Current thinking is that Chinese markets will rally at a furious pace through the 2008 Summer Olympics -- and then investors should take the money and run. Don't bet your gold medal that strategy will work.
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By Jim Jubak
I read something in The Wall Street Journal last week that really scared me (besides the editorial page, I mean): "In Beijing, investors talk of a one-way bet on the market until at least next year's Olympics."
In other words, even though the Shanghai stock market is up 52% this year, was up 130% in 2006 and is up 305% since this rally began back in June 2005, and even though everyone knows this speculative bubble isn't sustainable, it's smart to keep pouring money into Chinese stocks -- no matter their price -- because the government won't intervene and risk crashing the market until after the showcase Beijing Olympics are over.
So invest as much as you can in anything you can until Aug. 24, 2008, the day the Beijing games come to an end. Then run -- don't walk -- in an orderly fashion to the exit.
Yeah, like that will work.
Watch out for stampede
Speculative markets that think they've got a green light to run from excess to excess until a specific date scare me. The possibility of a stampede for the exits on the Shanghai exchange starting a wave of fear that spreads around the globe scares me. And the very real possibility that the Beijing government will make a mistake and crash the Chinese stock market scares me.
Everything is not black, however. Because the Chinese stock market is, so far, only tenuously connected to the global financial market, any crash in Shanghai is likely to have only modest global effects.
With those cheery thoughts fresh in mind, let's take a look at why speculators in Shanghai think they've got a green light until August 2008.
Any explanation starts with China's massive 40% savings rate. There simply aren't very many places where the average Chinese can put that money.
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Real estate has been a popular choice recently, but the government has cracked down on speculators in that sector. Most Chinese can't invest abroad. And banks don't pay much in interest.
The Chinese government recently raised the interest rate that a bank can pay on a one-year deposit to 3.06%, a jump of 0.27 percentage point from the prior rate. Inflation is China is running at about 3%, officially. And since bank interest is taxable, the return on a one-year bank deposit is actually negative.
Everybody's doing it
So no wonder that anyone in China looking for a positive rate of return -- and who isn't, beside financial masochists? -- has turned to the domestic stock markets in Shanghai and Shenzhen. There are now 100 million brokerage accounts in China. Sixteen million of those were opened in just the first four months of 2007. Trading volumes have soared. In April, trading volume on the Shanghai exchange was twice as high as in January 2007, and in the first four months of this year volume has been seven times volume in the first four months of 2006. On May 16, trading volume in Shanghai exceeded the trading volume on all other Asian markets -- including Tokyo -- combined.
There are no signs the Chinese stock market is slowing down. What seemed astonishing when brokerage companies in China opened 300,000 accounts in a day seemed old hat when a few days later brokerages report opening 550,000 accounts in a day. The press in China is full of stories of average citizens who have doubled their money. The Chongqing Morning Post recently featured a 60-year-old cleaning woman who had doubled her 20,000 yuan (or about $2,800) nest egg in two months. "At a time like this," the paper quoted her as saying, "who can lose money?"
Video on MSN Money
Global market blowup
Sure, the Shanghai stock market could melt down, but China isn't the only economy that could be in trouble. MSN Money's Jim Jubak says India, Japan, Europe and the U.S. are all on his shortlist of regions that could face a setback.
The central government in Beijing isn't happy about this. Officials have tried talking the market down without success. Central bank governor Zhou Xiaochu was quoted expressing "concern" in the People's Daily and no one blinked. Interest rate increases haven't slowed the river of cash flooding into stocks. Leaks that say the government is studying raising the tax on capital gains haven't worked, either.
Why is the government worried? Because China has been down this road before. A boom in 1999 drew in millions of new investors who were then wiped out when prices plunged in 2001.
This boom is even bigger. And the fallout from any sudden bursting of the bubble is likely to be immense.
The stock-market boom has made many Chinese richer, and that has led to a surge in buying: In effect the recent acceleration of the Chinese economy to a better than 11% growth rate has been fueled by the stock bubble. Taking away this stimulus will slow economic growth, although no one knows by how much.
The bigger danger, though, is the amount of debt racked up by individuals, companies and even government agencies in their frenzy to get a piece of the Shanghai action. It's hard to get any real figures on the use of debt to buy stocks, but what we do know is worrying. Common are anecdotes like that of Xiao Feng, reported in the Nanjing newspapers, who borrowed against his three apartments and two cars to buy stocks. In Shenzhen, newspaper editor Qi Xiaotong put her family home up for collateral for a loan of 1.3 million yuan (about $175,000) that she then used to buy stocks. "I don't think there is any risk at all, because I have already doubled my money," she told The Guardian.
Shenzhen News Net reported the story of another Nanjing man who mortgaged his apartment to raise 60,000 yuan (roughly $8,000) to buy stocks.
And irresponsible trading clearly isn't limited to individual Chinese. In mid-May, the Shanghai Municipal Housing Maintenance Funds Management agency, which cleans drains and repairs elevators in city apartment buildings, was revealed to have put about $103 million into the Shanghai stock market -- in spite of a ban on such investments. Estimates put the total stock-market investment by army and police units, local governments and state-owned companies at $125 billion.
The Party leery of ending the party
The government could bring the Shanghai market to its knees by raising interest rates on bank accounts -- thus diminishing that cash flow -- and increasing capital gains taxes at any time of its choosing. So why hasn't the government moved to snuff out at least some of this speculation?
Because moving in anything other than baby steps could unleash a storm of social unrest in China. The kind of wealth created by the stock-market boom is pretty much all that legitimizes Communist Party rule these days. The social contract in China now runs along these lines: Give us rising incomes, more things like those people have in the developed economies and a reasonable degree of stability, and we'll let you run the country. If the Communist Party can't deliver its part of the bargain, however, no one knows how much force it would have to apply to ensure its continued hold on power.
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The cynics trading on the reluctance of the Beijing government to rock the boat before the Olympics in August 2008 are absolutely correct. The games are a huge prestige event for China's rulers and they very much want to avoid anything that might increase the odds of embarrassing demonstrations in front of an international television audience numbering in the billions.
But after that? All bets are off. I'd expect to see further increases in interest rates and further loosening of limits on overseas investment by Chinese citizens. The model is the Qualified Domestic Institutional Investor plan launched in Hong Kong last June. It hasn't been very popular to because the returns from investing in China have so far outstripped returns from overseas markets that most Chinese investors don't see the point. But the effort is part of what China needs to create in order to tame domestic stock-market speculation: Other investment opportunities besides the Shanghai casino.
At best, the effect of all of this will be a gradual slowing of the gains on the Shanghai exchange early in 2008 as investors move to the sidelines in an orderly fashion in anticipation of the post-Olympics changes. At worst, we'll see a mad rush for an exit at a completely unpredictable point in time ahead of the games as some rumor panics investors into selling all at once. Remember, Chinese investors expect Beijing to act. They're already trying to time their exit.
A 1987-style crash in the Shanghai stock market would be a disaster for individual Chinese investors. Some would see their entire stock-market wealth disappear overnight. Some would see their entire stock wealth and their homes vanish in a single rush. The Chinese economy would be knocked for a loop.
Video on MSN Money
Global market blowup
Sure, the Shanghai stock market could melt down, but China isn't the only economy that could be in trouble. MSN Money's Jim Jubak says India, Japan, Europe and the U.S. are all on his shortlist of regions that could face a setback.
