The student loan debt crisis: How it started and where it's going

This guest post is contributed by Katheryn Rivas, who writes for online universities blog.  She welcomes your comments at her email Id: katherynrivas87@gmail.com.

If you have student loans or if you keep abreast of current events, you've likely heard the statistic that for the first time in history, student loan debt has surpassed credit card debt, closing in quickly on a trillion dollars. Many economists fear that the next debt crisis will be a fall out from student loans, as tuition and student loan interest rates skyrocket and as college degrees become increasingly necessary entrance tickets to the workforce. Making matters worse is an employment landscape that is especially bleak for young graduates.

Over the past two years, student loans have been hotly contested in the media and among average citizens. In fact, one could argue that a very significant part of Occupy Wall Street was composed of students who felt helplessly engulfed in student debt that they couldn't afford to pay back. The reasons for mounting student debt are various, but perhaps the biggest reason is that tuition rates are far outpacing the rate of inflation. Even state university tuitions, which typically have been drastically lower than private university tuitions, are unaffordable for the average family.

Completing a college education, for the average American, necessitates taking out on average $23,000 in loans for a bachelor's degree. Because student enrollment in college is so high, a bachelor's degree, while certainly a requirement for most good jobs, is not necessarily a guarantee of securing a good job as in the past. There are just too many bachelor's degree holders out there, all competing for a small number of jobs. Another factor in the student loan debt crisis is that students, who are often a mere 18 or 19 years old when taking out these crippling loans, don't necessarily always understand the magnitude of their decision nor the precise terms of repayment.

There's been talk in the media, too, of a student loan debt bubble similar to the mortgage crisis, which was responsible for igniting our current economic depression. While there's certainly something to be said for this theory, it's unlikely since, unlike subprime mortgages, student loans are mostly backed by the government, and the government often goes to extreme lengths to guarantee repayment, even if it means wage garnishments, tax levies, repossession of homes, etc.

Essentially, student loan debt won't bring our economy down to its knees, but it certainly has kept our economy down since so many former students are paying back loans instead of putting money into the economy by making purchases. Congress has discussed various ways of fixing the student loan debt crisis. Some of the proposed legislation discussed recently includes the Student Loan Forgiveness Act of 2012, which would use various measures to help distressed students repay, like improving the public works option to forgive debt, as well as enabling former students to refinance loans.

For those of you mired in student debt, be on the lookout for government legislation that can potentially help you. The most important thing to remember is that there are various options you have already before defaulting, including a deferred payment plan for low-income earners and loan consolidation. Defaulting on student loans almost always spells certain financial ruin.

Benefits of Recharacterizing Individual Retirement Account Distributions

Image attribution: SaraJennMarketing, CC by S.A. 3.0

 Recharacterizing an Individual Retirement Account contribution is a financial mechanism that enables account owners to transfer money deposited into one IRA to anther type of IRA. The reasons for recharacterizations vary, but if done for good reasons recharacterizing of IRA contributions can outweigh the drawbacks allowing for several possible advantages in terms of financial and tax planning.

• Avoids withdrawal penalty

If done properly, an IRA recharacterization will be performed by the account trustee via a direct transfer of funds per Internal Revenue Service Publication 590. Since direct transfers don't involve the account owner receiving the money it can't be considered income by the IRS. This method of moving money between retirement accounts is advantageous because it avoids tax penalties associated with indirect withdrawals i.e. via the account owner.

• Reverses a conversion

IRA recharacterizations can also be used to reverse a conversion. A conversion occurs when funds in one type of IRA are rolled over to another type. The IRS does not allow a conversion and recharacterization in the same year, however a recharacterization of a previous tax year's conversion is possible. An important advantage of reversing a conversion to a traditional IRA is after tax contributions may grow tax free if it is recharacterized to a Roth IRA; this is because traditional IRA earnings are only tax deferred. 

• Extended recharacterization

So long as an original IRA contribution was made before the April tax filing deadline, and a tax filing was made on time, recharacterizations can take place up until October of the following tax year according to the IRS. The advantage of this is the six months of extra time may be beneficial when making financial decisions where more time is needed to assess the value of that decision.

 • Lower Adjustable Gross Income

Section 1.408A-5 of Title 26 of the U.S. Code states IRA's to which contributions have been recharacterized to can be treated as the basis of contribution for tax purposes. For example, recharacterization can be beneficial to the tax payer if recharacterizing from an after tax Roth to a tax deferred traditional IRA. Moreover, if the tax filer has income taxable at 25 percent but can lower this to 15 percent by recharacterizing after tax contributions to tax deferred contributions via recharcterization to a traditional IRA, then the recharacterization may be advantageous.



• Reallocates retirement funds

Another advantage of recharacterizing IRA contributions is it provides an opportunity to correct erroneous financial planning decisions. For example, a $2000 was deposited into a traditional IRA, but later the account owner realized it would be more beneficial from a financial planning perspective to have made the deposit into a Roth IRA. By recharacterizing the $2000 as a Roth IRA deposit the account owner is in effect reallocating the IRA contribution.

The process of re-characterization can become rather complicated by direct transfers between accounts, the filing of additional IRS forms and the back calculating of earnings or losses incurred within an IRA during the period prior to re-characterization. If however, the benefits of recharacterizing are worth the additional time and/or money spent performing the recharacterization, it may be a good idea to recharacterize IRA contributions. In any case, it may be a good idea to first consult with the IRS or a qualified tax planner before deciding to recharacterize IRA contributions to make sure it is the right financial decision.

