Outside Economics

The Man Who Killed the Bank

Posted by Wendell Brock, MBA, ChFC on Tue, Aug 26, 2014

Long before we had the Federal Reserve Bank or the FDIC to insure the deposits of the general population, banks had to manage their deposits and losses on their own. In the early days of our Republic there was not branch banking or mega large banks run by powerful people. It wasn’t until the latter-half of the 1800’s that banking started to become really big business.

In the moral relativism of today's society, principles are sold out for pragmatism, making courageous stories like Andrew Jackson's as rare as gold-backed currency. Much could be learned by the study of Andrew Jackson's stand against the "moneyed-interest" drive to re-charter the Second National Bank. The following is a shortened account of this historic battle between the President Andrew Jackson of the United States of America versus President Nicholas Biddle of the Second National Bank.president07 Andrew Jackson 8x8 72

Jackson lived in the thriving American West, witnessing first hand the dire effects of inflationary banking policies in the western land prices. Jackson learned the salutary lesson of hard money (gold and silver coins) versus the prevalent paper based inflationary policies loved by bankers and wealthy merchants. Inflationary methods allowed banks to print paper, pretending the paper had value, even thought it wasn't backed by gold or silver. Without a check on the banks, like requiring banks to submit gold for paper dollars when requested, one can easily see how banks would fall into the trap of printing more paper than could possibly be redeemed on demand.

When Andrew Jackson was elected President of the United States, one of his missions was to end the syndicate of control over America's money supply by three power hungry groups: foreign interests, big business, and big politicians. Jackson believed that banks ought to run like any other businesses, having to sink or swim based upon their own business acumen, and needing reserves to secure their loans provided.

Nicholas Biddle was the president of the Second National Bank. The Second National Bank received the deposits of America, ensuring its solvency, and providing a special deal for the bank and its investors at the expense of other banks as well as the customers. When Jackson was elected president, Biddle was not alarmed with his rhetoric, having heard many politicians boast of drastic changes when entering office, only to conform into the system when elected. But Jackson's character was different; his campaign promises aligned with his actions after his election, necessitating a showdown between the President and the money interests behind the Bank.

Jackson shared his disdain for the Bank in his first Presidential message proclaiming, "Both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens, and it must be admitted by all that it has failed in the great end of establishing an uniform and sound currency."

Biddle seemed unconcerned initially and responded to Jackson's message with cool indifference. He wrote of Jackson, "They should be treated as the honest though erroneous notions of one who intends well." Clearly, Biddle did not believe Jackson had the courage or fortitude to fight against the entrenched money-interests feeding off of America's body politic. However, once Biddle realized Jackson's earnest intentions to end the Bank's charter he quickly rallied his political supporters to his cause.

Using smear campaign practices similar to those used by today's politicians, as well as threats of calling all the loans currently out on the American people, Biddle ramped up intimidation against Jackson in the attempt to thwart his policies. Jackson was unmoved. And when a recharter bill for the bank that had passed in both houses was placed on his desk for approval right before his re-election, he courageously vetoed it, knowing that he couldn't go against his principles that a truly free society must be based on a sound monetary system.

Following through on the threat he had hoped would sway the President, Biddle launched a campaign of loan closures across America, causing financial panic among the state banks and business community. They were forced to either pay back their loans or collapse into insolvency. State banks and businesses screamed for relief, appealing to Jackson to end the war and submit to the Bank's recharter.

Jackson denounced the Bank's action to his cabinet. The numerous bank and business closings only steeled Jackson's resolve to end Biddle's undue influence in the American economy. Many state leaders, awakened by the inordinate power that the Bank held over the economy, began to recognize the truth of Jackson's veto claims. In truth, the President believed that any power capable of causing a panic of this magnitude was not healthy for the freedoms of the American people.

Biddle truly believed, that by causing harm and suffering in America, he could control the political leaders of our country. In hindsight, had it been any other President besides Jackson at this time, he would have been right. Jackson, however, stood his ground and eventually won the Bank war, despite receiving many battle scars along the way.

Jackson did not use his veto pen to get re-elected, he simply believed that fiat money was wrong for our country. The election result: he won by a landslide! He proved that a person with conviction and character can stand his ground and win, no matter the size of the forces aligned against him. Boldly, at one point in the battle, Jackson told his Vice-President Martin Van Buren, “The Bank is trying to kill me. But I will kill it." Jackson's example demonstrates a leader's powerful effect upon others. When a person has the courage to stand strong, he strengthens the spine of others who recognize the truthfulness of his fight between right and wrong.

