make matters even better, Mint has released an iPhone application allowing you to do this. In the event that you have a large transaction (above a level that you set) or an upcoming bill, Mint will send you an e-mail or text message. At times, I have recommended using online banking services like eLoan to get better interest rates. Thanks to Mint, I now know that I could be getting a better deal if I opened an account with HSBC instead. Needless to say, I think Mint has done a lot to take the hassle out of money management.

Thanksgiving weekend is associated with a special tradition for retailers; Black Friday, the day after Thanksgiving that begins the Christmas shopping season. While I always love a deal, there are some deals that I almost always pass up: those involving rebates.

Why the rebate phobia? Simply, because I have had rebates go wrong too many times, and have little recourse when they do. Rebates typically require the purchaser to remove the UPC from an item’s box, rendering it unreturnable. Furthermore, the long window it takes the company to respond ensures that the rebate is over by the time the rebate is contested. Finally, the time and aggrevation required to follow through on unreceived rebates is often worth more than the rebates themselves. For all these reasons, the only rebate that I like is the instant rebate.

I would like to propose a formula:
True Rebate Value = (Face Rebate Value * Probability of Receipt without Intervention) + ((Face Rebate Value – Intervention Cost) * (Probability of Receipt with Intervention))

It will soon once again be the season of giving. In the holiday spirit, charity-minded readers may wish to consider giving money to the disadvantaged. Along with a large team of students, primarily based out of the University of Pennsylvania, I have helped create a site called Givology that enables people to make donations. The site’s purpose is to help people donate money to children in developing nations to spend on their education. We have decided to focus on developing nations, as the impact of a small donation is much larger there due to the difference in the purchasing power of a dollar.

Givology emphasises transparency and consumerism in the giving process. Rather than giving general donations, users of Givology pick individual children to recieve their contributions. The site features photos and descriptions of the children, as well as the means for donors to receive periodic updates about the status of the children to which they have donated. We have uploaded the handwritten autobiographies of the children and have included translations, as they are not written in English.

Givology primarily is meant to provide impoverished children with the financial resources that they need to obtain an education. Even in nations with free public education, some children cannot afford the supplies that they to attend school and be productive students. While most of the giving opportunities on Givology pertain to individuals, there is also the possibility of contributing to educational infrastructure projects. I personally donated to a project in which poplar trees were planted near a school, and their byproducts were sold as a sustainable source of revenue for that school. Fortunately, it has now been fully funded! Nonetheless, there are many children to whom you can still contribute. While at the moment, most of the children on the site are from China, we are actively in the process of adding children from other countries.

All contributions to Givology are tax-deductible, as Givology is affiliated with the Phelex Foundation, a 501(c)(3) non-profit organization. Givology can be visited at Givology.org.

This is an example of a student profile on Givology.

This week, Google released its Android cellphone platform. Android competes with iPhone OS. However, there are two key differences.

1. Android is being licensed to any interested hardware vendor. Apple’s iPhone OS is only sold with Apple hardware.

2. Apple’s application store is regulated by Apple, who performs quality control. Google’s application store is unregulated.

Recall that Google’s CEO sits on Apple’s board and that Google was involved with iPhone OS. Does this seem familiar?

I fear that Apple is pursuing the same flawed strategy in mobile computing that it did in desktop computing. Apple has refused to license Mac OS to other hardware makers (except for a few years in the ’90s),resulting in it perpetually having a low marketshare. Likewise, Apple’s stranglehold on Mac software development resulted in the release of fewer applications. Partnering with Microsoft at the beginning likely did little to help. It looks like history may be repeating.

The government is in the midst of an epic bailout of private industry. It is clearly in the public’s interest to rescue the ailing firms. Many have asked, “if we don’t share the gains, why should we share the losses?” The problem with this statement is that it ignores that we have shared in the gains all along. Even people whom are not retail investors often own pensions containing broad market indices. Companies like AIG are part of these indices and do business with many members of the indices. If they are allowed to fail, they will hurt Main Street even if Main Street does not know it. So, we must come to their aide. Hopefully, the government will be able to profit from the process.

In business school, over the years, I have heard that in a perfect market, arbitrage opportunities should not exist. While this is true in theory, in practice, they do as the market is not perfect. An arbitrage occurs when a person buys an item from person A at one price, and then is able to immediately sell (arbitrage) that item to person B at a higher price. This should not be able to happen because person B should prefer to buy the item from person A directly, at the lower price. For this to happen, person B needs to be aware that person A is selling at the price at which he is selling.

