What Do Banks Produce?

Bernie Sanders says banks have assets equaling sixty percent of the Gross Domestic Product (GDP). Bloomberg says banks are bigger than the GDP. But what is GDP? Well, according to Investopedia “The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period. You can think of it as the size of the economy.

GDP is the size of the economy. Why would banks representing 60 percent or more than 100% of the economy be important? Well, the economy is the total dollar value of goods and services produced over a specific period of time. If GDP is used to gauge the health of the economy then it should follow that if banks are bigger than the economy then their health reflects the health of the economy. Anything that negatively affects banks negatively affects the economy. We felt that effect in the 2008 recession.

When you think of banks, what goods and services do you see them producing? The only thing tangible I ever see coming out of a bank is money. But banks don’t produce money, the federal reserve does right? That is partially true. The federal reserve prints paper money and the treasury mints coins. So the banks don’t physically produce anything. But how can they represent more than the GDP?

That’s where things get interesting. Again, according to Bloomberg banks are not required by U.S. accounting standards to record the full amount of derivatives and mortgage backed securities on their balance sheets. If they were required to then they would be twice as big as they are because derivatives and mortgage backed securities are considered assets. That’s where we may get to the difference between Bernie’s assertion and Bloomberg’s. Bernie might just be looking at what is recorded on the balance sheets and Bloomberg is looking at the additional securities that are not recorded.

What are derivatives and mortgage linked securities and why are they so important to the health of our economy? A derivative is a contract between two or more individuals based upon a specific asset. It’s total value is determined by the price of that underlying asset and has absolutely no ownership interest in that asset. So you have an asset like JPMorgan which closed at a price of $78.83 this last Friday and you have a derivative of JPMorgan. Let’s say the derivative is a call option at a strike price of $79 with an expiration date of December 2, 2016. The last traded value of that option was $.63. Now that call option gives me the right to buy JPMorgan stock for $79 and it costs me $.63 to buy that option. It’s cheaper to me to buy the option than it is to buy the stock but if the stock goes down then I lose my $.63. In order for me to make money the stock has to go above $79.63.

But why would anyone buy an option like that? Say the stock went to $80. If I bought the stock I would have made a dollar. If I bought the option I would make $.37. Not that great of a deal right? But if you look at it in terms of the return on my investment, investing in the option has afforded me a greater return, 58.7% vs 1.2%. In order to buy that option you have to pay JPMorgan’s market maker $.63.

So you have the stock’s intrinsic value and you have the value of the derivatives of that stock. To give you an idea of how large that derivative market is let’s look at just JPMorgan’s call options. The strike prices available range from $50-$115 in increments of $.50 for a total of approximately 120 different strike prices. Multiply that by 15 different expiration dates and you have 1800 different options you could invest in.  Now consider that JPMorgan can offer 50,000 of each of these 1800 different options for sale and you have significant amounts of money being gambled on the price of JPMorgan stock alone. Now multiply these numbers by 3831 which is the number of optionable stocks and you begin to see that Bloomberg is probably right when they say banks are bigger than the US economy.

But what does that mean for you and me? It means that as long as we invest in any of those 3831 optionable stocks there is a chance that once again our investment could be halved by a recession. My suggestion? You’ve heard it before buy local, buy used, compare prices, give yourself a raise, do your research and change the world by directing where your money goes.

 

Your Spending Drives the Economy

Economics, specifically microeconomics is the study of how consumers and producers make their decisions. This includes three major players: the consumer, business and the government. All three of these players are important in making the economy run smoothly and efficiently. When one or another of these players does not spend money the economy comes to a halt. This happened in 2008 with the real estate bubble. Because banks had not reflected the true value of their real estate assets the market crashed and consumers saw 1/3 of their wealth evaporate. With this reduction in wealth consumers couldn’t spend. That left it to business or the government to spend money. In 2008 businesses did not step up to the plate and spend the money that needed to be spent in order to keep the economy rolling. That left it to the government. If the government had not spent the money they did at the time, then the economy of the entire globe would have come to a screeching halt. You remember this right?

Business could have spent the money. Banks could have spent the money. They didn’t. The bailout money the government gave them to help spur the economy, they kept. All this is said to emphasize what power the consumer has to direct the economy. Where we spend our money. Where we keep our money. These decisions affect the direction of the economy. Why do you think you get ads on your computer, on your FB page, in your email, on your phone, on the radio, on billboards? It’s because businesses are vying for your money. They need you. If you don’t spend your money they don’t survive. So spend it wisely.

Spend your money at those businesses that support your values, that support your community, your region of the country. You want to know why the Rust Belt voted for Trump? It’s because he identified with the reality that nobody is spending money in those regions. No businesses are spending money in those regions. You want your region to come back economically? Quit waiting for someone else to fix it. Take the money you have and spend it in your community. Quit shopping at Walmart, they’re based out of Arkansas. You want your money to go to Arkansas? Quit buying Budweiser. That money goes to St. Louis. Quit buying from Amazon. That money goes to Seattle. Get to know your community. Drive around. Stop in those businesses. Find out what they sell. Buy from them. Don’t shop online.

All the Time in the World.

Back in the mid 2000’s I discovered how to manipulate time. I was coming out of an abusive marriage. My youngest had gone off to college. I realized that she most likely wasn’t going to be living at home any more. So, I decided to embark on an experiment. All my friends in Denver were accustomed to me being with “She who will not be named” which made it hard to start anew. The first thing I had to do was divest my image of that other person. I had a couple of friends in NM and they weren’t that accustomed to me being with the other so I felt pretty confident I could have a fresh start. One of the things my divested partner was consumed with was more and bigger. I decided to go a different direction and see how little I could actually live on. So I packed almost everything I owned into a storage unit and took off to New Mexico. The hardest thing for me to get rid of was my hot tub, so I brought it along.

