My ambition has long been to be a young man of independent means. I achieved the “independent means” part some years ago, but I don’t seem to be making much progress toward being a young man.
Still working on it!
Category: Economics
Roll your own Cash Management Account
Back in the late 1970s, Merrill Lynch, and then several competitors, created what became known as a Cash Management Account. I really wanted one.
Basically, a Cash Management Account was a brokerage account wrapped around a money market fund and an associated credit card.
It was really aimed at high-value customers. The sort who might make discretionary purchases in the $10,000 range. The sort who wouldn’t want to have multiple tens of thousands of dollars sitting around in cash just in case a few of those purchases might end up being made in the same month. For those customers, a key feature was that the brokerage account was a margin account.
You had an American Express card tied to your account. You could charge whatever you wanted, just like on any other AmEx card. At the end of the month the account would automatically pay the balance on the card. You also had a checkbook that you could use to pay your bills. If either kind of transaction drained the cash out of your account, you’d automatically get a margin loan against your investments. Margin loans were at a preferred rate (because they were secured).
At your own convenience, informed by knowing when more cash would be flowing into your account (dividends on your stocks, interest on your bonds, transfers from the trust your daddy set up for you), you could either let the margin loan be paid off by incoming cash, or else decide to sell some asset or another.
For someone with liquid assets in, let’s say, the million dollar range, it was really very convenient. For someone with much less than that it was less useful, but to keep out the riffraff (people like me), they required a minimum initial investment of $20,000.
By the time I had the money to buy into an account like that, it’s advantages had pretty much been rendered moot by modernization in the financial industry. Now you can roll your own cash management account easily enough.
Here’s what I do:
- Have a local bank account for checking and a debit/ATM card. (Nowadays it wouldn’t have to be local, but I like having access to a local branch for teller services, a safety deposit box, etc.)
- Have an internet bank for a high-yield savings account.
- Have a brokerage account for investments.
- Have a credit card.
I have these accounts connected so that I can transfer money between them via the Automated Clearing House (ACH).
I make my local bank the center of everything: All deposits and all payments flow into and out of that checking account. Any time that adds up to surplus money, I transfer the funds to my internet bank to pick up the extra yield, or else to my brokerage account to be invested.
It’s basically exactly like a cash management account, except that I don’t have paying the credit card automated. (Actually, since I originally drafted this post, I’ve gone ahead and automated paying my credit cards. We went on vacation back in July and August, and were going to be out of town right when the bills could be expected, and not back home until after they needed to be paid. So, now almost all of my bills, finally, are paid automatically. I now live in, I don’t know, 2005 or thereabouts.) Oh, also: my brokerage account isn’t a margin account. (It could be, but the whole preferential rate structure for margin loans faded away some years ago, so there’s no point.)
If there’s something about a formal Cash Management account appeals to you, pretty much any bank, brokerage firm, or mutual fund company offers them now, often with no minimum investment. But there’s really no point.
Currently the ACH takes 2–3 days to move money, but the infrastructure for same-day payments (called FedNow) is now in place. Soon enough a few banks and brokerage firms will make it available to customers to distinguish themselves, and either the others will quickly fall in line, or I’ll move my money to the more enlightened institutions.
2023-08-17 06:13
Apparently I was a lazy girl my whole life, and didn’t even know it.
The Wall Street Journal provided a fairly succinct summary of a lazy girl job in July: “one that can be done from home, comes with a chill boss, ends at 5 p.m. sharp and earns between $60,000 and $80,000 a year — enough to afford the basic comforts of young-adult life, yet not enough to feel compelled to work overtime.”
Source: The New York Times
2023-08-14 10:24
Speaking as someone who has advocated for a return to local solar time (now that everyone has a supercomputer with GPS in their pocket to handle the necessary conversions), I was intrigued to read this article about just how bad things were before we started using timezones.
It’s peripheral to the main article, but I was kind of intrigued by this bit:
When he arrived in Ann Arbor in 1852, Tappan gave a speech outlining his vision for a new type of university. Drawing on the German model of education, he sought to transform the University of Michigan into an institution where knowledge was not just taught, but created.
2023-08-10 12:06
If you’re like me, and enjoy fantasizing about how nice it would be to have high-speed rail in the U.S., you might enjoy this video:
Rising prices in Britain are not inflation
Inflation and a declining standard of living are two different things. Inflation is when the money becomes less valuable, resulting in rising prices. But when a whole society becomes poorer, it can look like inflation, because prices may rise, but it’s not the same thing.
“Despite the Bank of England’s efforts so far, there is accumulating evidence that inflation will be harder to stamp out than previously expected. In the past week, data has shown that pay in Britain has increased faster than expected, inflation in the services sector has accelerated and food inflation is still near the highest level in more than 45 years.”
https://www.nytimes.com/2023/06/22/business/economy/bank-of-england-interest-rates-inflation.html?smid=url-share
To my eye, viewed from over here, that looks less like inflation and more like a falling standard of living—largely caused by Brexit. If you block immigration, of course wages are going to go up. If transporting stuff across the border takes longer and is more expensive and difficult, of course food is going to be more expensive. That’s not inflation. That’s reducing everyone’s standard of living by raising actual costs.