That is the kicker; in real life, person B is often unaware that an item can more cheaply be purchased from person A than from a middle man. From what I have observed, it is precisely this type of arbitrage that is behind many small businesses on eBay. All too often, I will see an eBay listing for “new hard drives in perfect packaging, except for a missing UPC.” These hard drives are far from garage sale items; their purchasers have bought them in a sale and submitted a rebate using the UPCs. They have been purchased explicitly for resale on eBay. The arbitrage is possible if the sale prices were very favorable, and are not available to buyer by the time the products are listed. Furthermore, the buyer may be willing to pay a premium to not have to deal with the rebate. However, products arbitraged on eBay are not always items that were purchased in a sale that has ended. Some items are sold on websites that are not easily indexed by price comparison tools, and thus are unknown to potential shoppers. For instance, refurbished computers sold by their original manufacturer are not typically shown on Froogle.com, but are often cheaper than those listed on eBay.

Why isn’t everyone arbitraging items? There are two reasons. First of all, it is time-intensive to purchase, resell and ship items. Secondly, and more importantly, arbitrage is risky, especially if the goods in question are perishable. (While computer products do not “spoil,” they rapidly decline in value over time, which is a form of perishing.) Furthermore, there are substantial transaction costs involved in reselling an item. For a seller to make a profit, the final sale price must be enough to cover the cost of the item, shipping, eBay fees, and PayPal fees. As a result, it is only profitable to attempt to arbitrage an item if it can be resold for substantially more than it was purchased for. I once bought two dozen fine paintbrushes (hog and sable hair) for around $1 each. I thought it would be an excellent investment, as they normally cost several dollars. After selling one brush, I quickly realized that if I included the time that it took me to ship the brushes as a cost, it did not make financial sense to sell them. Sometimes, an arbitrage opportunity is not large enough for it to be worth the effort.

The market is going for a wild ride, but I have decided to hold my positions. As I’ve created a portfolio that is relatively broadly based, it will hopefully recover as the global markets recover. I have made investments in the economies of the United States, the European Union, Latin America, and Asia. Despite all of the diversification, it is becoming growing clear to me how strong the entire world is connected. A downturn in one market tends to be correlated with a downturn in another. Likewise, the upturns are correlated as well. This likely has to do with the large amount of trade that occurs between nations.

For instance, the FTSE/Xinhua China 25 Index seems to have similar inflection points to the S&P 500:

While many environmentalists have talked to “saving the Earth” and “reducing pollution,” for some people, the greatest motivation is the almighty Dollar. Perhaps, the key to encouraging more people to make environmentally friendly changes is to unbundle the costs of consumption. However, when doing so, it is important to not merely use unbundling as a means of passing along price increases, as if that is done, it has the potential to lead to backlash.

At 7-Eleven convenience stores, customers can save money by bringing in their mugs or Slurpee cups for refills. Refilling a 22 o.z. durable Slurpee cup costs $0.95 in Philadelphia, while purchasing a similar beverage in a disposable cup costs $1.19. By providing customers with over a 20% savings for making an environmentally-friendly choice, 7-Eleven allows its customers to benefit from their behavior. Had 7-Eleven not passed along the savings, customers might experience decreased utility from bringing their own cups due to both the inconvenience and washing required, and may have been less likely to do so. 7-Eleven benefits from this policy, too. Given that the actual cost of the product is rather low, the cost of the cup may be near the size of the savings passed along to the customer. The true cost of the cup should be considered to include the cost of its production, its transportation to the store, and of the labor involved in stocking it in the store. By encouraging customers to bring their own cups, 7-Eleven also reduces the chance that it will have a “stock-out” and have no cups available, resulting in lost revenues.

American Airlines recently decided to charge passengers a $15 fee for checking one bag. While this may also follow the principle of market-based environmentalism as planes with less cargo require less fuel, it is likely to be viewed far more negatively, as it is being cast as a loss, rather than as a gain. Kahneman and Tversky showed that people experience more disutility from losses than they experience utility from gains of the same size. If American had raised its prices, but then provided $15 rebates to passengers checking no bags, the policy might have been viewed more positively. However, American likely chose not to do this, as people typically compare ticket prices among airlines, but not the “Total Cost of Ownership” (which in this case would include the baggage fee).