But the Chinese government has the financial reserves to restore confidence in the stock market and the economy in quick order, just as the U.S. Federal Reserve did after the October 1987 crash in the United States. I'd expect economic growth in China to rebound relatively quickly. Still, I worry that such an event would produce a surge in social unrest as the losers in the crash demand redress. The level of domestic protest -- and the amount of routine violence employed to quash it -- has been steadily on the rise in China in the past few years.
The world won't end
And the effect on other markets? Limited, I think, after an initial empathetic panic. Because China's financial markets remain relatively closed to most foreign investors, only a relatively few big overseas financial institutions would take much of a hit. International companies could see their Chinese partners go under and be forced to ride to the rescue, and it's possible that big investment houses in New York and London have derivative contracts out with Chinese institutions that would take a bite out of their bottom lines. But I don't see any exposure large enough to send a non-Chinese company spiraling down in the wake of a Shanghai meltdown. And that's the kind of event needed before the crash would spread.
But all this can change. If the Chinese government indeed doesn't act until September 2008, the bubble will be even more overinflated when it does. If the crash doesn't come until late in 2008, that's another 15 months for U.S. financial institutions to deepen their involvement in the Chinese financial markets.
In short, I don't think a Shanghai stock-market crash, as bad as it would be, is the kind of end-of-the-financial-world-as-we-know-it event that the doomsayers are calling for.
But I'm sure keeping my eye on China and its bubble.
Updates to Jubak's Picks
Sell Yahoo (YHOO, news, msgs).
Yahoo's greatest strength, branded online advertising, is under attack. The recent acquisitions of aQuantive (AQNT, news, msgs) by Microsoft (MSFT, news, msgs), the parent of MSN Money, and of privately held DoubleClick by Google (GOOG, news, msgs) are aimed right at Yahoo's leading 10% share of the market for branded advertising on the Net. Panama, Yahoo's new search-ad sales platform, is intended to let Yahoo fight back against Google in the market for search-based ad sales. There Yahoo trails Google with a 20% share in the first quarter, down from 25% in 2006. But in the still very young and fragmented -- Microsoft was No. 2 in the market with an 8% share in 2006 -- branded-advertising market, Yahoo's huge user base of 500 million has been a huge advantage. Since Yahoo knows so much about the behavior of these users, brand advertisers have been willing to pay up to ensure their ads hit exactly the right audiences.
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But in their acquisitions, Google and Microsoft have leapfrogged Yahoo by buying huge behavioral databases that rival Yahoo's in size but are built on data from across the Web rather than on the behavior of Yahoo users alone. I don't know whether that is a compelling strategic advantage in the long run, but I do know that defending its turf from Google and Microsoft will put pressure on a company that has struggled to execute in recent years. (And you'll notice, if you look at a price chart, that the stock has broken down again.) Better management at Yahoo could lead a strong counterattack, given the company's strengths, but I'm not willing to bet on the current team against the competitive field. As of May 29, I'm selling Yahoo out of Jubak's Picks with a loss of 16% since I added the shares in February 2005. (Full disclosure: I will sell my personal shares of Yahoo three days after this column is posted.)
New developments on past columns
"The 5 best stocks for 2007": Procter & Gamble's (PG, news, msgs) May 1 report on third- quarter earnings for the company's June 2007 fiscal year didn't do the stock any good. Shares fell by 4.5% from April 30 through May 10. I call this a buying opportunity. If you're looking for a blue-chip consumer products company to ride through the turmoil created by what seem to be (at the moment) rising interest rates and falling economic growth, you can't find a better horse than Procter & Gamble. Investors in Procter & Gamble are used to upside earnings surprises, and when they didn't get one in the third quarter, they sold. Not that the quarter was bad. Revenue climbed 8.3%, and organic sales (that's total revenue minus revenue from acquisitions) were up 6%. Earnings from operations grew by 12%. In its post-announcement conference call, the company confirmed earnings guidance for the 2008 fiscal year of $3.47. That would mean 14.5% growth in fiscal 2008 on top of Wall Street's projections for 13.5% growth in fiscal 2007. The shares sell for 20.7 times projected fiscal 2007 earnings per share. You have to go back to 2005 to find a time when the stock was cheaper. As of May 29 I'm keeping my target price at $72 a share but stretching out the timetable to December 2007 from the prior September.
Editor's note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest rate environment, see Jim Jubak's portfolio of Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Yahoo. He did not own short positions in any stock mentioned in this column.
Sunday, 3 June 2007
Kuwait kicks sand on the dollar
Kuwait recently waved goodbye and stopped pegging its currency to the U.S. dollar. Here's why Kuwait pulled out and what the weakening dollar means to your wallet.
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By Jim Jubak
The U.S. dollar took a big hit last week. From Kuwait. On May 20, Kuwait stopped pegging its currency, the dinar, to the U.S. dollar.
You know your currency has become a 98-pound weakling when Kuwait can kick sand on it.
Even worse, Kuwait wasn't acting out of any animus toward the United States. The tiny kingdom wedged between Iraq and Saudi Arabia remains a U.S. ally. So the country wasn't trying to make any political point. It had simply become too expensive for Kuwait to keep the dinar linked to the dollar. I expect other countries, not tomorrow but soon, to take the same action. And that will be just one more milestone in the decline of the dollar.
You should care about that in the short run because a dollar declining in both price and prestige makes everything from imported goods to home mortgages more expensive in the United States.
In the long run, Kuwait's action is just one more piece of evidence that the world is increasingly working with an ad hoc monetary system where each country attempts to extract momentary advantage from exchange rates.
A careful decision
Here are the bare-bone facts. On May 20, Sheikh Salem Abdulaziz Al-Sabah, governor of the Central Bank of Kuwait, announced that his country would end the peg that linked the Kuwaiti dinar to the U.S. dollar. Up until that point, the central bank had managed the dinar, intervening in the currency markets as required, to keep its price within 3.5% of the price of the U.S. dollar. Going forward, the bank will use a basket of currencies to set the price of the dinar. According to the bank, the U.S. dollar is likely to make up about 75% of that new currency basket. In effect, the move reduces the country's exposure to the U.S. dollar by about 25%.
Kuwait's central bank didn't make this decision lightly. A small country -- even a small, rich country such as Kuwait -- faces a daunting task if it decides to go it alone in the global currency markets. Currency speculators have access to so much capital these days that they can easily overwhelm the efforts of a central bank like that of Kuwait and run the value of a currency massively higher or lower. Actually, that can happen to not-so-small countries, too. In 1992, currency traders drove the English pound down and out of the European Exchange Rate Mechanism, creating billions in profits for traders such as George Soros, who had shorted the pound.
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By linking the dinar to the dollar, Kuwait had avoided the worst of those dangers. The dollar market is so huge and so liquid that it is harder to stampede one way or another. Pegging the dinar to the dollar gave business the confidence to trade in the dinar, since businesses wouldn't see their profits decimated by a rapid change in exchange rates. And pegging the dinar to the dollar prevented a huge rise in the value of the dinar at just the time that Kuwait, like so many oil-producing countries, was trying to diversify its economy by creating export industries based on oil. A big rise in the dinar would have made those exports uncompetitive on tough global markets.
The threat of inflation
Kuwait broke the dinar-dollar peg only when it became too painfully expensive to keep it. The steady decline of the U.S. dollar, which hit a record low against the euro in April, meant that the dinar fell gradually but steadily in price, too. That left Kuwait facing rising prices for everything it imports.
Not exactly a small problem for a country that imports almost everything. For example, only 1% of Kuwait is arable, so the country imports all its food except for fish and shrimp. Kuwait even imports much of its drinking water: 75% of the drinking water used by the population is either distilled from seawater or imported.