It looks similar, because the symptom tends to be rising prices, but they’re two different things. If the problem is inflation, then raising interest rates (by reducing the rate of growth in the money supply) will probably help. But if the problem is a declining standard of living, then it’s probably not going to help. Higher interest rates will just be yet another expense (like border controls) that flow through to making everything cost more.
The labor market may be becoming less evil
All through the 1990s I was waiting for the labor market to punish employers for their (then new) strategy of laying people off as soon as there was 15 minutes with no work to do, intending to hire them back (or hire somebody else) as soon as they had work again.
Capital markets forced employers to go that route. Any company that tried to resist—keeping on employees beyond the bare minimum—would see its stock price fall so much that it would be taken over in a leveraged buyout, and then the new owner would cut staff to the bone.
As I wrote for Wise Bread back in the day (in What’s an employee to do), it made me sad to watch. Surely, I thought, eventually the labor market would tighten up, and employers who had kept their employees on through a rough patch would have an advantage over employers who had to go out and recruit, hire, and train new employees.
But it never happened. Until, according to a recent article in the New York Times, now: Companies hording workers could be good news for the economy.
It’s a pretty good article.
Employers traumatized by not being able to hire enough people may not be quite so quick to lay them off:
“When the job market slows, employers will have recent, firsthand memories of how expensive it can be to recruit, and train, workers. Many employers may enter the slowdown still severely understaffed, particularly in industries like leisure and hospitality that have struggled to hire and retain workers since the start of the pandemic. Those factors may make them less likely to institute layoffs.”
Jeanna Smialek and Sydney Ember https://www.nytimes.com/2022/10/12/business/economy/companies-hoarding-workers.html
And, if employers do keep workers on as the economy slows, it will help the U.S. economy. As Federal Reserve Board Vice Chair Lael Brainard says:
“Slowing aggregate demand will lead to a smaller increase in unemployment than we have seen in previous recessions.”
https://www.federalreserve.gov/newsevents/speech/brainard20220907a.htm
Perhaps even more important than those things, it will make me happy.
After three decades in which the market was reinforcing exactly the wrong behavior, now maybe it will encourage the right behavior.
2022-10-11 06:19
Assets are called “safe” when they’re free of default risk. But that doesn’t mean their prices can’t drop, or that the financial system is safe if systemically important institutions buy them on margin.
What appears to be a liquidity issue will ultimately become a financial stability issue as investors discover their “safe assets” are not safe.
Source: Solvency Constraints – Fed Guy
2022-09-30 07:33
Every time I go to read an article at @TheNewEuropean, instead of showing me the article, they accuse me of running an ad blocker. This is false, and a little insulting. And it’s a bit annoying that I can’t read their articles. But, oh well. I’ll make do as best I can without reading the latest from @paulmasonnews.
I kinda like the Sinema tax changes
I’m generally unimpressed with Krysten Sinema, whose failure to support Democratic initiatives has generally been harmful. However, I kinda like the tax changes she’s forced into the climate package.
Fundamentally, I like dividends and I hate stock buybacks. So a tax on stock buybacks—even a small one—makes things better.
Now, most economists would have you believe that the two are equivalent. This is false.
Economists can gin up a model that suggests that owning a slightly larger share of a slightly smaller company is “equivalent” to getting paid a share of the company’s profits. Or that getting cashed out completely (by taking the buyback), and then finding a place to invest almost all of that cash in some new company is somehow equivalent. I don’t think either of those things is true even in an economic sense, but I think both are clearly false in a larger societal sense.
The way things used to work was that a company earned a profit, reinvested an appropriate amount of that profit in growing the business, and then paid out the balance to shareholders to do with as they pleased. (They could reinvest the money by buying more stock, they could spend it on luxuries—or necessities, they could invest it in some other company, they could donate it to charity—the possibilities are literally endless.)
This situation produces a sort of virtuous circle. A company that earns a reliable profit—and shares it with its stockholders—becomes more valuable, because people will pay more for a company that pays a reliable dividend. It’s good for the owners (their stock is worth more), it’s good for the employees (both line workers and managers), it’s good for the community (a profitable company pays taxes, their employees have money to spend, their shareholders have money to spend, etc.).
The non-dividend situation lacks all these dynamics. Instead of wanting to produce a profit, the company has all sorts of weird incentives—to maximize “growth” or “revenue” or “earnings” according to whatever weird metric appeals to Wall Street that week. Owners don’t get cash that they can spend. Instead they get the option to cash out at random intervals. The weird incentive structure encourages companies to make weird decisions regarding investing in growth (or dumping cash into buybacks). Shareholders who would otherwise be living on dividends are constantly having to make difficult decisions about selling small amounts of shares in this or that company for money to live on.
Maybe there’s some technical economic sense in which buybacks and dividends are equivalent, but they are very much not equivalent in a societal sense, producing very different results for ordinary investors and their communities.
The only reason any ordinary person would think a stock buyback was even close to equivalent is because capital gains have been tax-advantaged over dividends. So, something that reduces that tax advantage is all to the good.
Details: Krysten Sinema Agrees to Climate and Tax Deal – The New York Times