On April 10th, Jack Bogle came to speak to the MIT Alumni Association of Delaware Valley. Mr. Bogle is famous for having founded Vanguard, one of the world’s largest mutual fund companies, in 1974. Vanguard is well-known for having been a pioneer in the market for indexed mutual funds. Unsurprisingly, Mr. Bogle spent a large portion of his speech discussing the importance of following an index-based investing strategy. During his speech, I wrote down several of his most interesting points:

Bogle on the Global Economy 

• The global economy is anything but new. Chinese tea exports to Britain had an adverse impact on the price of the pound sterling, which motivated the British to find a product to export to China; opium.
• A decade ago, 15% of revenues of U.S. firms came from overseas. Now, 34% of revenues come from overseas.
• Although global stock markets seem to produce similar long-run returns to the U.S. stock market, when the dollar weakens relative to other currencies, they provide American investors with even greater returns.
• In 2007, 92% of mutual fund purchases were foreign; this may be a cases of performance chasing

Bogle on Investing

• When it comes to managing your portfolio, “Don’t do something. Just stand there. Don’t peak.”
• Buying and holding businesses is long-term investment. Speculation is the activity of forecasting the psychology of the market.
• The total return is the sum of the investment return and the speculative return
• Fund turnover is at an all-time high. It was 140% in 1929, around 40% in the 90’s, and reached around 280% in the 2000’s
• We are in a new era with the highest level of speculation in the nation’s history
• This is in part being driven by institutional stock ownership. Individuals own only 8% of stocks. Manager-agents speculate with the money of others.
• Many financial innovations are complex and costly. Innovation, on balance, subtracts value.
• The value of the S&P 500 is $13 trillion, but the value of the futures and options on it are $23 trillion!
• It really doesn’t make sense to have Exchange Traded Index funds. “What kind of nut would want to trade the Standard & Poors all day, in real time? Get a life!”
• There are 690 index funds, but 685 of them are likely to narrow. All people need are a few broad market indices: the U.S. market, the International market, and the emerging market
• In 2018, the Dow will be at 22,500

Bogle on Everything Else

• We need a federal standard of feduciary duty
• Corporate CEOs aren’t really creating much value. As soon as a CEO falls into the bottom quartile of pay, he is moved into the top quartile. This is helping cause the escalation in pay.
• The fiscal stimulus passed by Congress won’t help. Speaker Pelosi said that it is, “A gift to the people.” But, “we the people are doing the giving!”
• A weak dollar is good for U.S. corporations

 All in all, it was enjoyable to hear Mr. Bogle speak. Although he is now retired, he continues to be a vigorous man. He has made a lasting impact on the market by overseeing the introduction of the precursors to the ETFs that I know and love.

I’ve written several times in the past about the problems caused by gift cards. Now, there is yet another reason to avoid them…

Gift cards can be invalidated by bankruptcy proceedings!

On March 3rd, the Associated Press reported that The Sharper Image had temporarily stopped accepting gift cards in late February due to its Chapter 11 Bankruptcy Proceedings. Luckily for consumers, The Sharper Image decided to change its policy towards giftcards. On an update printed on its website, The Sharper Image wrote:

If you choose to redeem your card/certificate, you must purchase merchandise equal to twice the current value of the card/certificate in order to redeem it.

So, what was once a generous gift briefly became no gift at all, only to finally become half a gift. Gift cards are considered low-priority debt by a company. In the event of a bankruptcy, a company may eliminate its gift card obligations while eliminating its other debts. Yet another reason to not give gift cards. Everyone would have been better off had their friends and family members had the sense to select items for them at The Sharper Image, or had they given them cash if there was no obvious choice.

Today, I had an extremely amusing experience while picking up several shirts that I had left at the dry cleaners ten days prior. I had visited four days ago, when I was told that my shirts would be ready, only to be told to come back a few days later. Today, the man at the counter told me that it was unlikely my shirts were ready, as the cleaners had been rather busy. I asked him to check for them, and it turned out that they had been cleaned. I examined the shirts upon receiving them, and the following dialogue ensued:

Adam: It appears that one of my shirts is very wrinkled, and has a spot on it.