The decline in the dollar-pegged dinar had recently driven inflation to 4% in Kuwait, about two times the historic average.
Video on MSN Money
Shifting off the dollar
Although the U.S. dollar has been struggling against foreign currencies, there really isn't a good alternative global currency, says MSN Money's Jim Jubak. Still, some countries that want to reduce their reliance on the U.S. dollar may shift to a basket of other currencies.
That's not terribly high as inflation rates go, but as every central banker in the world knows, inflation gets out of control very easily. Expectations by consumers, workers and governments rapidly adjust so people get accustomed to rising prices and costs -- and include the assumption that prices will be even higher tomorrow in their thinking. Once these inflationary expectations take hold, they're hard to stomp out. That's why central bankers these days apply the brakes so heavily at the first sign of inflation.
Kuwait has only to look down the Persian Gulf to see what could happen. In neighboring Qatar, inflation climbed to a record 15% annualized rate in May. Soaring oil prices have left the country awash in cash, which has, in turn, led to huge increases in residential and commercial rents. With the Qatari riyal pegged to the dollar, the central bank there, like the one in Kuwait, has been handicapped in its fight against inflation.
But as long as the dinar was pegged to the U.S. dollar, there was very little Kuwait's central bank could do to fight inflation. For example, raising interest rates, a standard tool used by the U.S. Federal Reserve to fight inflation, was out because an increase in Kuwaiti interest rates would have sent the dinar soaring and broken the dinar-dollar peg. Breaking the peg put monetary control back in the hands of the Central Bank of Kuwait.
But the bank may have just traded one problem, inflation, for another -- currency speculation. In the weeks before Kuwait went off the peg, speculators had been buying dinar hand over fist in anticipation of the move. If the dinar soared in price, they'd make a huge profit on their currency holdings. In an effort to beat back those speculators and to prevent the dinar from the kind of rapid increase in price that is often followed by a wrenching plunge, the central bank on May 28 suspended sales of short-term central bank certificates of deposit. The country's banks use these CDs as a place to park short-term funds, and the suspension had the effect of driving short-term interest rates in Kuwait to 4.125% from 5.1875% a few days earlier.
Fallout in the U.S.
This all leaves the U.S. dollar in a very uncomfortable position. On the one hand, we are seeing a gradual move away from the dollar by the world's central banks in favor of baskets of currencies. This puts gradual downward pressure on the price of the dollar and leads to a gradual increase in U.S. inflation and U.S. interest rates, as well as a gradual decline in relative U.S. standards of living and U.S. financial market performance.
As in Kuwait, where such a move resulted in a 25% shift away from the U.S. dollar in favor of other currencies, I don't think the result is a stampede out of the U.S. dollar. The dollar balloon isn't about to burst. But we are witnessing the air gradually leak out of the currency.
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I think this reflects global fundamentals. The U.S. economy is less dominant in the global economy today, with the rise of China, India and the European Union, than it was in, say, 1980. The size of the U.S. trade deficit also argues for a gradual depreciation of the dollar in order to bring global trade flows closer into balance.
On the other hand, it's clear that some countries in the world are quite happy to preserve as much of an unofficial dollar peg as they can. It's to the benefit of a country with an export driven economy like China, which uses what I'd call an unofficial, mostly-dollar-peg monetary policy, to keep their currencies pegged to the dollar. That way their own currency doesn't appreciate, and their exports retain a price advantage in the marketplace. Saudi Arabia, which has an official dollar peg, falls in that category because that country is trying to build up value-added, export industries to diversify its economy. Russia, a country with an aging industrial base that wasn't globally competitive to begin with, certainly doesn't want to see the ruble appreciate so that the country's exports become even less competitive.
The combination seems to be heading toward a jury-rigged global monetary system. This system doesn't rely on market mechanisms to adjust the relative value of currencies. Instead, individual countries opt in and out of those market mechanisms as they choose with their policy moves designed to maximize their own return from the rules of the market.
Video on MSN Money
Shifting off the dollar
Although the U.S. dollar has been struggling against foreign currencies, there really isn't a good alternative global currency, says MSN Money's Jim Jubak. Still, some countries that want to reduce their reliance on the U.S. dollar may shift to a basket of other currencies.
This system as a whole relies upon a touching faith that enough countries will play by the rules of the market, so that the market will continue to function with rules that can be exploited as national self-interest dictates.
Interesting concept. Don't think I'll sell my position in gold stocks just yet.
New developments on past columns
"China's Olympian stock-market sprint": It was a huge overreaction -- which just shows you exactly how big the speculative bubble is on China's Shanghai stock market. The Shanghai Composite Index fell 6.5% on May 30 as investors reacted to news that the Beijing government had raised the tax on stock trades. How big was the increase in what is called the stamp tax? Well, it went from 0.1% up to a whopping 0.35%. On a $10,000 trade, that's an increase from $10 to $30 in taxes.
By itself the tax increase won't change a thing on the Shanghai market -- an increase of $20 won't stop the speculators or individual Chinese who see the stock market as the best route to wealth from trading. But I'd read the tax increase as another warning from Beijing to the Shanghai market of the government's intention to act when the time is right (in my opinion, after the Beijing Olympics in August 2008). Judging from the market's drop, traders in Shanghai got the message.
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E-mail to a friend
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By Jim Jubak
The U.S. dollar took a big hit last week. From Kuwait. On May 20, Kuwait stopped pegging its currency, the dinar, to the U.S. dollar.
You know your currency has become a 98-pound weakling when Kuwait can kick sand on it.
Even worse, Kuwait wasn't acting out of any animus toward the United States. The tiny kingdom wedged between Iraq and Saudi Arabia remains a U.S. ally. So the country wasn't trying to make any political point. It had simply become too expensive for Kuwait to keep the dinar linked to the dollar. I expect other countries, not tomorrow but soon, to take the same action. And that will be just one more milestone in the decline of the dollar.
You should care about that in the short run because a dollar declining in both price and prestige makes everything from imported goods to home mortgages more expensive in the United States.
In the long run, Kuwait's action is just one more piece of evidence that the world is increasingly working with an ad hoc monetary system where each country attempts to extract momentary advantage from exchange rates.
A careful decision
Here are the bare-bone facts. On May 20, Sheikh Salem Abdulaziz Al-Sabah, governor of the Central Bank of Kuwait, announced that his country would end the peg that linked the Kuwaiti dinar to the U.S. dollar. Up until that point, the central bank had managed the dinar, intervening in the currency markets as required, to keep its price within 3.5% of the price of the U.S. dollar. Going forward, the bank will use a basket of currencies to set the price of the dinar. According to the bank, the U.S. dollar is likely to make up about 75% of that new currency basket. In effect, the move reduces the country's exposure to the U.S. dollar by about 25%.
Kuwait's central bank didn't make this decision lightly. A small country -- even a small, rich country such as Kuwait -- faces a daunting task if it decides to go it alone in the global currency markets. Currency speculators have access to so much capital these days that they can easily overwhelm the efforts of a central bank like that of Kuwait and run the value of a currency massively higher or lower. Actually, that can happen to not-so-small countries, too. In 1992, currency traders drove the English pound down and out of the European Exchange Rate Mechanism, creating billions in profits for traders such as George Soros, who had shorted the pound.