Financial News 03/29/2012

• NYT: Federal Reserve Bank appears to be serving special interests
• BEA: Q4, 2011 GDP latest estimate is 3%
• Bloomberg: SEC oversight of hedge funds higher under Dodd-Frank Act
• BI: Inflation, low VIX, & flat yield curve are investment warning signs
• MW: Alaska, Nevada and South Dakota among retirement friendly states
• DOL:  359,000 jobless claims were filed the week ending 03/24/2012
• AP: Spanish workers strike over austerity based labor reforms
• Irish Times: European Commission moves to lower cell-roaming charges
• BBC: Auto gas crisis pending prior to logistics strike

Is The Iraqi Dinar Worth Investing In?

 Image attribution: U.S. Navy, US-PDGov

When one dollar is equal to over a thousand Iraqi Dinars one might experience significant pause as to whether investing in the Dinar is a good idea. The Iraqi Dinar has been valued between approximately 1,150-1,200 per U.S. Dollar since January 2009 despite the significant depreciation of the dollar since then.

What this low fluctuation in the Iraqi Dinar's value means is either the Iraqi Dinar is being held around this price via monetary policy or that market forces have allowed it to appreciate at a pace similar to the depreciation in the dollar. According to the CIA World Factbook, the former is the case. Either way, the Dinar has not increased in value a great deal for over two years, and therefore does not appear to have provided a fabulous return on investment in that time.

Currencies that are valued via monetary policy are less likely to fluctuate in value. In the case of Iraq, the central bank's steadying of the Dinar's valuation beginning January 2009 halted what appeared to be a decline in value. In doing so, the currency maintained its purchasing power but became subject to the Central Bank of Iraq's decision making processes. In other words, via close oversight by the Iraqi Central Bank, the valuation and hence the return on investment on the Iraqi Dinar would in effect be determined by the decisions made by that bank and investors' ability to capitalize on price movements within the Dinar's historical range.

Even if the Iraqi economy improves in terms of Gross Domestic Product, the valuation of the Dinar will not necessarily improve along with it. This is evident in the International Monetary Fund's account of Iraqi GDP which has shown significant positive growth since 2009.  The U.S. State department claims investment interest in Iraq has improved, and increases in Iraqi oil production have been noted by the Central Intelligence Agency. Moreover, since 90 percent of Iraq's revenue is based on oil exports according to the CIA, one might suspect under free market conditions the Iraqi Dinar would appreciate in value, but it hasn't.

In the short-term the Iraqi Dinar may be stable within a range of 100 or so Dinars per the dollar, however the long-term prospects for the economy in general are uncertain. This is especially the case after 25-50 years when Iraq's  100-200 billion barrels of oil per the U.S. Energy Information Administration are exhausted assuming increases in production from global oil supply that meet global demand. Regardless of what happens to oil revenue and the Iraqi Dinar, the economy of Iraq is still subject to substantial obstacles in infrastructure, education, health care, and regional instability according to the CIA and U.S. State Department. Without substantial improvement to developing these economic essentials the Iraqi economy will be challenged and heavily reliant on the commodities market.

In summary, central banking policy, geo-political instability and national infrastructural challenges make the Iraqi Dinar more of a speculative endeavor with valuation basis more reliant on monetary policy than economic performance unless good reason can be found linking economic performance to changes in the valuation of the Dinar. Even if economic performance is tied to the Dinar's exchange rate, there is still substantial reason to doubt its appreciation. In light of this, carefully considering investment in the Iraqi Dinar might be well advised. One way to follow the price movement of the Iraqi Dinar is to monitor the auction price rates offered by the Iraqi Central Bank. These auctions sell currency to banks throughout Iraq in effect influencing the value of the currency along with bank reserve requirements and other policies outlined by the Iraqi Central Bank.

Financial News 03/28/2012

• Bloomberg: S&P denies usefulness of its own ratings in court records
• Business Wire: Fitch claims U.S. states have range of pension burdens
• Nasdaq: Ongoing consumer deleveraging to thwart economic expansion
• AP: Consumer confidence measured with small sample and few questions
• Census/Commerce Dept:  February durable goods orders up 2.2%
• Fortune: PIMCO mutual fund manager says market returns to lower
• Cleveland: Leaving workforce not an option for many boomers
• BI: Citi economist forecasts Greek like Troika plan for Spain's economy
• Reuters: UK and France considering strategic oil reserve release

Financial News 03/27/2012

• Bloomberg: U.S. dividend paying stock accounts for 25% of global total
• BI: GIC Fellow says monetary policy fails the private sector
• PREIM: 21/22 R.E. sectors had February supply contraction
• BW: Wall Street lobbying paying off for bank speculators
• Option Queen: Crude oil poised to move to $110 area
• AP: Stock buyers interpret Fed Chief statements as bullish
• Huff Post: Veteran unemployment rate 7.6%
• Finance Daily: Free access to codes and standards denied
• OECD: €1 trillion Euro rescue fund needed to restore market confidence

Financial News 03/26/2012

• MarketWatch: Fed Chief Bernanke cautious, uncertain about job growth
• Business Insider: Corporate earnings at high end of 4-8% of revenue range
• WSJ: Dividend stocks exposed to greater to greater capital risk than bonds
• Investor Place: Market volume at historical low, HFTs cancel 98% of orders
• CNBC: Investment banks to shrink by $1 trillion, cut costs, & lower ROE
• Reuters: U.S. firms under pressure from Chinese wage inflation
• Bloomberg: CFBP proposes monitoring compliance with debt laws
• NYT: Supreme court begins review of health care reform law today
• Sacramento Bee: Timeshare owners increasingly subject to resale scams

Financial News 03/23/2012

Image attributions: Bear: LadyofHats, Public Domain; Bull: Jastrow, Public Domain

