Dennis Smith
I advised a few columns back that the market would have ups and downs in the summer and that there would be good buying opportunities during this time. I also said that I expected the markets to rise in the fall, and I continue to believe that they will. The effect of seven interest rate reductions since January will begin to kick in about now, and that will spur business executives to spend on rebuilding inventories, plant modernization and expansion, and development of new products. All these things are tied to interest rates.
And then there is the tax rebate check that you should have received by now, and that should revitalize the economy a little. Just a little? Well, really, it’s just cookie jar money, about $40 billion, and that is only four one-hundredths of our gross domestic product (GDP). We have a 10-year tax bill promulgated by a Democratic Senate with this small amount up front where we need it most, with a coming reduction equal to a full 2% of our GDP five years out, when we probably won’t need it as much. President Bush, in my opinion, should have gone on a hunger strike to get the reductions up front, or he should have demanded an immediate reduction in the capital gains tax. The country needs money in the marketplace right now, and not later.
Just to put it in perspective, if a firefighting family of four goes to any of the 50 best restaurants in New York City for a meal of soup, salad, chicken, dessert and coffee, the bill would come to at least the $300 you would have received from the tax rebate. And that’s not steak, and without wine to boot.
The Democrats were wrong to reduce the up-front tax reduction of the Bush tax bill, and the Republicans were wrong in accepting the reductions and yet claiming they had produced a great tax bill. Our government has the primary responsibility to insure a stable economy, and it can do that in just two ways. It can print more money and drive interest rates down (this is our monetary policy), or it can lower taxes and increase spending (this is our fiscal policy). We seem to be relying solely on the monetary policy of cutting rates, because I do not think that this $300 dinner for a family of four in a good restaurant is the kind of tax reduction that is needed to motivate our consumers into the stores.
I am hoping that the interest rate reductions (monetary policy) are enough to energize our economy. If the economy does not pick up speed, the Congress will almost certainly be forced to reduce the capital gains rate (fiscal policy), because politicians will do anything to prevent a growing unemployment rate.
In the meantime, mutual funds are at their lowest cost level in years, and stocks have been beaten to the bottom. Even a well-managed company like Sun Microsystems (I don’t own any of its stock) has in the last year been taken from $65 to less than $12 a share. There is a saying on Wall Street that great fortunes are made in bear markets, and that is simply because moneyed people can go in and buy good and stable companies at rock-bottom prices. That scenario does exist now, but I wouldn’t mortgage the house to get in this market. If the economy doesn’t begin to spark soon, we may have flat prices at the bottom for several years to come.
The best financial policy for you and your family is to be patient. Continue to be certain that your investments are prudently weighted between stocks, bonds and money markets, or in mutual funds with long and good track records. The economy will get better, and I am hoping it is getting better at the moment you read this.
There is something else you should be thinking about. I know that it is ironic in such hard economic times to speak to you of the importance of saving, even as little as $1,000 a year, but I believe your future depends on it. Just five years ago, Americans were saving about 7% of their income, but this rate has been declining ever since. Last year was the first year in decades in which our savings went negative, which means we spent more than we earned. The economic pros in Washington are concerned about this, and you should be as well.
In March, I wrote an entire column about the importance of saving for the long and short terms. In times of a weak economy, however, you should try not to forego your commitment to saving a few dollars here and a few dollars there, and then putting that money away in a savings lock box of some kind. The reality of compounded interest rates will convince you that this is a sound personal and family policy, for if you can find a way to save $100 this month, at 10% it will be worth $672 in 20 years. But, remember, the interest can stay the same, but your savings will balloon if you increase the principal and the time, so that if you took $1,000 instead of $100, and held it for 30 years instead of 20, you would end up with $17,450. Can you imagine how it would balloon if you saved regularly from year to year?
More and more municipalities are recognizing that firefighters very much value the idea of long-term growth, and so the topic of 401(k) and 459 retirement accounts, along with IRAs and annuity funds (and DROP plans as well), always come up at the collective bargaining table.
“The important thing about these retirement funds is that firefighters are in the job for the pension,” one high-level union officer told me, “and that retirement contributions have no FICA or benefit costs attached to them.” In New York, for instance, it costs the city $1.70 for every dollar that goes into the increase of a firefighter’s salary, but when money is contributed to retirement accounts there is no Social Security or benefits additions. The city pays a dollar for every dollar of retirement fund contribution.
The value of these plans to the firefighter has to do with compounded interest and sound investment policies. At today’s dollar value, new firefighters in New York will leave the job as millionaires if they stick for 30 years. That’s what I’ve been told, and, boy, do I wish them the best of everything.
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About the Author - Dennis Smith
Dennis Smith is the founding editor of Firehouse Magazine and the best selling author of
Report From Engine Co. 82 and other books. He has completed the federal Series 7, Series
63 and Series 65 exams and is a licensed financial advisor. Dennis Smith will be providing
some financial insight beginning with the January issue of Firehouse Magazine, as well as
authoring regular on-line commentary for Firehouse.com.
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