More from MSN Money
China's Olympian stock-market sprint
3 hot sectors where shares are scarce
Why investing is safer overseas
The new era of tech investing
How cheap debt overinflates stocks
By linking the dinar to the dollar, Kuwait had avoided the worst of those dangers. The dollar market is so huge and so liquid that it is harder to stampede one way or another. Pegging the dinar to the dollar gave business the confidence to trade in the dinar, since businesses wouldn't see their profits decimated by a rapid change in exchange rates. And pegging the dinar to the dollar prevented a huge rise in the value of the dinar at just the time that Kuwait, like so many oil-producing countries, was trying to diversify its economy by creating export industries based on oil. A big rise in the dinar would have made those exports uncompetitive on tough global markets.
The threat of inflation
Kuwait broke the dinar-dollar peg only when it became too painfully expensive to keep it. The steady decline of the U.S. dollar, which hit a record low against the euro in April, meant that the dinar fell gradually but steadily in price, too. That left Kuwait facing rising prices for everything it imports.
Not exactly a small problem for a country that imports almost everything. For example, only 1% of Kuwait is arable, so the country imports all its food except for fish and shrimp. Kuwait even imports much of its drinking water: 75% of the drinking water used by the population is either distilled from seawater or imported.
The decline in the dollar-pegged dinar had recently driven inflation to 4% in Kuwait, about two times the historic average.
Video on MSN Money
Shifting off the dollar
Although the U.S. dollar has been struggling against foreign currencies, there really isn't a good alternative global currency, says MSN Money's Jim Jubak. Still, some countries that want to reduce their reliance on the U.S. dollar may shift to a basket of other currencies.
That's not terribly high as inflation rates go, but as every central banker in the world knows, inflation gets out of control very easily. Expectations by consumers, workers and governments rapidly adjust so people get accustomed to rising prices and costs -- and include the assumption that prices will be even higher tomorrow in their thinking. Once these inflationary expectations take hold, they're hard to stomp out. That's why central bankers these days apply the brakes so heavily at the first sign of inflation.
Kuwait has only to look down the Persian Gulf to see what could happen. In neighboring Qatar, inflation climbed to a record 15% annualized rate in May. Soaring oil prices have left the country awash in cash, which has, in turn, led to huge increases in residential and commercial rents. With the Qatari riyal pegged to the dollar, the central bank there, like the one in Kuwait, has been handicapped in its fight against inflation.
But as long as the dinar was pegged to the U.S. dollar, there was very little Kuwait's central bank could do to fight inflation. For example, raising interest rates, a standard tool used by the U.S. Federal Reserve to fight inflation, was out because an increase in Kuwaiti interest rates would have sent the dinar soaring and broken the dinar-dollar peg. Breaking the peg put monetary control back in the hands of the Central Bank of Kuwait.
But the bank may have just traded one problem, inflation, for another -- currency speculation. In the weeks before Kuwait went off the peg, speculators had been buying dinar hand over fist in anticipation of the move. If the dinar soared in price, they'd make a huge profit on their currency holdings. In an effort to beat back those speculators and to prevent the dinar from the kind of rapid increase in price that is often followed by a wrenching plunge, the central bank on May 28 suspended sales of short-term central bank certificates of deposit. The country's banks use these CDs as a place to park short-term funds, and the suspension had the effect of driving short-term interest rates in Kuwait to 4.125% from 5.1875% a few days earlier.
Fallout in the U.S.
This all leaves the U.S. dollar in a very uncomfortable position. On the one hand, we are seeing a gradual move away from the dollar by the world's central banks in favor of baskets of currencies. This puts gradual downward pressure on the price of the dollar and leads to a gradual increase in U.S. inflation and U.S. interest rates, as well as a gradual decline in relative U.S. standards of living and U.S. financial market performance.
As in Kuwait, where such a move resulted in a 25% shift away from the U.S. dollar in favor of other currencies, I don't think the result is a stampede out of the U.S. dollar. The dollar balloon isn't about to burst. But we are witnessing the air gradually leak out of the currency.
More from MSN Money
China's Olympian stock-market sprint
3 hot sectors where shares are scarce
Why investing is safer overseas
The new era of tech investing
How cheap debt overinflates stocks
I think this reflects global fundamentals. The U.S. economy is less dominant in the global economy today, with the rise of China, India and the European Union, than it was in, say, 1980. The size of the U.S. trade deficit also argues for a gradual depreciation of the dollar in order to bring global trade flows closer into balance.
On the other hand, it's clear that some countries in the world are quite happy to preserve as much of an unofficial dollar peg as they can. It's to the benefit of a country with an export driven economy like China, which uses what I'd call an unofficial, mostly-dollar-peg monetary policy, to keep their currencies pegged to the dollar. That way their own currency doesn't appreciate, and their exports retain a price advantage in the marketplace. Saudi Arabia, which has an official dollar peg, falls in that category because that country is trying to build up value-added, export industries to diversify its economy. Russia, a country with an aging industrial base that wasn't globally competitive to begin with, certainly doesn't want to see the ruble appreciate so that the country's exports become even less competitive.
The combination seems to be heading toward a jury-rigged global monetary system. This system doesn't rely on market mechanisms to adjust the relative value of currencies. Instead, individual countries opt in and out of those market mechanisms as they choose with their policy moves designed to maximize their own return from the rules of the market.
Video on MSN Money
Shifting off the dollar
Although the U.S. dollar has been struggling against foreign currencies, there really isn't a good alternative global currency, says MSN Money's Jim Jubak. Still, some countries that want to reduce their reliance on the U.S. dollar may shift to a basket of other currencies.
This system as a whole relies upon a touching faith that enough countries will play by the rules of the market, so that the market will continue to function with rules that can be exploited as national self-interest dictates.
Interesting concept. Don't think I'll sell my position in gold stocks just yet.
New developments on past columns
"China's Olympian stock-market sprint": It was a huge overreaction -- which just shows you exactly how big the speculative bubble is on China's Shanghai stock market. The Shanghai Composite Index fell 6.5% on May 30 as investors reacted to news that the Beijing government had raised the tax on stock trades. How big was the increase in what is called the stamp tax? Well, it went from 0.1% up to a whopping 0.35%. On a $10,000 trade, that's an increase from $10 to $30 in taxes.
By itself the tax increase won't change a thing on the Shanghai market -- an increase of $20 won't stop the speculators or individual Chinese who see the stock market as the best route to wealth from trading. But I'd read the tax increase as another warning from Beijing to the Shanghai market of the government's intention to act when the time is right (in my opinion, after the Beijing Olympics in August 2008). Judging from the market's drop, traders in Shanghai got the message.
Is there a statute of limitations on debt?
Yes, the clock ticks on credit-report scars and on the debts themselves. But that doesn't necessarily get you off the hook.
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By Liz Pulliam Weston
Not too long ago, the only people who had to worry about legal limitations on old debt collections were folks who didn't pay their bills.
Today, however, increasingly aggressive collectors are going after people for debts they've already paid or that aren't even theirs. Knowing something about so-called "statutes of limitations" on debts can help you deal with misdirected or belligerent collection attempts.
Here are just a few examples from my mailbag:
Suzy from New York City was fielding calls from a so-called "debt repurchaser," a company that buys old debts from other collection agencies. The repurchaser demanded payment for a credit card bill that Suzy paid through a credit counselor, but she'd long since lost all her records regarding the account.
Jerri's credit card number was stolen and used to call a 900 number, a premium call that cost more than $200. Her credit card issuer removed the charge and reissued new cards. Apparently the 900-number service provider turned the debt over to a collection agency, because three years later she started getting calls demanding payment.