• AP: Bank of America to give foreclosed property owners option to rent
• Reuters: Senate approves ban on Congressional insider trading
• Business Insider: Military spending $76 million/yr to assess its spending
• FTC: FTC open to public comment about its rules of practice
• CNN Money: Bernanke denies monetary policy caused housing bubble
• Daily Finance: Dividends riddled with financial planning holes
• Census:  New home sales down 1.6% in February at 313,000 units
• Bloomberg: Convertible offshore trusts used to avoid estate tax
• MW: SEC investigating collusion between exchanges and HFT firms
• ZH: Investors irked by sovereign immunity, Spanish LT bonds take heat

Why the price-to-earnings ratio is not an adequate valuation metric

The price to earnings ratio is often used as a measure of corporate performance and overall market performance via the P/E ratios of whole indexes. If the ratio is low in comparison to previous levels then the market is sometimes believed to have room to rise even if it is already inflated. For example, market analysts and observers such as StockCharts.com illustrate this point. Moreover, since 82 percent of companies that reported Q4, 2011 earnings had GAAP vs Operating P/E ratios that were in-between 15 month highs and lows, then those companies are believed to be fairly valued per Stock Charts.

Even GAAP or Generally Accepted Accounting Principle Price to Earnings ratios can be misleading however. This is because it measures earnings and not revenue. Earnings are what are left after a company deducts outflows such as expenses, and dividends. So if revenues decline quarter after quarter, but earnings rise relative to price via cost cutting, then it will appear as though the company is becoming cheaper. For example, ABC Corporation earns $100 million on 5,000,000 shares in Q3, 2011 and has a share price of $300 giving it a P/E ratio of 15. Then in Q4, 2011 ABC Corporation increases earnings to $125 million by laying off 625 workers at 40k/yr; the price rises to $325/share and the P/E ratio drops to 13 making it seem undervalued.

Clearly the above corporation is questionable investment if it has to lay more people off to stay profitable. The price to earnings ratio does not measure underlying financial conditions.  But that's not all, if cost cutting has already been tried, and that option is no longer available because it would actually cause earnings to decline, ABC Corporation can also reduce the P/E ratio by purchasing existing shares or issuing new shares if the price per share declines. To illustrate,  if ABC corporation purchases 1,000,000 shares in Q1, 2012 and both earnings and share price remain near their $125 million and $325 levels, the P/E ratio then drops even more to 10.4. All the company did was shrink its own shares outstanding.

Financial News 03/22/2012

• Reuters: S-1813 (MAP-21) Sec 40304 allows IRS/tax related travel bans
• Gallup: 85% of Americans favor government action on gas prices
• DOL: 348,000 jobless claims were filed the week ending 03/21/12
• CNBC: SEC advocates registered peer to peer lenders over non-registered
• Daily Finance: Oklahoma state loses $33 million because insured didn't die
• Fox: FedEx settles for $3 million on DOL discrimination allegations
• BBC: UK retail sales dropped .8% in February
• Bloomberg: Euro manufacturing index dropped to 47.8 in February
• NYT: China relaxes financial controls to counter capital outflows

Financial News 03/21/2012

• Reuters: An increasing number of cities are choosing debt delinquency
• Bloomberg: SEC slow to implement Dodd-Frank Act on rule controversies
• Business Insider: Women pay $1 bn/yr more on health insurance than men
• BW: Millions of jobs unfilled due to employer suspicion per economist
• MarketWatch: Global inflation being fueled by central bank monetary policy
• WSJ: Oil cost rise  a possible problem for the global economy per IMF
• TD Ameritrade: VIX futures term structure a cautionary note to investors
• Investor Place: Treasury prices and yields indicate possible momentum
• Irish Times: Portugal's deficit has tripled in the first three months of 2012
• UK-ONS: UK budget deficit £11.1 bln, February receipts down £17.5 bln

Financial News 03/20/2012

• BBC: World's biggest employers: U.S. DOD, PLAC, Walmart, McD's
• AP: Employers now asking for Facebook IDs and Passwords
• Census: February housing starts 698,000, 1.1% decline from February
• CNBC:  Government "encourages" defined benefit retirement plans
• MW: NY Mayor defends Goldman Sachs due to commercial relevance
• Reuters: No limitation on indebtedness, not leverage led to financial crisis
• AP: GOP "budget blueprint" cuts Medicaid, food stamps & Pell grants
• Bloomberg: U.K. inflation higher than expected at 3.4%
• BI: China forecasted to produce 15 million autos/yr by 2015

Why The U.S. Is Headed Toward More Social Policies

A trend toward socialism in the United States is inevitable for more than one reason. First, this is evident in a Harvard Business School study that found Americans prefer Sweden in terms of income distribution. There are reasons that underlie this socialist sentiment, and they include systemic economic weakness, unsustainable government spending, redirection of tax policy and cultural values.

Economic considerations regarding the effects of tax policy indicate at least a willingness to consider more social tax policies. For example, Economics Professor, Christina D. Roma via the New York Times illustrates how the benefits of conservative tax policy are not quite so clear, and how national debt and income inequality are getting worse; the Occupy movement would probably agree.

Unsustainable health-care spending among other things adds another dimension to why the United States is headed toward socialism. Moreover, Business Insider claims the U.S. health care system is a statistical outlier in terms of health-care spending as a percent of GDP. However, this week the U.S. Supreme Court will evaluate Obama Care per the Los Angeles Times, which also states Socio-care a la Europe and Canada isn't necessarily the right solution. For more on that perspective, an assessment of universal health care might be of use.

