Step3 Prophet

The Relationship between Money and Debt

I read an interesting post at Mymoneyblog.com (one of my regular reads) the other day entitled Where Does Money Really Come from? The author posted a flash video that I think everybody should watch(he didn't create it, he just found it). It outlines the fundamental concepts behind our modern banking system, and in some ways is quite scary. The animation is hokey but the lesson is vital. The last 15 minutes of the video get all conspiracy theory on you, so take what you will from it. 

I think he is spot on when he says exponential growth cannot be maintained infinitely in a world with finite resources. Eventually the world will have to find a sustainable equilibrium between people and resources. I just hope we won't bypass that equilibrium point too far before we realize it.

I think this video also explains some of the reasons behind inflation as well.

The video's author dosen't really account for all the money losses though. For example, right now banks are buying other banks( and their assets) for a fraction of what they are "worth". When business fail they take a chunk of money out of supply. When a companies stock price plummets, it takes a lot of peoples money with it. These factors mitigate the overall money supply and inflation rate.

His idea of a system where there is no interest, and where government taxes and money creation control the money supply,  seems to be trading one set of rules for a different set, with the net sum being zero.  The idea that if the government had no more interest payments to make, there would be more money for infrastructure is true under our current system, but would it be true under his proposed system? My instinct says no.

His views on interest are somewhat simplistic as well. Lending money at 0% interest is unsustainable because not all loans will be repaid. No one would lend money when the profit is zero but the losses are greater than zero. Furthermore, the interest to repay a loan does not need to increase the overall money supply. A person (or business) makes choices about how to spend their money. Some of it goes to food and shelter, and some of it may go to interest, or it may go toward a flat screen television instead.

The video's assertion that if there were no debt there would be no money under our current system is ridiculous. In that case the supply would reach equilibrium and interest rates would go to zero on money deposited in a bank, because there would be no major lending going on.

And finally, do bankers really want to own and control society? Hardly. They don't want to own everything, because owneing things is expensive. It's much easier to just deal with money. As for control, it depends on how much you let them control you. If you have no debt, then they have no leaverage. His assertion that banks would promote certain industries while suppressing others seems kind of strange too. I think greed will win out every time. If there is money to be made, the bankers will support.There is also the Federal Reserve to contend with.

Weekend Update - music, food, and politics

To escape from the drudgery of work I took a few days off this weekend. I was going to take Thursday through Sunday off, but it ended up that I had too much unfinished business on Thursday, so I did Friday through Sunday instead.

This turned out to be an good weekend. I did a lot of sleeping in to catch up on my rest. Mel came over on Thursday and telecommuted from my place on on Friday. Then we went over to her place for Friday and Saturday night.

On Friday, on the way over to Mel's place we picked up my 4th Designed Dinners order. They brought back calzones this month, so I'm excited about that. As a gift for picking up the order early, the manager gave me a bottle of Black Opal Cabernet Merlot. Mel says she likes some other varieties they produce, and I've heard good things about Australian wines, so I'm looking forward to trying it out.

On Saturday we went around town with Mel's brother, who was visiting Seattle as part of a gig. He's in the U.S. Army Jazz Ambassadors band, who were playing with the Seattle Symphony at the Beniroya hall. That afternoon we watched the new Futurama Movie "The Beast with a Billion Backs" and for the evening he got us comp tickets to the show. It was an impressive review of Jazz history, along with some performances by up and coming young jazz artists. Afterward we saw two other Seattle landmarks, The Lusty Lady and Deja Vu.

Today I'm taking it easy while Mel does her thing at a fiber festival. I've started adjusting my investment contributions to match the plan I came up with last week. The sticking point is which bond fund to invest in, and how? I'm leaning toward waiting until the start of next year and buying into a fund as part of my 2009 IRA contributions. I'll save the money now, so that when January hits I'll buy the fund right out with new money instead of stealing from my existing IRA contributions. Putting it in my IRA has a lot of advantages. Since these types of funds pay large dividends regularly(quarterly, or even monthly), keeping them in a tax advantaged account makes sense. In a regular investment account you would owe taxes on all those interest payments. When I buy the bond fund, I may just make all of my IRA contribution at that time. That way I don't have to think about it for the rest of the year. It would simplify the number of monthly transactions I make for my investments.