Brian in West Hollywood messed up his credit big-time in his early 20s, but his father stepped in, paid off his bills and closed all his accounts. Nearly 15 years later, Brian had rebuilt his credit and was looking forward to buying his first home when he got a disturbing call from a collection agency. "They claim I have an outstanding debt of $387.30 from the early 1990s," Brian wrote. The debt was supposedly from a credit card that Brian doesn't remember ever having. "They have threatened that if I do not pay this, it will damage my credit report. . . . I feel like this is a scam, but I don't know. . . . I am nervous about any negative marks on my credit report."
The Federal Trade Commission and state regulators around the country have taken action against collectors that have tried to resuscitate old, paid-off debts or that hounded people about debts that weren't theirs. But you can't always count on regulators intervening in your case, so knowing something about debt limitations can help you defend yourself against the worst practices.
How old is too old to collect?
There are two major types of limitations on debt that you need to know -- and that many people confuse.
The first has to do with how long debt problems can show up on your credit reports. Federal law typically requires credit bureaus to drop negative information after seven years. The clock usually starts ticking 180 days after the account first goes delinquent (in other words, when you miss your first payment on the account). There are exceptions: Bankruptcies can remain on your credit reports for up to 10 years, and some debts, such as unpaid tax liens, can stay on your reports indefinitely.
More from MSN Money
Make a deal with debt collectors
Calculator: Are you in debt trouble?
Sleazy new debt collector tactics
Zombie debt is hard to kill
Your 5-minute guide to credit scores
Collectors can't legally restart the seven-year clock by "re-aging" the debt (giving it a new delinquency date) or by selling it to another agency. (The FTC shut down one large collection agency, CAMCO, after charging the company repeatedly re-aged debts in its attempts to collect.)
The other curb on debt collection is the statute of limitations, which gives creditors a certain time period -- in most states, three to six years -- in which to sue you over a debt.
Statutes of limitations vary widely by state, and by the type of debt, according to attorney John Lamb, co-author of "Solve Your Money Troubles: Get Debt Collectors off Your Back & Regain Financial Freedom." States often have different rules for oral and written contracts, as well as for "closed-end" contracts such as installment loans and "open-ended" contracts, which typically (but not always) include credit card accounts.
California, for example, has fairly short statutes of limitations on most debts: two years for oral contracts and four years for written contracts, promissory notes and credit card debts. Kentucky, by contrast, says creditors can sue over written contracts for 15 years after the last payment was made, and for five years on most other debts, including credit cards.
Some other key points about statutes of limitations:
The devil's in the details. Not only do states have different statutes of limitations for different debts, but two states may treat the same debt differently. A credit card debt might be considered an open-ended account in one state and a written contract in another. The only way to know for sure is to check your state laws or consult an attorney.
You can inadvertently restart the clock. Generally, the statute of limitations starts ticking from "date of last activity" on the accounts, said Los Angeles bankruptcy attorney Scott Bovitz. (If the account is still listed on your credit reports, the date of last activity should be noted there.) On a credit card debt, that could be the last payment you made or the last purchase you charged. But in some states, Lamb said, making a payment on an old debt, agreeing to an extended repayment plan or even acknowledging that the debt is yours can extend the statute of limitations or restart the clock altogether.
A creditor may still sue you after the SOL has run out. Suing or threatening to sue you after a statute of limitations has run out violates the Fair Debt Collection Practices Act, Lamb said, but that doesn't mean it doesn't happen. To prevent the creditor from winning a judgment against you, you'll need to show up in court and point out that the statute of limitations has expired.
The creditor may try to pick a better venue. If you sign a credit contract and move to another state with different limits, the creditor may try to sue you in the state that has the longer statute. If that's not the state in which you currently live, Lamb said, you should protest: "The general rule is that the state you live in" is the one whose statutes should apply.
Debts can still exist even if the creditor can't sue. Some people erroneously believe that debts are erased after the statute of limitations has run out. Although the creditor's ability to sue you has been curtailed, it can still try other methods to persuade you to pay, including calls and letters. The debt can also be sold to another collector that can renew efforts to get you to pay. A legitimate debt is truly erased only when it's paid or erased in bankruptcy court.
First, make sure you're covered
So how should you handle attempts to collect an out-of-statute debt? Sometimes the best recourse is to simply "hang up the phone and walk away," Lamb said.
"You want to be very careful," Lamb said, "not to say anything that could be used to restart the statute of limitations."
More from MSN Money
Make a deal with debt collectors
Calculator: Are you in debt trouble?
Sleazy new debt collector tactics
Zombie debt is hard to kill
Your 5-minute guide to credit scores
If you want to fight back, you should first make "absolutely sure" the statute of limitations has indeed expired, Lamb said. Otherwise, contacting the collector may goad it into more action.
In Jerri's case, for example, the statute of limitations in her home state of Wisconsin had three more years to run. Since the bogus debt didn't turn up on her credit reports and the collection agency didn't threaten to sue, she opted to just ignore the calls, which eventually stopped.
You can start your research at one of a number of Web sites that post information on statutes of limitations, such as CreditInfoCenter.com, whose chart includes links to relevant state laws.
If you're sure the debt is too old for a lawsuit, you could send the collector a letter via certified mail, return receipt requested. The letter should include the fact that the debt isn't yours (if that's true), that the statute of limitations has expired and that you want all collection efforts stopped.
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By Liz Pulliam Weston
Not too long ago, the only people who had to worry about legal limitations on old debt collections were folks who didn't pay their bills.
Today, however, increasingly aggressive collectors are going after people for debts they've already paid or that aren't even theirs. Knowing something about so-called "statutes of limitations" on debts can help you deal with misdirected or belligerent collection attempts.
Here are just a few examples from my mailbag:
Suzy from New York City was fielding calls from a so-called "debt repurchaser," a company that buys old debts from other collection agencies. The repurchaser demanded payment for a credit card bill that Suzy paid through a credit counselor, but she'd long since lost all her records regarding the account.
Jerri's credit card number was stolen and used to call a 900 number, a premium call that cost more than $200. Her credit card issuer removed the charge and reissued new cards. Apparently the 900-number service provider turned the debt over to a collection agency, because three years later she started getting calls demanding payment.
Brian in West Hollywood messed up his credit big-time in his early 20s, but his father stepped in, paid off his bills and closed all his accounts. Nearly 15 years later, Brian had rebuilt his credit and was looking forward to buying his first home when he got a disturbing call from a collection agency. "They claim I have an outstanding debt of $387.30 from the early 1990s," Brian wrote. The debt was supposedly from a credit card that Brian doesn't remember ever having. "They have threatened that if I do not pay this, it will damage my credit report. . . . I feel like this is a scam, but I don't know. . . . I am nervous about any negative marks on my credit report."
The Federal Trade Commission and state regulators around the country have taken action against collectors that have tried to resuscitate old, paid-off debts or that hounded people about debts that weren't theirs. But you can't always count on regulators intervening in your case, so knowing something about debt limitations can help you defend yourself against the worst practices.
How old is too old to collect?
There are two major types of limitations on debt that you need to know -- and that many people confuse.
The first has to do with how long debt problems can show up on your credit reports. Federal law typically requires credit bureaus to drop negative information after seven years. The clock usually starts ticking 180 days after the account first goes delinquent (in other words, when you miss your first payment on the account). There are exceptions: Bankruptcies can remain on your credit reports for up to 10 years, and some debts, such as unpaid tax liens, can stay on your reports indefinitely.
More from MSN Money
Make a deal with debt collectors
Calculator: Are you in debt trouble?
Sleazy new debt collector tactics
Zombie debt is hard to kill
Your 5-minute guide to credit scores
Collectors can't legally restart the seven-year clock by "re-aging" the debt (giving it a new delinquency date) or by selling it to another agency. (The FTC shut down one large collection agency, CAMCO, after charging the company repeatedly re-aged debts in its attempts to collect.)