The trend to socialism is not just evident in wealth distribution survey results and health-care, it is also evident in our culture. American history demonstrates an unwillingness to bend to the will of aristocracy just because they win the money game, this time it's inter-cultural. To illustrate, the Washington Post and the New York Times publish substantially liberal perspectives on employment and government policy,  consumer sentiment is near 30 year lows, the Center for American Progress exists, and the merits of money-centrism are questioned via the Occupy Movement and publications like Alter Net. 

The economic playing field has changed, new generations of Americans are finding it difficult to outperform their parents financial successes. No longer does post WWII GDP bonanza drive the economy effortlessly, and U.S. global economic dominance has waned along with massive innovation to the economic scale of satellite communications infrastructure, the Internet and corresponding information technology. If the U.S. is to stay economically viable or competitive something has to change, and that could quite possibly lead to policies that enable a wider population to compete.

Financial News 03/19/2012

• Investor Place: SEC charges 3 for potential private market fraud
• Smart Money: Home reassessment 1 of 3 ways to lower R.E. costs
• CNN Money: Tax installment payment cap $50,000 from $25,000
• MW: Gasoline prices rose for 9 straight days 03/10-03/18
• Reuters: Economic events warrant a balanced perspective
• HGTV: 2012 HGTV Dream home winner Vicki Naggi 
• IMF: Debt, joblessness, & systemic weakness threaten world economy
• Business Week: Chinese home price decline continued in February
• Bloomberg: Wealthy Brazilians break law to squat on nature preserves

Federal Reserve accuses BLS and media of misleading public via Economic Statistics

Economic data is falsely reported per the Federal Reserve Bank. In a publication by the Federal Reserve Bank of St. Louis, the media is criticized of misusing statistics to attract readers. The article titled 'How Statistics Can Mislead: The Case of "Family Caps" in State Welfare Programs' states, "Whenever the results of a study are released, the media, interest groups and policymakers often use the findings to declare victory or dispute the ill-founded methods by which the results were obtained." It goes on to say when statistics are referred to, they are often misinterpreted. 

In another report from the Federal Reserve Board called 'Offshoring Bias in U.S. Manufacaturing', and also cited by Daily Finance, it is claimed valuation of imported goods is overestimated leading to misleading economic productivity statistics.  The research states "Although costs savings are a primary driver in the shift to sourcing to foreign suppliers, the price declines associated with offshoring are not systematically observed: this is the essence of the measurement problem."

Measurement of economic statistics can also be knowingly altered to achieve different results. For example,  in 1990 Consumer Price Inflation measurements changed. According to Shadow Statistics, an organization that re-interprets and provides alternate statistical metrics, under the old inflation measurements, inflation is closer to 10 percent. That number may not seem like a lot, but it is very disturbing considering savings accounts, government bonds, dividends, certificates of deposit and a handful of other investments don't even yield half that. 

This is not just a U.S. problem, recently a Chinese statistical agency was found to have released falsified data as well according to Bloomberg. This agency did not just manipulate data however, they collected false information from producers and service providers. Since those numbers are used in estimated the Chinese Gross Domestic Product, then that big number which many people look was quite possibly overstated, and most certainly wrong.  Does this mean when positive GDP statistics are released bullish equity movements based on that data are "bubbular" in nature?

It's not just economic data that is misleading, law enforcement agencies do the same thing. For example, in 2010 a whistle-blower uncovered  falsification of crime fighting data compiled by the NYPD per NBC. That's another topic with the point being it is probably naiive to believe or think all information published by government sources is not subject to some kind of political or economic agenda. The evidence is overwhelming, yet, much of the time data is taken at face value. Perhaps there is already too much to worry about in the World, but does that mean ignoring things like this is a better choice?

Financial News 03/16/2012

• NYT: S.E.C. buffered by Federal Court overturn of District ruling
• Reuters: Paypal is producing a mobile phone credit card scanner
• BLS: Consumer inflation rose .4 percent in February
• Daily Finance: Second Goldman Executive in a week lambasts firm
• BI: Household deleveraging to continue pressuring consumer spending
• AP: White House Secretary denies strategic release of U.S. oil with U.K.
• IMF: Dollar foreign reserves 35.54% in Q1, 2010, 33.02% in Q3, 2011
• BBC: Home prices in Spain dropped 11.2% in 2011

St. Louis Fed Says Corporate Power Structure is Un-American

Top jobs are about power first, then skill. Keeping America white is also at the top of the agenda despite many pro-active concessions made over the last five decades. According to a Federal Reserve Bank of St. Louis study published by the Department of Labor, white men charge the most, and comprise 95%-97% of Fortune 500 companies. The research goes on to say, "In short, the fact-finding report tells us that the world at the top of the corporate hierarchy does not yet look anything like America."

If the DOL is willing to admit it, then it's essentially undeniable. In light of that, it's not unrealistic to hypothesize middle management replacements that are not white men often become women and minorities who are either unaware of glass price ceilings or don't mind doing the same job for less. Then of course, a whole round of bias takes place under that gang because they too have social biases, and the cycle goes on.

Apart from political and cultural bias in power positions, there is also a whole range of discrimination at every other level. In other words, even though the U.S. Equal Employment Opportunity Commission sites Title VII of the Civil Rights Act as prohibiting discrimination based on race, color, religion, sex or origin there are quite a few other things to discriminate against with less flak. A few things on the long list are poor character, bad attitude, distracting smell, inappropriate attire, weird vibes, criminal record etc. There's no shortage of things to discriminate against, and employment law only covers the Sesame Street basics of human decency.

If employee candidates can successfully surpass discrimination barriers then come the work related obstacles. Employers themselves have objectives, be they personal, profit driven or purely administrative. Employers assessing potential employees at this level look for compliance, pliability, flexibility, subservience, friendliness, demeanor etc. In other words,  things that contribute to the "corporate environment" and ethos should not be underestimated. Things like overzealous use of skill, over achievement, excellent know how, experience and industriousness are technical requirements that sometimes get  in the way of status quo loving managers and executives.