Andrew Jackson was a man of strong convictions. He stood by his love of liberty even when it hurt him politically to do so. It takes courage to stand by one's convictions, especially when a person is offered peace and financial rewards to surrender them. Courage isn't the absence of fear; rather, it's the acknowledgment that one's principles are bigger than one's fears, regardless of the consequences.

$20 Bill

Courage, just like lack of courage, is contagious. Character is courage and integrity combined. Integrity is identifying what is right and courage is the ability to stand for truth even when it hurts. Jackson accomplished many things in his life, both militarily and politically. However, I believe his finest hours were in his courageous stand against the Second National Bank. May today's leaders learn similar courage in today's fight against tyranny.

Topics: Bank, Federal Reserve Bank, FDIC

Offensive Taxes

Posted by Wendell Brock, MBA, ChFC on Thu, Aug 14, 2014

Hardly anyone likes taxes, but some are more offensive than others. Here are three that are pretty big offenders. I don’t think folks mind paying some taxes, but it’s when it takes nearly five months of work to hit tax freedom day that it becomes a greater burden. Not to mention the waste that is found in government, so these three taxes can and ought to be fixed.

Alternative Minimum Tax - AMT

Once upon a time, Congress dreamed up the alternative minimum tax (AMT), which is an add-on to the “regular” federal income tax. The stated reason for the AMT was essentially to make sure that the rich who benefit from multiple federal income-tax breaks still have to pay at least something to the Treasury. Oddly enough, the rules for this tax were poorly crafted, thereby allowing for creative math to come into play, of course, erring on the side of the IRS.TaxReady

One can consider the AMT as a separate tax system. The AMT will affect certain types of income that are tax-free under the regular tax system, while not allowing some regular tax deductions. Also, the maximum AMT rate is “only” 28%, versus 39.6% under the regular tax system.

The most likely AMT victims are upper-middle-income individuals who pay relatively high state and local income and property taxes and have spouses and kids. The truly rich ($750,000+) are rarely affected, and this is for two reasons.

First: Their marginal regular federal income rate is 39.6%, while the maximum AMT rate is 28%. So the regular tax bill for a person with really high income will usually exceed the AMT bill. On the other hand, folks in the upper-middle-income zone may have enough regular tax deductions that they pay an average regular tax rate lower than the AMT rate. If so, they will get hit with the AMT.

Second: Many tax breaks for really high-income folks are already cut back under regular tax rules before they even get to the AMT calculation. For instance, the passive activity loss rules restrict tax benefits from traditional tax-shelter investments like rental real estate and limited partnerships. And if your income exceeds certain limits, you’ll run into phase-out rules that chip away or eliminate your personal and dependent exemption deductions, your biggest itemized deductions, and your tax credits. So you may have little or nothing left to lose under the AMT rules. In contrast, folks in the upper-middle-income zone often have lots to lose, such as significant deductions that are allowed for regular tax but disallowed under the AMT rules. As a result, they wind up owing the AMT.

You are allowed a relatively generous AMT exemption, which would be the equivalent to a deduction when calculating your AMT bill. But unfortunately, the exemption is phased out at higher income levels. If your AMT bill exceeds your regular tax bill, then of course you will owe the higher AMT amount.

Varying factors make it difficult to figure out who will be affected by the AMT and who won’t. But here are some general guidelines:

  • Your income is high enough ($250,000 or more) that a good part or all of your AMT exemption is phased out.
  • You have relatively hefty deductions for state and local income and property taxes under the regular tax rules (say, $20,000 or more). These deductions are not allowed under the AMT rules.
  • You have a spouse and several kids, which translates into four or more personal and dependent exemption deductions under regular tax rules. These deductions are not allowed under the AMT rules.
  • You exercised an in-the-money incentive stock option (ISO). The so-called bargain element (the difference between the market value of the shares on the exercise date and the ISO exercise price) does not count as income under the regular tax rules, but it counts as income under the AMT rules.
    • You have a significant deduction for home equity mortgage interest. Under the regular tax rules, you can deduct interest on up to $100,000 of home-equity loans. But under the AMT rules you can only deduct interest on loan balances of up to $100,000 that are used to acquire or improve a first or second residence.
    • You have write-offs for miscellaneous itemized deduction items (such as investment expenses and fees for tax advice and preparation) under regular tax rules. These deductions are disallowed under the AMT rules.