My first residence was a small adobe on a farm near San Juan Pueblo. It was a beautiful place but my landlord had it in her mind that I would become her farm manager. Tending to animals and crops are not one of my better skills so my time there was limited. My next two houses were small adobes. One was in Villanueva where the closest sports bar was 30 minutes away and where people were dumbfounded that anyone would want to watch hockey. The next was in Albuquerque’s south valley. The cockroaches drove me out of there. Fortunately I had made friends with a guy who let me park an RV in his junk yard for $10 a month. I was there for three months in the summer of 2009. That was as small as I could go.

What I learned those three months in the junkyard is that after a 150 square foot RV an efficiency apartment is like a castle. But more importantly, I learned that the less I have to take care of the more time I have to do what I want. In effect I learned how to manipulate time. Couple a spartan existence with F*ck You Money and I had the time and resources to follow my dreams. My true friends, those who liked to spend time with me regardless of what I owned, are still my friends.

F#ck You Money

The popular definition of “F#ck You Money” is that you have enough money that when your boss asks you to do something you don’t want to do, like take a pay cut, you can say “F#ck You.” Following is a simple formula for creating “F#ck You” money.

Save 1/2 of what you make and invest it.

The nice thing about this formula is that the more you use it the longer you can say “F#ck You.” To make my point. Let’s say you get paid $200 every week. If, with your next paycheck, you take $100 and invest it at 5% interest you can tell your boss “F#ck You” for 1.05 weeks or 1 week and about 8 hours. If you do this on your first pay check you’ll probably be looking for a job, so I wouldn’t suggest it. But look at what happens if you do it for a year. Investing $100 a month at 5% compounded monthly will give you enough money to say “F#ck You” for 1.115 years or one year and 4.5 days. Having a year and 4 days to find a job before you run out of money is better than only having a week don’t you think?

Now look what happens if you do this for 5, 10 and 20 years.

5 years: “F#ck You Money” = 5.797 years or 5 years, 9 months and 17 days.

10 years: “F#ck You Money” = 13.131 years or 13 years, one month and 17 days.

20 years: “F#ck You Money” = 34.621 years or 34 years, 7 months and 14 days.

What do you think having the ability to say “F#ck You” for 5, 13 or 34 years is going to do to your presence of mind? I’m thinking it’s going to make you a hell of a lot more confident, less likely to take shit from anybody, make you a better employee and definitely allow you to negotiate your pay better. It makes sense doesn’t it? If you want to work out your own scenario go to the savings calculator on dinkytown.net.

The trick is saving half of what you make and investing it in something that will give you 5% interest. As for saving half of what you make check out my other blogs on how to save money: Affordable Nutrition, Buying Used, and Buy Local.

To get a consistent 5% return on your money you’re going to have to educate yourself on investments and there is plenty to trip you up especially the lure of higher returns. All I can say about the lure of higher returns is beware. If it sounds too good to be true it most likely is. A good place to start your education is with index funds. The other thing you can do is find a good wealth manager. But again, you’re going to need to do your homework. I would suggest against wealth managers at investment banks. There is something about that combination that stinks “conflict of interest” to me. Also, you don’t want a manager who gets paid commission on what they sell you. Instead pick one who gets paid on the value of your investments. That way they get paid more when your investments grow. So the incentive is to grow your investments. In the mean time start socking away the cash.

As an addition to saving money look at the ways credit cards and gift cards pay you back. Some grocery stores offer discounts on gas for every dollar you spend on groceries. Some even give you double points when you buy gift cards. If you shop regularly at a specific store it might be worthwhile to buy one of those stores gift cards. And, if you use a points earning credit card to buy the gift card you could be saving two ways. One, you earn points by buying the gift card with the points earning credit card. Two, if you buy it at the grocery store you can earn twice the cash per gallon off gas.

 

Top Reasons to Buy Local

The biggest benefit I see to buying local is that, compared to an online retailer, you return almost fifty times the amount of money back to your community. This increases the wealth of everyone in the community. It decreases taxes because it puts less of a strain on infrastructure. It employs more local people. It fosters choices more in line with the values of the community. It creates a more cohesive community which leads to less crime. It is healthier because with the increased cohesiveness there is the tendency to address health problems more effectively and the food is better for you.

Buying local also increases the unique characteristics of your community which increases tourism. When you go on vacation do you eat at a chain restaurant or do you sample the local fare? Do you shop at Walmart or do you try the local shops who have a more unique selection? Do you engage in the cultural activities that only your destination has to offer or do you choose the same types of entertainment you can find in every major city? You choose the local color of course. Otherwise, why would you go on vacation? Encourage others to enjoy a richer cultural experience when they come to your town. Support your local businesses.

If you want to increase your wealth and the wealth of your community get  involved with your local business alliance. They can help.

 

How to Save a Million Dollars

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Here we have how to save a million dollars using Dinkytown’s Future Value Calculator. All of these scenarios use 5% interest compounded monthly with weekly deposits. What changes are the amounts of the initial and weekly deposits.

Time: 40 years, initial deposit: $190, weekly deposit: $150, Future Value: $1,000,006

Time: 30 years, initial deposit: $373, weekly deposit: $275, Future Value: $1,000,004

Time: 20 years, initial deposit: $533, weekly deposit: $557, Future Value: $1,000,001

Time: 10 years, initial deposit: $1981, weekly deposit: $1472, Future Value: $1,000,000

Naturally the future value will change if you change the other numbers but this is a good baseline to start with. The trick is to find a good solid investment that’s going to give you that return on a consistent basis. That’s where your Community Financial Institution comes in. Generally they have investment advisors that can help.

Once you have the plan all you have to do is save the money.