Financial News 03/15/2012

• AP: Foreclosure rate rose in about 26 U.S. states last month

• DOL: 351,000 jobless claims were filed for the week ending 03/10/2012
• Reuters: Mortgage whistle-blowers and lawyers reap $11.7 million 
• BLS: Producer inflation rose .4% in February
• CNBC: U.S. Treasuries a financial safe-haven despite demand slump
• Fitch: U.K. AAA credit rating revised to negative outlook
• CNN Money: Ex Fed Chief Volcker advocates less spending, & higher tax
• Business Insider: China's slumping property market cooling economy
• Bloomberg: U.S. considering sanctioning India for its trade with Iran

Financial News 03/14/2012

• EBRI: Retirees insecure, with low savings, and unrealistic expectations
• Thompson Reuters: Biotech and alternative auto patent filings on upswing 
• Business Insider: Goldman Sachs abuses clients per outgoing executive
• BLS: U.S. import prices rose .4% in February
• FED: "Economy" has been expanding moderately per FOMC
• NYP: Stocks in the Nasdaq rallied to a 12 year high yesterday
• BEA: U.S. account deficit up to $124.1 billion in Q4, 2011
• NYT: Citigroup Inc. one of four banks to fail banking stress test
• Bloomberg: UK unemployment rises for 12th time along with pay slowdown
• AP via WP: Higher oil price a tax on already slowing glowing economy

Financial News 03/13/2012

• Dept. of Commerce: February retail sales up 1.1% at $407.8 billion
• Bloomberg: Retiree health care costs under-funded by states
• Reuters: World's largest accounting firms spent $9.4 million on Congress
• Option Queen: Interest rates rising despite FOMC statements
• Business Insider: 2013 Republican win could lead to tax cuts
• NFIB: Small business optimism index rose for sixth month to 94.3
• BBC: Price of hotel rooms during 2012 Olympics doubled
• MW: Spanish revised 5.3% deficit sparks contention from Austria per AP
• Bloomberg via SFGate: Chief economist says India's growth rate is weak

Financial News 03/12/2012

• Reuters: Survival services still in high demand throughout U.S.
• Daily Finance: Reinvested dividends of 10 most overlooked tax deductions
• CNBC: Inflation and low wages are weak stimulus for the economy
• CNN Money: Mass transit seeing rise in traffic with higher energy costs
• Kiplinger: Nissan Versa S 4-dr one of the cheapest cars to run
• Business Insider: Global oil supply a zero-sum-game on supply
• AP: China's trade deficit up on Jan-Feb 6.9% export growth
• MarketWatch: New Greek 11 year bond yields up to 19%
• Bloomberg: Portugal's 10-year bond yields have reached 13%

How Apple Inc. Bypasses U.S. Labor Laws

The benefits of outsourcing include being able to exploit foreign workers beyond a level that would be considered ethical or legal in the U.S. Based on the well researched infographic below, courtesy of Online MBA Programs, it would seem Apple is not exactly socially responsible with the production of their products.

Apple products are known for their reliability and quality, and have a stellar reputation that has become tarnished by its overseas operations. Whether that will lead to the boycotting of their products by a conscientious few has probably already been factored into the business decision. It is quite possible the benefits of exploiting less restrictive labor laws in China as financially advantageous for the business, but where should the line be drawn?

Created by: Online MBA Programs

Financial News 03/09/2012

• Kiplinger: Baggage fees, and "demutualized stock" are tax deductible
• CNN: Tax payers unemployed for 30 days avoid fines via IRS Form 1127A
• BLS: U-3 unemployment rate unchanged at 8.3% in February
• Reuters: 270 Churches have been foreclosed by banks since 2010
• DF: Roofers and contractors top BBB inquiry list
• Bloomberg: Bull market is 3 years old as of today
• BEA: Trade deficit increased $52.6 billion in January, up $2.2 billion
• AFP: Possible World Bank Heads include J. Kerry, S. Rice and L. Summers
• Yahoo: Waiter fired for revealing Peyton Manning's bill with $200.00 tip
• AP: Swiss watchmaker Hublot unveils Diamond watch worth $5 million
• NYT: Inflation and economic growth in China slowed in February

Investment risk-management techniques

Image attribution: Janoon028, standard royalty free license

 Risk can be minimized a substantial amount by properly following three key principles. These principles include the use of risk avoidance techniques, understanding the situations in which investments are exposed to risk and third, knowing which financial tools have the best probability of avoiding, and even capitalizing on risk.

1. Understanding investment risk

Economic analysis

A method of understanding investment risk is economic analysis. By understanding what impact specific economic conditions have, an investor can more effectively manage his or her risk. Economic analysis involves more than just major economic trends, but also being able to forecast those trends, and what asset classes and investment instruments would be most likely affected by that economic event. To illustrate economic analysis, the Conference Board, a business research association, measures global business cycles to assist in evaluating the economic impact of those business cycles.

Market performance

Markets are sub-components of an economy. Broad based economic indicators may span across individual markets and therefore do not help in understanding all aspects of investment risk. Knowing each market, what affects it financially and what its performance depends on are ways to understand investment risk in those markets. 

2. Risk avoidance techniques

Asset class

Asset class investing is a technique to manage financial risk and follows the principle of the risk pyramid. In the risk pyramid, investments are divided by asset classes or categories by risk level; the apex includes asset classes with the highest risk, and the base consists of more stable investments. Asset class risk levels can help an investor better assess what level of risk a particular type of asset is. Even less risky investments within asset classes cannot protect against all types of risk however. For example, U.S. Treasury bonds, in the bond asset class,  have relatively low socio-political risk, but are not all immune from interest rate risk.