Social Security or FICA Tax

The second tax that has some serious flaws is the Social Security tax. It can be just as expensive as the federal income tax for many folks, especially self-employed individuals.

If you are an employee, your wages will be reduced by the 12.4% Social Security tax up to the annual wage ceiling. Half the Social Security tax bill (6.2%) is withheld from your paychecks. The other half (also 6.2%) is paid by your employer.

Unless you closely examine your pay stubs, you may be completely unaware of how much the Social Security tax is actually costing you. Potentially, a lot! The Social Security tax wage ceiling for 2014 is $117,000, and it will be even higher next year. If your wages meet or exceed the $117,000 ceiling for this year, the 2014 Social Security tax hit will be a whopping $14,508 (12.4% x $117,000).

If you are self-employed as a sole proprietor, partner, or limited liability corporation (LLC) member, you know the full cost of the Social Security tax all too well. That’s because you must pay the entire 12.4% rate out of your own pocket, via the self-employment tax.

But there is a disconnect between the Social Security tax and the benefits. While the Social Security tax ceiling increased by 2.9% from 2013 to 2014 (from $113,700 to $117,000), Social Security benefits only increased by 1.5%. This scenario has occurred routinely in the past few years, and they aren't stopping now! According to Social Security Administration projections, the Social Security tax ceiling in 2022 will be $165,600, which equates to a $20,534 Social Security tax bill (12.4% x $165,600). That is a hefty tax, especially considering it is in addition to regular income tax as well as all the other taxes!

Social Security Benefits Tax

And this leads us to the third unfair tax. When you start receiving Social Security benefits, you may be surprised to discover that between 50% and 85% of your payments get hit with federal income tax (the taxable percentage goes up with your income). Incredible, right?

As I just explained, you already paid Social Security tax years ago in the form of withholding from your wages or the self-employment tax. Plus, you already paid federal income tax on those Social Security taxes years ago, because they were included as part of your taxable salary or self-employment income. Now you are paying tax on the benefits too. That amounts to double taxation, or maybe even triple taxation depending on how you look at it. While retirees with very low income, less than $32,000 per year, won’t get taxed on their Social Security benefits, everybody else will take a hit.

Tell us what you think about these taxes are they a burden on your family? How would you solve the problem of these taxes?

Topics: Social Security, Alternative Minimum Tax, AMT, Social Security Benefits, income tax

Economic Bubbles and What to Do

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 08, 2014

Is there any doubt that we are living in a bubble economy? At this moment in the United States we are simultaneously experiencing a stock market bubble, a government debt bubble, a corporate bond bubble, a bubble in San Francisco real estate, a farmland bubble, a derivatives bubble and a student loan debt bubble.

carbon bubble

Another very troubling bubble that is brewing is the massive bubble of consumer credit in the United States. According to the Wall Street Journal, consumer credit in the United States increased at a 7.4 percent annual rate in May. That might be okay if our paychecks were increasing at a 7.4% annual rate, but that is not the case at all. Instead, median household income in America has gone down for five years in a row.

This pattern of bubbles is not isolated to the United States alone. In fact, the total amount of government debt around the world has risen by about 40% just since the last recession. It is never sustainable when asset prices and debt levels increase much faster than the overall level of economic growth. At some point a massive correction will happen. History has shown us that all financial bubbles eventually burst.

You know that things are serious when even the New York Times starts pointing out financial bubbles everywhere. Their definition of a bubble is “when the price of everything blasts upwards, obliterating the previous ceilings of historical benchmarks, it's a pretty good indication that you're in a bubble.”

The bubbles in the financial markets have become so glaring that even the central bankers are starting to warn us about them. For example, just consider what the Bank for International Settlements is saying:

“There is a common element in all this. In no small measure, the causes of the post- crisis malaise are those of the crisis itself – they lie in a collective failure to get to grips with the financial cycle. Addressing this failure calls for adjustments to policy frameworks – fiscal, monetary and prudential – to ensure a more symmetrical response across booms and busts. And it calls for moving away from debt as the main engine of growth. Otherwise, the risk is that instability will entrench itself in the global economy and room for policy maneuver will run out.”