Another piece of business I took care of today is canceling my Netflix subscription. While I'm a firm believer in the product, I just don't have the time to watch enough DVD's to make it cost effective. I tend to value a product or service by how often I use it. With the amount I'm using Netflix recently, I think I'd be happier keeping the $15 a month. Soon to be on the chopping block: XM radio. It's a another service I really like, but don't get to enjoy very often these days.

Finally, I filled out my absentee voter registration card. I'll send it out in tomorrow's mail( along with my last netflix dvds). I've been putting off doing this for a while, but I think I'll be able to get the letter in under the deadline. If I don't make it I won't be too disapointed since I'm not very enthusaed about either candidate. Charles Wheelan over at the Yahoo! finacial expert page does have some interesting points to make though.

Asset Allocation

Several weeks ago I did a post on my current financial state. Actually, it was more of a current paycheck allocation, but that can tell you a lot about your financial state. Today I'll examine my current investment allocation and determine if/when I want to change it.

 I started out when I got my first real bonus and decided to invest it for my future ( I was 20 at the time). I was pretty dumb about finance back then, but I did a little research and decided that Vanguard's S&P 500 was the way to go. Not a bad choice, but I should have opened up a Roth IRA instead of a regular account. I fixed that mistake a few years later, but some damage has been done. As my savings ( and income) has increased I've branched out into other areas. Currently all my investments are in high risk, high potential return investments. The bulk is in the S&P 500 index through various companies , with the rest being in other P2P loans, small cap stocks,  Emerging Markets, REITS(Real Estate Investment Trusts), and individual stocks. That sounds like impressive diversification, but really it's more my love of trying out new things than a plan.

So far I've avoided bonds and other guaranteed "safe" investments because I figured that I'm young and can handle the risk. If my portfolio were to drop 50% in value I wouldn't like it, but I'm not counting on using it until decades from now. As I've become more savvy about personal finance, I've realized that a certain amount of safe investments can serve as a gauge for my high risk investments. When used with an asset allocation plan, the periodic rebalancing can help you maintain the gains your portfolio achieves in good times, and be a "buy" indicator in rough market time.

I've had this demonstrated to me personally in the past year by my emerging market fund. I bought it in '06 for about $22 a share. Last year its value went up to $35 a share at one point ( I thought I was a financial genius!), but now it's back down to ~$23. Since I did monthly investments, it turns out that my average share cost is greater than the current share price. If I had had an asset allocation plan in place, I could have sold excess shares of the emerging market fund at a good price ( or better yet, bought less and invested in other areas instead).

So here is a snap shot of my current investment allocations:

S&P total	38.63%
P2P Loans	16.71%
Small Cap	12.57%
International	13.50%
REIT	10.32%
Individual Stocks	8.28%
Bonds	0.00%
SUM	100.00%

The table shows that I'm heavily weighed in large American companies and P2P loans. followed closely by Small Cap and International stocks. When you consider that my individual stocks are also large American companies, they make up about 46% of my portfolio. This isn't necessarily a bad thing, but I think my allocation should be heavier in other areas. I want a more exposure in the international and REIT areas, and while I think P2P loans are a lot of fun, I'm probably over exposed to them right now. I would also like to add a bond fund for several reasons. It is a way to mitigate risk while at the same time giving indications of how well my high risk investments are performing. The stocks should out pace the bond fund during the good years, and under perform it in bad years. By maintaining the allocation, I buy low and sell high. Also, it gives me a place to quickly reallocate if a stock fund goes wild.