Investment methods

A number of investment methods exist that protect against investment risk. Diversification and dollar cost averaging are widely known and practiced techniques of protecting against risk,  but these investment techniques are not the only ways available. For example, income investing, through investment in dividend paying stock protects against capital depreciation. Additionally, Dividend Reinvestment Plans (DRIPS)  reinvest stock dividends that add to the affect of income investing. In the case of Initial Public Offerings (IPOs) price risk can be protected against by purchasing shares before they become publicly traded.

3. Investment risk management tools

Financial instruments

A financial instrument is a particular account, contract or financial arrangement that allows for and facilitate particular financial advantages, objectives and disadvantages irrespective of the asset class invested in. For example, a Roth IRA is a tax savings financial instrument designed to lower savings costs and prepare for retirement. Additionally, an Exchange Traded Fund or ETF, some might offer tax protection in the form of investment in tax free municipal bonds whereas others may invest in commodities. In both cases, the Roth IRA and the ETF are financial instruments that have the capacity to invest in multiple asset classes and thereby manage risk.

Insurance

Insurance is a risk management tool because it specifically serves as a hedge against risk realization that investments themselves can't protect against. To illustrate, insurance protects investments against liability claims from debtors or the need to use investments in adverse circumstances such as bankruptcy. In other words, investments made within an insurance product or financial instrument are afforded a certain amount of legal protection that can help reduce exposure to debtors. In the case of unemployment or disability insurance, a state provided protection indirectly helps reduce investment risk arising out of personal circumstances.

Financial News 03/08/2012: Higher Oil a Drag on Economic Growth

 Image attribution: digitalart, standard royalty free license

Nowadays, with any good economic news, the price of oil rises along with it. However, good economic news is not proportionate to corresponding percentage rises in the price of gas which means that growth will be hampered by oil. Even Jim Cramer, who is known for being optimistic expressed doubts about the economy on CNBC's 'Mad Money' saying $6 per gallon gas is possible.

Another problem to economic growth is its effect on China which is currently a global economic driver. In addition to Europe's recession, high-oil is quickly becoming another major concern per Reuters. Moreover, according to Reuters, Asia is the largest consumer of commodities which means any increase in oil costs will lower corporate profits and related investments into the economy there. 

In the United States, were gas is already taxed between 26.4-.68 cents per gallon, Congress even discussed the issue of rising gas prices precisely because it threatens the economy per the Associated Press. Questions of increasing domestic capacity, balancing environmentally friendly energy solutions and drilling on government owned land have done little to grease the legislative mechanics.

Delays such as moratoriums on drilling cost the economy billions according to Joseph R. Mason in Louisiana State University report. Moreover, every .10 cent rise in the cost of gas costs the economy $11 billion per the CS Monitor and as restated by CBS Atlanta. That pretty much cancels out the $193 billion from shale oil production that All Energy Consulting claims is a benefit to the economy.

However, shale oil production as well has not grown at an equal pace with oil prices. Since the late 1990s gas prices have risen near 400 percent whereas shale oil production is closer to 200 percent in terms of dollars per thousand cubic feet stated by AEC. There is little doubt the energy is an issue, and will likely continue to be issue, especially if political events in the Middle East take a sharper turn.

• DOL:  362,000 jobless claims were filed the week ending 03/03/12
• Reuters: U.S. Treasury to sell $6 billion or 7% of its stake in AIG
• WP: Wealthiest D.C. residents 29 times richer than bottom 20%
• CFA Institute: Rouge trading shares problems associated with gambling
• O.F.: FDIC Insurance at 30 month high, bank charge-offs at 42 month low
• Economist: Natural hazards at 3-dacade high is costing more to economies
• NASDAQ: ECB leaves rates unchanged, BOE does same per the  NYT
• Bloomberg: Greece will force investors hand as needed in bond swap

Financial News 03/07/2012

• Bloomberg: Fed Chief okay with increasing inflation to stimulate economy
• NYT: Texas businessman convicted by jury for running $7 billion Ponzi
• BLS: Labor costs up 2.8% in Q4, 2011, labor productivity rose .9%
• Time: Mitt Romney remains GOP front runner after Super Tuesday
• CNBC: Jim Cramer expresses pessimism over market, $6/gallon possible
• ADP: 216,000 non-farm private payrolls were added in February per ADP
• Investor Place: Small-caps, bonds and Chinese stocks weaker than others
• IBD: Brazilian economy cooling, confirms global economic slowdown
• Reuters: Success of Greek bond swap may set precedence for Portugal

Financial News 03/06/2012

• U.S. Treasury: Foreign U.S. Treasuries holdings have surpassed $5 trillion
• IBD: SEC reforms would require daily pricing of money-market assets
• Berkley via Reuters: Top 1% gained 93% of economic recovery income
• CNBC: CEO says 5% market correction to be expected
• CNN Money: Small businesses increased low wage hiring in February
• Zero Hedge: Sub-nanosecond trading could jeopardize financial markets
• Bloomberg: Portugal's 10-year bond yields hit 13.85% today
• BI: 75% private bondholder majority needed to prevent Greek default

The 4 percent rule assumes positive ROI

The four percent rule is a retirement cash-flow principal that begins withdrawing from pensions at a rate of four percent, then adjusts upward each following year to account for inflation. In principal this method is designed to preserve income for the duration of retirement up to 30 years per U.S. News.

However, for retirees seeking to preserve capital, a rate above four percent is necessary after the first year of using  the four percent rule according to the Prosperity Concierge. Moreover, when managing annuities or retirement income from pensions, they must achieve a return on investment of above four percent in order to maintain principal value. That is excluding inflation which would make the actual required return to be more like 7 percent or higher. 