This is quite a harbinger coming from the BIS. As for the “room for policy measures running out,” according to Jim Rickards, author of Currency Wars and The Death of Money, the Fed has two options at this point, they can continue to taper off the mass printing of money, which he says will lead to another recession within this depression. Or if they don't continue to taper, perhaps have a pause in printing and they increase their asset purchases, then that will signal to the market that the Fed must keep on printing and it will trigger hyper-inflation. This will cause the dollar to collapse and gold prices to increase.

According to the minutes from the Fed's June 17-18 meeting, the Federal Reserve is leaning towards ending the economic stimulus in October. Fed policymakers have been tapering their government bond purchases in $10 billion increments at each meeting since December, cutting them to $35 billion a month from $85 billion. At that pace, the Fed would be buying $15 billion in Treasury bonds and mortgage-backed securities by its October meeting.

Yet while Fed officials are planning on halting the bond buying, closing out the program will have another side-effect. The bond purchases have held down long-term interest rates for several years, spurring purchases of homes and factory equipment. The Fed has been planning on increasing the interest rates sometime in 2015, after all, they can't stay suppressed forever.

With all the bubbles that are out there, what will happen once the interest rates increase?

Is this sustainable?

Of course not.

None of these financial bubbles are.

So, what to do?

Now is a good time to be considering other options such as precious metals. Precious metals have always been an important part of a well-rounded portfolio. But with all the economic uncertainty out there, many people are beginning to insist on having some sort of precious metal not just in their portfolio, but in their hands. There are even a few states who have recently voted to accept gold and silver as legal tender. There is a reason why these precious metals have been the currency standard since Biblical times. In short, they don't lose their value.gold vs silver

There are many naysayers out there arguing that buying gold and silver is a foolish investment. Perhaps as an investment, they are right. But as a type of insurance against the consequences of the monetary manipulations and bubbles that are within our economy, maybe having some gold or silver in your hands becomes wisdom. How much to have dependes on your personal situation, 

We really don't know what the economy will look like in the next few years. We can look at history to see what typically happens when this type of mix of bubbles and monetary manipulation come in to play. We would be foolish to think that the results that happened then could never happen to us. Common sense tells us to be prepared. What does being prepared look like for you? I believe it is far easier to be prepared than to try and predict the future.

Topics: Economy, Gold, Precious Metals, Silver, Economic Bubbles

Social Security; The Qualitative Dimension

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 01, 2014

Last week I discussed some of the factors that go into the decision about when to take Social Security. The discussion was primarily based on working the numbers and coming to the basic conclusion that it is an entirely individual choice based on one's financial situation. This week I want to add to this discussion some of the qualitative aspects of life that should not be neglected when making such a decision.

To give an example of what I have in mind for this discussion, consider some of these questions: Will I be better able to do some of the things I have always wanted to do if I take Social Security earlier rather than later? If I wait on taking Social Security will I have the stamina, interest and motivation to do the things I want to do now, later in life?

Last week I showed that the payout is often larger by waiting a few years to take Social Security, however, will waiting enhance the quality of your life? Would you be wiser to take it at a younger age and use the lesser amount to fund some of the life experiences (travel, toys, etc.) that you may not have the stamina or interest to pursue later in life?

The US Travel Association reports that the average age of leisure travelers is 47.5 years old. Mature travelers comprise 36 percent of leisure travel volume (18% are 65+, 18% are 55-64). Nearly two in ten (19%) are 45-55, 17% are 35-44, 20% are 25-34 and 8% are 18-24 years old. I give this statistic because many people dream of traveling once they retire. The majority of travelers- 36%- are over age 55. Will you have the money and the stamina to fulfill your travel dreams? Would the decision to take Social Security earlier help you reach that goal?

The American Psychological Association reports that a number of physical changes occur as adults reach age 65. The most common are listed below.

  • Hearing impairment among older adults is often moderate or mild, yet it is widespread; 48 percent of men and 37 percent of women over age 75 experience hearing difficulties.
  • Visual changes among aging adults include problems with reading speed, seeing in dim light, reading small print, and locating objects.
  • The amount of time it takes to respond to features in the environment once they are detected is typically slower among older adults.
  • The proportion of older adults needing assistance with everyday activities increases with age. Nine percent of those between ages 65 and 69 need personal assistance, while up to 50 percent of older Americans over 85 need assistance with everyday activities.
  • The top five causes of death among older adults are heart disease, cancer, cerebrovascular disease (relating to the blood vessels that supply the brain), pneumonia and flu, and chronic obstructive pulmonary disease. In spite of a decline in physical health, two-thirds of older adults who are not living in institutions (such as nursing homes) report their health to be good, very good, or excellent compared with others their age. What's important to remember about people over age 65 is that while many begin to experience some physical limitations, they learn to live with them and lead happy and productive lives.