I want to have the bulk of my portfolio in high risk, high return investments. To keep up with inflation and get ahead of the game there is really no other way. I'm happy with my current investments and have reasons for owning each of them. Most of my investments  are uncorrelated (except my individual stocks and the S&P 500) which means that when one is doing poorly, the other can help make up for it. Granted, the current economic downturn is based on real estate, so at the moment my REIT and the general market are correlated, but I don't expect that to last for more than 5-10 years.

My current ideal allocation would look something like this:

	Current	Goal
S&P total	38.63%	25.00%
Loans	16.71%	10.00%
Small Cap	12.57%	10.00%
International	13.50%	20.00%
REIT	10.32%	15.00%
Stocks	8.28%	10.00%
Bonds	0.00%	10.00%
SUM	100.00%	100.00%

Now, how do I get there? A quick reallocation now might be interesting, but I would incur a number of tax penalties that I would like to avoid. Instead I think I will just reallocate where I put new money. By adjusting how much of each investment class I buy, I can gradually shift the allocation while not incurring any tax penalties.

Wow, for the first time I have a plan. I'm pretty sure it's a good plan based on the hordes of financial magazines, books, and online articles I've read(the hordes really applies to the online articles part). In a future article I'll look at where this plan will take me in the next 10-15 years. This is just the staring point really. As the saying goes, a plan is just a place to start deviating from.

(Photo by Wendibular via Flickr)

I've got those working blues

Lately work has really been getting me down. I've been working 12-15+ hours a day, which really sucks because I'm on salary. It's also left me with very little time to blog. When I've been able to get away for a little while, I spend time with my girl friend and take care of those little things like laundry, dishes, and making a lunch to take to work. Special thanks to Mel for helping me with the household chores.  The one bright spot(besides seeing Mel) was going sailing last Sunday after I got off work. The weather was phenomenal and a friend of mine knows how to sail a little catalina type boat, so Mel and I went sailing with him on Sunday. We sailed around the sound for a few hours, and I got a horribly moderate sunburn on my legs (I was wearing a jacket for the wind, so my arms are fine). It's moderate because I won't be peeling, but I was darn close.

I didn't even have time for my regular Aerogarden update. Oh well. This job has taught me a lot about priorities. If you have to set prorities, something isn't getting done. It's also shown me how difficult it can be to try and meet a million different requirments with an undermanned staff. I'm still learning how to get organized enough to at least remember what I'm neglecting to do.

First of month net worth update

Once again I've updated my overall financial activity on NetworthIQ/Step3 . I've pulled finally pulled out of the slump from 2 months ago! Click on the link to see all the not too transparent details!

Major changes this month:
-Retirement accounts are up due to my REIT activity. Non-retirement stocks are up only due to cash infusions (ie: buying more)
-Credit card debt and cash are both way up due to 0% APR arbitrage plan and aggressive saving.
As a side note, For my cash cushion goal total I only count the portion of my money that's in my high interest savings account and NOT needed to payback my 0% credit card loan.
-Loans are flat as I had to write off some of my defaulted loans. I've been taking money from LC and putting it in Prosper during LC's quite period.

Also this month, I plan to come up with a financial allocation plan, as run some projections on how my net worth will change of the next 10-15 years with that allocation plan.

Aerogarden Tomato 21th week update

What crazy week I've had. Despite that, things are going well for the garden. I spent a little bit of time today clearing out dead leaves and dying branches, and looking at the health of the plants overall. Both remaining plants seem to be in good order. They both have new growth shooting out every which way, and tomatoes are growing at a good rate also. I have several bunches that are ready for harvest, if I can figure out what to do with them. Maybe I'll pack them in my lunch tomorrow. The wide view pic shows the left most plant has a stalk running up above the light canopy again, as well as its predecessors who've succumbed to gravity. Here is a close up of the bunch in the lower right corner of the wide view pic.

For more aerogarden madness, check out my garden tab.