According to the  Statesman Journal maintaining retirement cash-flow is more challenging due to uncertainty in financial markets, inflation and longer life-spans.  That means, early retirees or those who retire at 65 and live more than 30 yrs will experience a dramatic drop in retirement income after the 30 years accounted for by the four percent rule expiration.

Assumption can be a dangerous word in finance and should be a red flag for anyone forecasting future income based on a financial plan. The four percent rule assumes no negative valuation such as equity devaluation during a bear market.  Strong asset allocation is an understatement when assessing the effectiveness of the four percent rule as it is not only desirable, but necessary for the method to work. To obtain optimal benefit, retirement capital should preserved, or at least extended for maximum duration via financial instruments that preserve capital value.

International term-deposits that are laddered for consistent 6 percent or greater yields are one place to start looking. Highly rated utility firms that's equity values keep up with inflation and yield high dividends are another.  Exchange traded funds that invest in solid corporate and government bonds that allocate risk proportionally using a sound investment strategy is another. 

Financial News 03/05/2012

• Reuters: Financial services at edge of regulation yield 25% over 4 years
• Philadelphia Inquirer: $450 billion in tax breaks set to expire by 2013
• Business Insider: Priced in gold, postage stamps cost less than .10 cents
• Investor Place: Profit hyperbole self-defeating per Grantham
• WP: Director of Earth Institute seeks World Bank Presidency
• Bloomberg: China lowers 2012 growth forecast to 7.5%, an 8 year low
• CNBC: Greek default possible without enough bond holders participation
• MW: European Feb. PMI contracts to 49.3, retail sales increased per BBC

Considering Long-Term Care Insurance?

Like the smoker who knows cigarettes can cause cancer, but assumes it will never happen to them, or the teenager who thinks it’s okay to send just one text while driving, many people think long-term care insurance is something they’ll never need. Or maybe they just hope they won’t need it.

Unfortunately, people put off making a decision about long-term care (LTC) insurance because they are in denial over the possibility of needing it. But once you need it, it’s pretty hard to qualify.  Insurance is tricky that way. True, you may be paying for something you’ll never end up using but remember it’s going to be less expensive the younger you are. And if you wait too long, you may no longer be eligible.

One thing to remember about LTC insurance is that you can always add to your policy later.  If you’ve decided that long-term insurance is something you might be interested in buying, start out with a policy you can afford. Variables include the amount that is paid out for care, how many years the policy runs, and the waiting period required after the claim is approved.

Many long-term insurance policies also offer riders that allow you to make changes later. Common ones include a cost-of-living increase in benefits and protection against inflation.

No doubt about it, long-term insurance can be a great safety net to have. But the truth is it’s not right for everyone. Experts advise that if you have more than $50,000 in savings in addition to a home and car, it is probably worth your while to purchase LTC insurance.  However, if your assets total less than $50,000 and your annual income is primarily from Social Security, it probably doesn’t make sense to spend the money on the annual premiums. The fact is that even with the insurance benefits, you’ll probably end up going through your entire savings. That’s the bad news. The good news is that you’ll be eligible for Medicaid, which will take over payments for your nursing home or in some cases, assisted living care. 

If you can afford the insurance, one nice benefit (besides getting at least a portion of your care paid for) is that LTC insurance will cover a variety of long-term care services:  nursing home or assisted living care, adult day care, respite, hospice, memory care facilities and even in-home care.

Medicaid, on the other hand, will generally only cover care in a skilled nursing home, which means the person will need to move away from “home” or their assisted living facility once their funds have run out.  And while the level of care is as good or better in a nursing home, the atmosphere is usually more sterile and double rooms are not uncommon.

There isn’t a right or wrong answer to the question of long-term care insurance. If you’re a baby boomer or beyond, it’s a good idea to sit down with someone knowledgeable about the subject and find out whether an LTC insurance policy is right for you. Just do it soon!

Offshore tax shelters explained

Offshore Tax Shelters Around the World 

 Image attribution: Arkyan, GFDL, CC BY-SA 3.0

An offshore tax shelter is a legal mechanism or entity by which income that would normally be earned and taxable in one tax district is only taxable within the domicile of that tax shelter's registration. In other words, when capital is transferred to another legal jurisdiction and is subject only to that jurisdiction's taxation system, then income earned from use of that capital is no longer considered taxable in a higher taxed jurisdiction.

Several criteria must apply for offshore tax shelters to be legitimate. For example, if income is earned for purposes other than tax avoidance, it is more likely to be considered legal. This is more the case when the income earned through that tax shelter comes from the country that holds tax sheltered assets. Moreover, this is because income earned in a higher tax zone can still be taxable even if earned from a foreign registered entity.

Some entities attempt to avoid taxable income earned from offshore entities by taking advantage of rules that don't require taxes from foreign registered entities. For example, a Senate committee report chaired by Senator Carl Levin found that certain hedge funds were avoiding taxes on dividends earned within the U.S. This abusive practice was accomplished by restructuring the transaction so the money would not be taxable under the rules of the new transaction. The transactions were still considered tax evasion because they were believed to not serve the purpose of the transaction, but rather the intent of tax evasion.

In some cases, tax treaties are signed into law between two countries. The Internal Revenue Service (IRS) states these treaties often do not protect residents or citizens from U.S. Taxes due to a 'savings clause'. However, also according to the IRS, there are exemptions to the savings clauses of tax treaties. In such case, the saving clause exemptions of a tax treaty can serve an offshore tax shelter by allowing income to be earned within the United States through the tax shelter in so far as tax exemptions apply. Filing of specific tax forms may still be required by the IRS in order to claim the tax exemption.