These statistics can help us factor in the very real changes in health that we experience as we age. Not that everyone will experience some or all of these health challenges, but to simply acknowledge that the older we get, the more physical limitations we can expect. What do you want to do with your life before physical limitations set in that would thwart your dreams?

The point is that there is a qualitative dimension to this choice that is often overlooked or ambiguously lumped in the statement of 'individual choice'. People often forget to take into consideration the aging process with its diminished energy and somewhat constricted abilities, and therefore run the risk of not achieving their dreams and dying with a pot full of money. Abraham Maslow once commented that you can pay too much for money.

In researching for this article, I wondered, how are seniors spending their money? Below is a chart showing the top five areas that seniors are spending their money. It may surprise you to see education listed. This is typically due to either contributions to a grandchild’s college fund or else paying off college loans that were co-signed by the seniors.

Age Stats 1

Now see how those expenditures change as seniors age past 75.

Age Stats 2

Seniors spending reflects their hobbies. For 65 to 74 year-olds, for instance, notice that two of the top five fastest-growing expenditure categories are miscellaneous entertainment, which includes exercise equipment, photography equipment, campers, boats and other motorized recreational vehicles, and electronics; and pets and hobbies, which not only includes expenses for pets and pet supplies, but also toys, games, tricycles and playground equipment.

The Baby Boomers are far more active than their parents were. They have traveled more places, participated in more sports, and likely climbed more mountains. All resulting in an active lifestyle, that will be interesting to watch as they continue to age; how and when will they start to slow down?

According to the Bureau of Labor Statistics, the number of seniors age 75 and older are around 12,147,000 with a mean after-tax income of about $34,245 and a mean expenditure of $34,395.

One more thing that is noteworthy to mention is that 25 years ago, the credit card debt of seniors was negligible, and now it is around $5000 for seniors aged 75 years or older. I hope these statistics give you an idea of how to plan for your senior years. It isn't just about the numbers, but it is very much about the quality of life you want to maintain during those years.

I would like to share the story of a dying 85 year old man imagining how he would've lived his life differently if given the chance. It is found in the book Living, Loving & Learning by Leo Buscaglia, who discovered it in a journal of humanistic psychology.

He says, "If I had my life to live over again, I'd try to make more mistakes next time. I wouldn't try to be so perfect. I would relax more. I'd limber up. I'd be sillier than I've been on this trip. In fact, I know very few things that I would take so seriously, I'd be crazier. I'd be less hygienic. I'd take more chances, I'd take more trips, I'd climb more mountains, I'd swim more rivers, I'd watch more sunsets, I'd go more places I've never been to. I'd eat more ice cream and fewer beans. I'd have more actual troubles and fewer imaginary ones.

You see I was one of those people who lived prophylactically and sensibly and sanely hour after hour and day after day. Oh, I've had my moments, and if I had it to do all over again, I'd have more of those moments. In fact, I'd try to have nothing but beautiful moments- moment by moment by moment.

I've been one of those people who never went anywhere without a thermometer, a hot water bottle, a gargle, a raincoat, and a parachute. If I had to do it all over again, I'd travel lighter next time. If I had to do it all over again, I'd start barefoot earlier in the spring and stay that way later in the fall. I'd ride more merry-go-rounds, I'd watch more sunrises, and I'd play with more children, if I had my life to live over again. But you see, I don't."

The bottom line is that as we age, we may not want to travel as much, go out to the movies as much, or visit great grand-children who may be graduating from Kindergarten (as important as that may be). We may simply choose to stay closer to home and do less, simply because our perceived needs are changing and we discover that we want less. While this may be the case, and it is hard to predict, exactly how we will live at that age, choose to be happy with what you have. Manage your affairs so that when you do take Social Security it works for you and your life style, not just by the numbers. 

Topics: retirement, Social Security, Baby Boomers


Wendell W. Brock, MBA, ChFC

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