The other curb on debt collection is the statute of limitations, which gives creditors a certain time period -- in most states, three to six years -- in which to sue you over a debt.
Statutes of limitations vary widely by state, and by the type of debt, according to attorney John Lamb, co-author of "Solve Your Money Troubles: Get Debt Collectors off Your Back & Regain Financial Freedom." States often have different rules for oral and written contracts, as well as for "closed-end" contracts such as installment loans and "open-ended" contracts, which typically (but not always) include credit card accounts.
California, for example, has fairly short statutes of limitations on most debts: two years for oral contracts and four years for written contracts, promissory notes and credit card debts. Kentucky, by contrast, says creditors can sue over written contracts for 15 years after the last payment was made, and for five years on most other debts, including credit cards.
Some other key points about statutes of limitations:
The devil's in the details. Not only do states have different statutes of limitations for different debts, but two states may treat the same debt differently. A credit card debt might be considered an open-ended account in one state and a written contract in another. The only way to know for sure is to check your state laws or consult an attorney.
You can inadvertently restart the clock. Generally, the statute of limitations starts ticking from "date of last activity" on the accounts, said Los Angeles bankruptcy attorney Scott Bovitz. (If the account is still listed on your credit reports, the date of last activity should be noted there.) On a credit card debt, that could be the last payment you made or the last purchase you charged. But in some states, Lamb said, making a payment on an old debt, agreeing to an extended repayment plan or even acknowledging that the debt is yours can extend the statute of limitations or restart the clock altogether.
A creditor may still sue you after the SOL has run out. Suing or threatening to sue you after a statute of limitations has run out violates the Fair Debt Collection Practices Act, Lamb said, but that doesn't mean it doesn't happen. To prevent the creditor from winning a judgment against you, you'll need to show up in court and point out that the statute of limitations has expired.
The creditor may try to pick a better venue. If you sign a credit contract and move to another state with different limits, the creditor may try to sue you in the state that has the longer statute. If that's not the state in which you currently live, Lamb said, you should protest: "The general rule is that the state you live in" is the one whose statutes should apply.
Debts can still exist even if the creditor can't sue. Some people erroneously believe that debts are erased after the statute of limitations has run out. Although the creditor's ability to sue you has been curtailed, it can still try other methods to persuade you to pay, including calls and letters. The debt can also be sold to another collector that can renew efforts to get you to pay. A legitimate debt is truly erased only when it's paid or erased in bankruptcy court.
First, make sure you're covered
So how should you handle attempts to collect an out-of-statute debt? Sometimes the best recourse is to simply "hang up the phone and walk away," Lamb said.
"You want to be very careful," Lamb said, "not to say anything that could be used to restart the statute of limitations."
More from MSN Money
Make a deal with debt collectors
Calculator: Are you in debt trouble?
Sleazy new debt collector tactics
Zombie debt is hard to kill
Your 5-minute guide to credit scores
If you want to fight back, you should first make "absolutely sure" the statute of limitations has indeed expired, Lamb said. Otherwise, contacting the collector may goad it into more action.
In Jerri's case, for example, the statute of limitations in her home state of Wisconsin had three more years to run. Since the bogus debt didn't turn up on her credit reports and the collection agency didn't threaten to sue, she opted to just ignore the calls, which eventually stopped.
You can start your research at one of a number of Web sites that post information on statutes of limitations, such as CreditInfoCenter.com, whose chart includes links to relevant state laws.
If you're sure the debt is too old for a lawsuit, you could send the collector a letter via certified mail, return receipt requested. The letter should include the fact that the debt isn't yours (if that's true), that the statute of limitations has expired and that you want all collection efforts stopped.
The 5 most expensive addictions
Despite growing publicity about 'soft' addictions, drinking, smoking, drug abuse, overeating and gambling still are the most costly to society.
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By Forbes.com
Addictions are all the rage. Life experts popping up everywhere from group-speaking engagements to "The Oprah Winfrey Show" are extolling the dangers of overdoing activities from shopping and watching television to surfing the Web, drinking coffee and even daydreaming. Some even include excess complaining on the list.
"Everyone has some sort of (addiction), whether it's constantly checking your finances or just biting your nails," says Judith Miller, an author and speaker on the subject. "The problem is doing these things beyond their intended use, and they dominate your life."
Worrisome? Perhaps. But despite the hype, the overall economic effects of "soft addictions" pale in comparison with traditional "hard addictions" like drug abuse and alcoholism. While common sense says that those who spend work hours popping out to the store for a new pair of shoes or surfing the Web for personal use probably cost employers something in lost productivity, there's no definitive proof that employee "downtime" is any more prevalent than it was a generation ago, when telephone and water-cooler banter was in.
To be sure, there's plenty of anecdotal evidence to suggest that people can flirt with financial distress when overindulging in their favorite hobbies or escapes. Miller says the typical person she's met on her speaking and research travels spends $15,000 a year on his or her soft addictions, and that no one has ever spent less than $3,000.
Statistical evidence sparse
But there's precious little scientific quantification to enable economists to determine how much these problems really cost. Take sex addiction; it's good for headlines whenever it gets discussed, and it's considered a serious malady by the medical profession, but no formal cost studies exist.
Treatment-Center.net, an online service that compiles lists of treatment facilities around the country, estimated that the percentage of U.S. men addicted to pornography has grown to 20%, from 6%, in the past 10 years. That sounds plausible -- the Internet's been growing at an explosive rate during that time. But how much does this cost the economy? No one can say.
More from Forbes.com
Slideshow: 5 most expensive addictions
Celebrity second chances
Tips for handling workplace addictions
Industries with the most problem drinkers
Curb your snacking addiction
"We don't have government funds to carve out as much data for things like sex addictions, exercise and others," says John Fitzgerald of the Center for Addiction Management.
Some companies, such as New York tech advisory firm Basex and outplacement firm Challenger, Gray and Christmas, have tried to quantify the productivity costs of employees distracted by online activity, such as fantasy sports. But the methodology, which is simply to multiply average employee wages by an estimated number of minutes per day online, essentially treats people as robots who would normally spend every moment in full concentration mode.
That's never been the case. Why not look into how much productivity is supposedly lost by bathroom breaks or endless meetings?
The biggest problem, from an economic perspective, is that despite all these ills attacking the labor force, government statistics show that, thanks to technology, the average worker is twice as productive today as he or she was 40 years ago, meaning that an occasionally distracted employee is a small price for a business to pay for so much more output.
'Hard' addictions most costly
Meanwhile, studies compiled by various government health agencies show that the five most-chronicled "hard" addictions -- alcohol, drugs, tobacco, gambling and eating disorders -- are what society truly pays for. Those maladies cost taxpayers and businesses $590 billion annually, primarily in lost productivity and government-assisted medical treatment. That's about 5% of the national debt. And it doesn't count the sometimes bankrupting amounts of money those people personally spend on drugs, liquor, cigarettes or at the craps tables. Economically, those purchases are treated as pure transfer payments, no different than any other form of shopping.
The Substance Abuse and Mental Health Services Administration (SAMHSA) estimates that a combined $276 billion was spent or lost in 2005 on health care, lost productivity, premature death, auto accidents and crime relating to drug and alcohol abuse. Approximately three-quarters of that money came from public sources, it found.
About $18 billion of the tab went for treatment, even though fewer than 15% of the estimated 22 million Americans who engage in substance abuse actually seek treatment.