Cleaner: You know, you really don’t need to take your shirts to the dry cleaners. I wash all of my shirts, and iron them too!

Adam: But, these aren’t any old shirts. These are special dress shirts that need dry cleaning. I wash and iron my “normal” shirts myself.

Cleaner: Well, I even wash and iron my dress shirts and tuxedo shirts. If you want it done right, you should do it yourself. You don’t need to take them to the cleaners.

Adam: Do you use spray starch? I like my shirts starched.

Cleaner: Nope! All you really need is some water and an iron. Nonetheless, if you really want, we can go back over the shirt for you.

Anyway, the reason that this dialogue amused me is that the man working at the dry cleaners actively tried to discourage me from using the services of his employer. He strongly advocated that I do the job myself, and even suggested that he would not have shirts cleaned by his employer! (I know the man is an employee, as I have met the owners of the cleaners.) Employees like this hurt business. Why would I want to trust a dry cleaner that even the man cleaning my clothing would not trust?

I would bet that the employee is paid some sort of fixed wage, and does not benefit financially from the level of sales of the dry cleaner. If he had, perhaps he would not have made such an active effort to scare away a customer! Perhaps it is a prejudice of mine, but when buying goods and services from small businesses, I really prefer to patronize owner-operated businesses to businesses that are run by employees that do not share in the profits. Owner-operated businesses often provide me with better service because the owners have a vested interested in my returning.

Why Not Berkshire Hathaway?

I used to be quite ambivalent towards Berkshire Hathaway, but I’ve recently decided that it is worth consideration. I’ve never worried about the soundness of Warren Buffet’s investment decisions. Instead, I’ve worried about his health. After all, he is a 77 year old man, whose favorite restaurant is Gorat’s Steakhouse, and whose favorite beverage is Cherry Coke. It is also not clear that he consumes either item in moderation. But, I’ve decided to throw caution to the wind, and give him a chance.

Why Berkshire Hathaway?

Berkshire Hathaway is special in that it is an American chaebol, a type of large conglomerate more often seen in Korea (Samsung is the biggest of the chaebol). In a chaebol, one company uses its collective wealth to make a series of unrelated investments. The head of the company (in this case, Buffett) has the ability to oversee the management of each of the investments. As a result, this form provides the diversification of a mutual fund, but better leadership. When you buy a mutual fund or index fund, you receive a series of separate investments in a bundle. Unfortunately, the person that picked that bundle cannot do anything to improve the performance of each of the investments. This is not so at Berkshire Hathaway; Buffett can change the leadership of his investments as he sees fit, and thus has a form of control that no mutual fund manager has. Even if he were to die, the person who replaced him would be able to exercise this form of control. Furthermore, Berkshire Hathaway can use excess cash from any of its business units to cross-subsidize other investments. Its insurance products provide a particularly large pile of cash. As a result, it has much more affordable access to capital than its competitors. Thus, there is a distinct advantage to investing in a conglomerate.

 Which Shares Should I Buy?

Unlike most companies, Berkshire Hathaway has never undergone a split. As Buffett wanted investors to be able to afford to buy shares directly, without the intervention of a money manager, he decided to create both A shares and B shares. B shares are anchored at 1/30th of the value of A shares, and are similar in every respect, except that they do not have any voting priviledges. Depending on the electronic broker that you use, the shares are listed as BRK-A and BRK-B or BRK/A and BRK/B. At the time of writing, the price of BRK-A was $139,400, and the price of BRK-B was $4,648.

You may notice that this site now contains advertisements. One part of Google’s revolution is that it has enabled small-time content generators to receive advertising revenues. Google is rather vague on its payment terms, but does mention that it pays based upon two standard means: by impression and by click.

 By Impression

When a marketing company pays by impression, it pays the owner of a website for each time that an advertisement is loaded. This form of payment makes sense for many advertisements that do not require an immediate online action by the user. For instance, it would make sense for an advertisement promoting a football game being shown on television at 8 p.m. to pay by the impression, not by the click. As ultimately, the advertisement’s goal is to promote an offline behavior (watching television), whether or not the user takes action online should not matter.

 By Click

Sometimes, a marketing company is only interested in paying by the click. For the content provider to receive revenue, a visitor to his website must click on an advertisement. This mode of advertising makes sense in situations where an immediate online action is required, such as in the promotion of a website or the online sale of a product.