With our without tax information sharing treaties between countries, tax that is illegally sheltered is still illegally retained income. In other words, tax shelter fraud and misuse of offshore portfolio investment strategy are considered tax evasion and not tax shelters as distinguished by the IRS. For this reason it is necessary to understand the basic tax laws that classify income as either taxable or non-taxable, and the difference between tax shelter fraud and tax shelters.

For most individuals that earn income in an offshore account, that income must still be reported to the IRS. However, if that income is not earned by an individual, but rather an entity that is legally separate from the individual, new rules apply. Even this can be considered tax evasion if that entity is established solely to avoid taxes. In other words, the motive of an offshore tax shelter should not be tax avoidance, but rather tax sheltered income according to  US Legal. When considering offshore tax shelters, consulting with the IRS or contacting a skilled tax professional that is also accurately knowledgeable in the area of offshore tax shelters may be advisable.

Financial News 03/02/2012: Consumer Sentiment Metric Does Not Measure Retail Spending

It is evident that consumers are spending less as thrift shops have been seeing substantial revenue gains. Two examples are Big Lots which just reported a 4.2 percent rise in revenue per MarketWatch and Dollar General which has increased revenue for the last five years per the Motley Fool.

Year over year retail spending has increased a little over five percent per Census data, but after inflation of 3.6 percent as measured by the Bureau of Labor Statistics, that is an increase of 1.4 percent, an amount .2 percent less than the 2011 annual growth in gross domestic product. 

Yet despite anemic gains in inflation adjusted retail spending, consumer sentiment has risen for the last year to reach an index level of 75.3 per Reuters. A longer-term chart of consumer sentiment can be viewed at the Federal Reserve Bank of St. Louis. 

So it looks like consumer sentiment is just that, sentiment and does not necessarily translate into economic growth as measured by retail spending and GDP growth. That is using newer ways of measuring things like inflation. Moreover, according to older measurements, retail spending has declined in terms of real dollar value and inflation soared over nine percent in 2011 per the American Thinker. 

Debasing the dollar could be monetary policy's way of making Americans feel richer, when in fact they are getting poorer. For example, according to the BLS Inflation Calculator, one 1970 dollar is worth $5.84, that is an increase of 484 percent in 41 years. How many retirement plans can beat that kind of growth?

• Daily Finance: Baby Boomers last to enjoy full pensions and social security
• Bloomberg: SEC enforcements don't bear statistical fruit
• RealtyTrac: 41% of foreclosures at auction, majority under $200K
• WNYC: New York approves new socially conscious business structure
• ISM: Index value of 52.4 shows 4th month of slowing manufacturing growth
• MW: Tax planning hazed by uncertainty over pending changes in tax law
• RFE: 25 of 27 European politicians sign fiscal treaty to prevent more debt
• BBC: Spain renegotiates higher 5.8% government deficit spending target
 ..........

Cost effective ways to dine out with children

Image attribution: Paul Glazzard, CC BY-SA 2.0

There are plenty of ways to dine out with kids without breaking the bank. These frugal methods for dining out can make interesting, and sometimes educational outings as well as affordable or free food. Frugal ways to dine out with kids can also be part of a daily activity that brings family or friends together to share experiences, entertainment and food.

• Kids eat free restaurants

For those who still like to go to restaurants when dining out with kids, kids eat free restaurants might be just the thing. According to Frugal Living, there are many kids eat free restaurants for parents and adults to choose from when dining out with kids. Among these restaurants listed by Frugal Living are select franchises of Applebees, Buffalo Wild Wings, Cinzetti's and quite a few others.

• Promotional dinner seminars

Sometimes promotional seminars also offer free dinner. This can be  a useful way to introduce children to the adult world of finance while also getting them a free dinner. For example, the Better Business Bureau of Louisville, Kentucky mentions many investment planners and estate planners offer free lunches or dinners to potential clients. If kids are actually interested in the topic of the seminar, or if they warm up to the idea of the seminar, the meal can be that much better.



• Church dinners

Churches also offer free dinners alongside specific church events per the Salisbury Post. These events might require kids and adults to attend a church service, parish meeting or community sponsored event, but can also be a frugal source of dinner. For those parents looking to introduce their children to life among church goers, a free church dinner might be just the thing. What's more these types of dinners are not necessarily limited to one faith only.

• Hunting pot luck

Another frugal way to dine out with kids is at hunting events such as hunting pot lucks. At these events, newly acquired game and wildlife becomes the main dish after a day of venturing outside amongst ducks, deer, turkey, rabbit or even fish. If hunting is your thing, hunting pot lucks are a way to teach kids about the activity while spending quality time with them and following up with a hearty meal.

• Food holidays and birthdays

If a kid can't get a free meal or discount on his birthday, a national food holiday might be just the thing. Food holidays are promotional holidays that promote a specific type of food at discounts or free. For example, on March 1, 2011, the International House of Pancakes (IHOP) offered free pancakes for National Pancake day.  If pancakes aren't the right type of food, there are plenty other food holidays that might contribute to a frugal outing with the kids.

Financial News 03/01/2012

• U.S. DOE: 2013 model vehicles to offer up to 53 miles per gallon
• Kiplinger: U.S. business spending to grow 6% in 2012
• DOL: 351,000 jobless claims were filed the week ending 02/25/12
• Reuters: Workforce drop excluded, 6% unemployment could take 5 yrs
• Bloomberg: Gold price fell after Fed testimony revealed QE3 less likely
• Fed: U.S economic activity likely increased in January and early February
• Telegraph: Greek bondholders not to be reimbursed by CDSs per ISDA
• CNBC: Chinese local government investment in infrastructure down 70%