Early intervention recommended
"Many don't recognize they have a problem. Plus, there's the stigma," says Jack Stein, a SAMHSA director. He favors early intervention, including questioning of hospital patients by medical professionals who are qualified to detect an alcohol or drug problem.
Fitzgerald believes that standard inpatient treatment for a set period of time, or until an addict is "cured," is ineffective. He's found that with his patients, brief periodic follow-up visits make a big difference in keeping them sober.
"The real issue is keeping people connected with their treatment after their main rehab; it should be more about long-term management." he says.
Cigarette smoking, despite a shift in public attitudes over the years that's raised its social stigma, costs taxpayers $157 billion annually in medical expenses and lost productivity, according to the Centers for Disease Control and Prevention.
There are some outward signs that more people are kicking the habit. According to the Treasury Department, the 378 billion cigarettes officially sold in the United States last year represent a 21% drop from 1998, the year a group of state attorneys general secured a landmark settlement against the tobacco industry. The lawyers were quick to take credit for the sales decline in a statement this year, claiming that by "focusing attention on the conduct of tobacco companies and the dangers of cigarette smoking," they compelled more people to quit.
But given that the surgeon general's landmark warning on smoking came in 1964, it's doubtful that many people needed a reminder of cigarettes' health risks decades later. More likely, the sky-high taxes imposed by federal, state and local governments sent a good chunk of the business underground.
Meanwhile, eating disorders carry a $107 billion price tag, according to the National Institutes of Health. The estimated 39 million workdays lost to obesity-related problems cost businesses about $4 billion annually in lost productivity. And to think, some people criticized Wal-Mart Stores for considering a policy of attracting and retaining healthy employees.
Physical addictions aren't the only serious problems. Compulsive gambling, defined by the American Psychological Association as a mental health disorder of impulse control, accounts for $40 billion in annual losses from counseling, productivity declines and social services, according to an estimate by the National Gambling Impact Study Commission, a body created by Congress to study the problem.
Cutting down on shopping or television may make sense for plenty of people, but it's probably not a life or death decision. And neither your boss nor your fellow taxpayers are likely to care -- at least not until there's research out there that shows they should.
The 5 most expensive addictions
Alcohol. Estimated annual cost: $166 billion. Binge drinking hits the unemployed harder on a per capita basis -- 10.4%, vs. 8.4% of employed people. It is most prevalent in small metropolitan locales, rather than big cities or rural areas. The $18 billion spent on alcohol and drug treatment last year represented 1.3% of all health care spending.
Smoking. Estimated annual cost: $157 billion. The tab includes $75 billion in direct medical expenses, with the rest in lost productivity from ill patients missing work. Given the low-tax (or no-tax) underground cigarette economy on the Web and on Indian reservations, it's unlikely that sales and usage have dropped much over the past decade, official government statistics notwithstanding.
Drugs. Estimated annual cost: $110 billion. Like alcohol, illicit drug use is more prevalent among the unemployed. Most addicts are also heavy drinkers, though only a small minority of alcoholics are drug abusers. Crystal meth has followed marijuana, cocaine and heroin as the drug of choice among the young set.
Overeating. Estimated annual cost: $107 billion. Overeating increases the risk of many health problems, including heart attacks. Obesity causes 14% of attacks suffered by males and 20% of those suffered by females, the National Institutes for Health says, and fewer than a third of adults get regular exercise. The bulk of the $107 billion is the direct cost to treat heart disease, osteoarthritis, hypertension, gall bladder disease and cancer.
Gambling. Estimated annual cost: $40 billion. Addicted gamblers often feel compelled to chase after bad bets with more money in the hope of winning back their losses. And some who catch the fever develop the need to periodically raise the betting stakes to keep the same thrill. Also, addicts often face job loss, bankruptcy and forced home sales, and they are at greater risk to commit crimes like forgery and embezzlement.
By Tom Van Riper, Forbes
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By Forbes.com
Addictions are all the rage. Life experts popping up everywhere from group-speaking engagements to "The Oprah Winfrey Show" are extolling the dangers of overdoing activities from shopping and watching television to surfing the Web, drinking coffee and even daydreaming. Some even include excess complaining on the list.
"Everyone has some sort of (addiction), whether it's constantly checking your finances or just biting your nails," says Judith Miller, an author and speaker on the subject. "The problem is doing these things beyond their intended use, and they dominate your life."
Worrisome? Perhaps. But despite the hype, the overall economic effects of "soft addictions" pale in comparison with traditional "hard addictions" like drug abuse and alcoholism. While common sense says that those who spend work hours popping out to the store for a new pair of shoes or surfing the Web for personal use probably cost employers something in lost productivity, there's no definitive proof that employee "downtime" is any more prevalent than it was a generation ago, when telephone and water-cooler banter was in.
To be sure, there's plenty of anecdotal evidence to suggest that people can flirt with financial distress when overindulging in their favorite hobbies or escapes. Miller says the typical person she's met on her speaking and research travels spends $15,000 a year on his or her soft addictions, and that no one has ever spent less than $3,000.
Statistical evidence sparse
But there's precious little scientific quantification to enable economists to determine how much these problems really cost. Take sex addiction; it's good for headlines whenever it gets discussed, and it's considered a serious malady by the medical profession, but no formal cost studies exist.
Treatment-Center.net, an online service that compiles lists of treatment facilities around the country, estimated that the percentage of U.S. men addicted to pornography has grown to 20%, from 6%, in the past 10 years. That sounds plausible -- the Internet's been growing at an explosive rate during that time. But how much does this cost the economy? No one can say.
More from Forbes.com
Slideshow: 5 most expensive addictions
Celebrity second chances
Tips for handling workplace addictions
Industries with the most problem drinkers
Curb your snacking addiction
"We don't have government funds to carve out as much data for things like sex addictions, exercise and others," says John Fitzgerald of the Center for Addiction Management.
Some companies, such as New York tech advisory firm Basex and outplacement firm Challenger, Gray and Christmas, have tried to quantify the productivity costs of employees distracted by online activity, such as fantasy sports. But the methodology, which is simply to multiply average employee wages by an estimated number of minutes per day online, essentially treats people as robots who would normally spend every moment in full concentration mode.
That's never been the case. Why not look into how much productivity is supposedly lost by bathroom breaks or endless meetings?
The biggest problem, from an economic perspective, is that despite all these ills attacking the labor force, government statistics show that, thanks to technology, the average worker is twice as productive today as he or she was 40 years ago, meaning that an occasionally distracted employee is a small price for a business to pay for so much more output.
'Hard' addictions most costly
Meanwhile, studies compiled by various government health agencies show that the five most-chronicled "hard" addictions -- alcohol, drugs, tobacco, gambling and eating disorders -- are what society truly pays for. Those maladies cost taxpayers and businesses $590 billion annually, primarily in lost productivity and government-assisted medical treatment. That's about 5% of the national debt. And it doesn't count the sometimes bankrupting amounts of money those people personally spend on drugs, liquor, cigarettes or at the craps tables. Economically, those purchases are treated as pure transfer payments, no different than any other form of shopping.
The Substance Abuse and Mental Health Services Administration (SAMHSA) estimates that a combined $276 billion was spent or lost in 2005 on health care, lost productivity, premature death, auto accidents and crime relating to drug and alcohol abuse. Approximately three-quarters of that money came from public sources, it found.
About $18 billion of the tab went for treatment, even though fewer than 15% of the estimated 22 million Americans who engage in substance abuse actually seek treatment.
Early intervention recommended
"Many don't recognize they have a problem. Plus, there's the stigma," says Jack Stein, a SAMHSA director. He favors early intervention, including questioning of hospital patients by medical professionals who are qualified to detect an alcohol or drug problem.