In Conclusion

Google has made it easier for everyone to add advertisements to their websites. As a result, people no longer have to enter independently into contracts with advertising providers. This has leveled the playing-field for generators of web content, as now everyone can monetize!

Recently, Bloomberg reported that the supermodel Giselle Bundchen wanted her contracts to be denominated in any currency but the dollar, as she feared that the value of her dollar-denominated contracts would shrink due to the depreciation of the dollar. Ms. Bundchen is one smart model.

 In July 2007, I created a contract with an outsourcing company based in China. While at the time all of the payments specified in the contract were denominated in both Renminbi (the currency of the People’s Republic of China), and U.S. Dollars, we made the official currency of the contract the Renminbi. Although it is fortunate that our developers have not been harmed by the weakening of the dollar, the contract has become more expensive for us over time. In July, a Dollar bought 7.6 Renminbi, while now it only buys about 7.2 Renminbi. As a result, the cost of our contract has grown by nearly 5.5% due to the weakening of the dollar.

 What can someone do if they hold a contract denominated in a foreign currency and face a weakening exchange rate? The simple solution is to convert money to the stronger currency at the beginning of the contract, and pay from the previously converted currency, rather than to convert domestic currency as payments are due. In the event that the domestic currency strengthens, it may be wise to convert the money back. However, as there is often a conversion fee in the form of a spread, it is best to not convert money back and forth if it is unnecessary. While it is sensible to convert money at the onset of a contract, it is likely not sensible to convert the money back and forth whenever there is a slight strengthening or weakening of the dollar.

Many articles about personal finance contain substantial errors or biases. I recently came across a particularly memorable such article, Why You Might Never Own a Home, by Lauren Barack. The first sentence should be a tip-off:

Cathy Mano, 44, works at a nonprofit in San Francisco. Her husband is an acupuncturist. The two pull in a little less than $100,000 a year together.

Whether or not there is a “middle-class crunch,” the Mano family is bound to be stressed. Barack’s colleagues at MSN Real Estate declared that San Francisco is the country’s second most over-priced city, with a cost of living higher than New York. Nonprofits typically have lower wages than for-profits. Regardless of the economy, if Mano wishes to own a home, it would be wise for her to either leave her present line of work, or to leave San Francisco. It shouldn’t be surprising to hear her state, “We can’t afford to buy a home.”

 Barack then interviewed Linda Sirois. She stated:

 Sirois’ son, at 29, has many of the trappings of middle-class life — a nice car, an iPod. But a home still seems out of reach. “It’s much harder than it was when we were starting out,” says Sirois, who considers herself middle class. “We paid $16,000 for our first house. You can hardly buy a car for that now.”

Assuming that the first home was born at approximately the time of her son’s birth, it was purchased thirty years ago. According to MeasuringWorth.com, a $16,000 home purchased in 1978 would cost $92,000 today if its cost the same relative share of Amercian GDP. While you cannot buy a house or many cars for $16,000, the Sirois family has forgotten that their son also likely earns far more than they earned thirty years ago due to inflation.

While it is obviously clear that Americans are increasingly having difficulty keeping their homes, we must still discuss the issue in a sensible fashion. The real problem is that many people are facing declining wages. Furthermore, expenses are increasing in large part due to the rising cost of necessities. The cost of healthcare has increased faster than inflation, and the price of fuel has risen rapidly in the past several months. There are many problems faced by today’s consumer, but Americans today, as always, are free to live in which ever city or town they wish, and may work in any industry for which they are capable. For those freedoms, we should be thankful.

There are very few stores today in which I enjoy my encounters with the staff. I often shop online because I find the prices lower, and because I do not feel that I could benefit from the assistance of the store employees. I have found many times that employees will know less about the product that I am trying to buy than I do, and that they are mainly there to try to upsell me (”How about a five-year warranty on your iPod for 30% of its price?”) or to prevent me from shoplifting.

 However, there are stores in which I value contact with the staff. One notable exception is Home Depot. I visited a Home Depot last week in order to receive assistance in constructing a box. A helpful tradesman named Leo measured and cut the wood that I needed. He also provided me with both mechanical and creative advice on how I might better complete my project. Through this process, he was able to identify some additional materials that I needed (and to sell them to me). As a result of his help, Home Depot not only sold me wood, it sold me service. I would be willing to pay a premium for such service, as it enabled me to better complete my task. Although Leo “upsold” me a little bit, he did so in an informed manner, which resulted in my buying the suggested items. While extraordinarily helpful, Leo was by no means a unique Home Depot employee. I specifically shopped there because I have in the past encountered many helpful Home Depot employees, and anticipated that I would be able to receive excellent service by shopping there. Home Depot makes the effort to hire skilled tradesmen that are experts in the products that they sell.

RadioShack used to be like Home Depot. As a boy, I loved to talk to their men in red coats about my electronics projects. Back in the early 1990s, RadioShack sold both electronic components and assembled appliances. Their employees were likely former members of the electronic trades, as they were intimately familiar with their products. In recent years, Radio Shack has reduced its stock of components and replaced its old men in red coats with younger workers with less knowledge about its products. RadioShack has transformed itself from a business selling both products and service into a business selling commodities (computers, cell phones, and the occasional spool of wire). I rarely visit RadioShack, as I can often buy these commodities more cheaply online, and I gain little from the contemporary RadioShack in-store experience.

 No, this is not an article on hippy togetherness. It’s an article on the problems generated by subcontracting.

 Whether investing in high-grade tranches of subprime mortgages or contracting a job, it is important to realize that if the other party has a problem, it may become your problem. At one company, a substantial amount of product development was contracted out to another firm. The company was very careful to create a good contract in which its liability would be minimal unless the contractor delivered. Unfortunately, the contractor had subcontracted the project using a contract that was not performance-based. As a result, the contractor experienced substantial losses from its relationship with the sub-contractor. Needless to say, this affected the contractor’s ability to complete the task. Thus, the mistakes of a contractor can adversely affect the hiring firm, even if the hiring firm created a strong and properly incented contract.

This same problem occurred on a broader scale with the United States subprime mortgage crisis. Institutional investors bought various tranches of subprime mortgages, based on faith that the risk associated with them had been modeled correctly. Mistakes in modelling the risk have affected both the investors and those that sold the tranches.

How can one avoid this problem? Unfortunately, the answer is not simple. One must make the effort to analyze all of the downstream issues affecting one’s contracts. This is often hard to do, as contracts often lack the right of downstream inspection. Thus, it would be advisable for people entering into contracts to demand the right to both inspect the firm being hired, and all firms subcontracted by that firm or sub-subcontracted by the subcontractors. Thus, this clause of right to inspection would have to be included in all of the contractors contracts with its subcontractors. This way, you will be aware of the full situation, and will be able to both assess your subcontracts and be able to help your contractors before their problem becomes your problem.

In previous entries, I suggested that high-interest savings accounts were a good, more liquid alternative to certificates of deposit. While I am about to state the obvious, the problem with savings accounts is that they do not provide a locked-in rate of return, unlike certificates of deposit.

 If you have money that you plan on keeping illiquid for a defined period of time, it is probably wisest for you to try to predict whether the interest rate will increase or decrease over your time horizon. If you foresee the interest rate decreasing, buying a certificate of deposit will enable you to maintain a rate of return regardless of the decisions of Ben Bernanke. If you foresee the interest rate increasing, holding your money in a high-interest savings account will enable you to take advantage of the increase.

Some people choose to invest their money in collectibles such as art, trading cards, cars, and items owned by celebrities. Is it wise to invest in collectibles? Well, for any investment to be a good investment, it must have a higher rate of return on average than the alternate investments available to you, for the same amount of risk. If it is more risky to invest in a baseball card than in a Treasury Bill, you would need to expect to receive a higher rate of return from the baseball card due to its higher risk.

 The problem with collectibles is the chance that they will eventually be worth nothing. A trading card salesman once told me, “It does not matter what price a card is worth in a guide. It is only worth the price at which you can sell it.” Whether a collectible appreciates has to do with the demand in the market, and the amount of supply that exists. If there are a lot of the item for sale, prices will be lower than if it is scarce. Also, tastes may change over time. Art that is considered interesting today may be viewed less or more favorably in the future. Items labeled as “collectibles” at the time of production are unlikely to appreciate if they are produced in large quantities, or are of limited demand from the market.

 My computer collection, Magic card collection, and Marvel card collection all have not appreciated. In fact, my collection of historical computers has probably depreciated over time. Why? The computers are not particularly scarce, and their utility decreases as they become more obsolete.