Fitzgerald believes that standard inpatient treatment for a set period of time, or until an addict is "cured," is ineffective. He's found that with his patients, brief periodic follow-up visits make a big difference in keeping them sober.
"The real issue is keeping people connected with their treatment after their main rehab; it should be more about long-term management." he says.
Cigarette smoking, despite a shift in public attitudes over the years that's raised its social stigma, costs taxpayers $157 billion annually in medical expenses and lost productivity, according to the Centers for Disease Control and Prevention.
There are some outward signs that more people are kicking the habit. According to the Treasury Department, the 378 billion cigarettes officially sold in the United States last year represent a 21% drop from 1998, the year a group of state attorneys general secured a landmark settlement against the tobacco industry. The lawyers were quick to take credit for the sales decline in a statement this year, claiming that by "focusing attention on the conduct of tobacco companies and the dangers of cigarette smoking," they compelled more people to quit.
But given that the surgeon general's landmark warning on smoking came in 1964, it's doubtful that many people needed a reminder of cigarettes' health risks decades later. More likely, the sky-high taxes imposed by federal, state and local governments sent a good chunk of the business underground.
Meanwhile, eating disorders carry a $107 billion price tag, according to the National Institutes of Health. The estimated 39 million workdays lost to obesity-related problems cost businesses about $4 billion annually in lost productivity. And to think, some people criticized Wal-Mart Stores for considering a policy of attracting and retaining healthy employees.
Physical addictions aren't the only serious problems. Compulsive gambling, defined by the American Psychological Association as a mental health disorder of impulse control, accounts for $40 billion in annual losses from counseling, productivity declines and social services, according to an estimate by the National Gambling Impact Study Commission, a body created by Congress to study the problem.
Cutting down on shopping or television may make sense for plenty of people, but it's probably not a life or death decision. And neither your boss nor your fellow taxpayers are likely to care -- at least not until there's research out there that shows they should.
The 5 most expensive addictions
Alcohol. Estimated annual cost: $166 billion. Binge drinking hits the unemployed harder on a per capita basis -- 10.4%, vs. 8.4% of employed people. It is most prevalent in small metropolitan locales, rather than big cities or rural areas. The $18 billion spent on alcohol and drug treatment last year represented 1.3% of all health care spending.
Smoking. Estimated annual cost: $157 billion. The tab includes $75 billion in direct medical expenses, with the rest in lost productivity from ill patients missing work. Given the low-tax (or no-tax) underground cigarette economy on the Web and on Indian reservations, it's unlikely that sales and usage have dropped much over the past decade, official government statistics notwithstanding.
Drugs. Estimated annual cost: $110 billion. Like alcohol, illicit drug use is more prevalent among the unemployed. Most addicts are also heavy drinkers, though only a small minority of alcoholics are drug abusers. Crystal meth has followed marijuana, cocaine and heroin as the drug of choice among the young set.
Overeating. Estimated annual cost: $107 billion. Overeating increases the risk of many health problems, including heart attacks. Obesity causes 14% of attacks suffered by males and 20% of those suffered by females, the National Institutes for Health says, and fewer than a third of adults get regular exercise. The bulk of the $107 billion is the direct cost to treat heart disease, osteoarthritis, hypertension, gall bladder disease and cancer.
Gambling. Estimated annual cost: $40 billion. Addicted gamblers often feel compelled to chase after bad bets with more money in the hope of winning back their losses. And some who catch the fever develop the need to periodically raise the betting stakes to keep the same thrill. Also, addicts often face job loss, bankruptcy and forced home sales, and they are at greater risk to commit crimes like forgery and embezzlement.
By Tom Van Riper, Forbes
Why flights are getting longer?
Why flights are getting longer
Congestion at airports and in the sky is causing airlines to incorporate delays into their schedules. The cost to consumers and the carriers is high, and relief is slow in coming.
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By The Wall Street Journal
It takes 25 minutes longer to fly from New York to Los Angeles today than it did 10 years ago, and not because the head winds are stronger or the continental U.S. has stretched itself wider.
Dallas-Houston is now an hour-long flight instead of 55 minutes. United Airlines' 6 p.m. departure from Philadelphia to San Francisco is scheduled for 33 more minutes than it was 10 years ago. New York-Washington flights now get blocked out at almost two hours, even though you can fly it in about 35 minutes.
Travel delays get lots of attention for the pain of being trapped for hours, the inconvenience of missed connections and late arrivals, and the cost. About a half-million U.S. flights arrived late last year, and this coming summer may see record levels of delays, officials say. Estimates peg the cost at roughly $6 billion a year for airlines and more than $9 billion a year for passengers in terms of the value of time lost.
MSN Travel: Coping with flight delays
But that's only part of the problem. Many delays are now simply being incorporated into schedules, at high cost to consumers and airlines. Congestion at airports and in the sky have forced airlines to pad their schedules more than ever so flights have a better chance of arriving "on time," which the U.S. Department of Transportation defines as within 15 minutes of the airline's scheduled arrival time. Flights now arrive technically on time but with 30 minutes or more of delays written into the flight plans.
A check of two dozen flights from June airline schedules found that "block times" -- the times airlines allot in their schedules for the trip -- are about 10% higher than they were in June 1997. That kind of slowdown makes trips less productive for travelers, with more time spent sitting and waiting. It can also frustrate travelers who arrive "early" on days when there aren't slowdowns, only to wait for a gate to open at the scheduled arrival time.
More from MSN Money and The Wall Street Journal
How to win the airline bumping game
How to get money back when airfares drop
Find the cheapest airfare deals
Airlines add summer deals
A year in Paris -- for next to nothing
How to sleep cheap on your vacation
'It'll probably get worse before it gets better'
Even though some of today's airplanes cruise faster than the models they have replaced and are equipped with advanced navigation systems capable of flying the shortest route between two distant points, airlines have had little opportunity to take advantage of those improvements. Congestion in the sky and high fuel prices often slow the cruise speed of planes. A lack of modern equipment for air-traffic controllers means planes still fly from one radio beacon on the ground to another, hopscotching across the country instead of flying shorter, more-direct paths.
Experts say congested airports need more runways, and the modernization program that the Federal Aviation Administration has embarked on should eventually help speed up air travel. But "it'll probably get worse before it gets better," said Russell Chew, a former operating chief at the FAA who recently became chief operating officer at JetBlue Airways (JBLU, news, msgs).
Video on MSN Money
Taking the private route
Frustrations with flight delays as well as the hassles of heightened airport security since Sept. 11, 2001, has spurred a meteoric rise in private jet traffic.
FAA Administrator Marion Blakey says the modernization program is already producing improvements. New navigation routes have been added for the Dallas-Fort Worth and Atlanta airports, for example, using advanced navigation technology. That's allowed more than 10 takeoffs or landings per hour at each big airport, she said.
"We're creating more lanes in limited airspace," Blakey said. And that means planes move faster -- eventually.
The high price of delays
Consider the mess for flights between New York's Kennedy airport and Washington's Reagan National Airport. With congestion slowing Kennedy to a crawl most days, Delta Air Lines (DAL, news, msgs) now schedules its 8:40 p.m. flight with a Comair regional jet at one hour, 58 minutes. But in June 1997, Trans World Airlines had an 8:45 p.m. departure on that route with a turboprop airplane scheduled for 1:14 from gate to gate. It takes the faster plane 44 minutes longer.
It isn't just the Northeast corridor that is seeing the air slowdown. Northwest Airlines has added nine minutes to the length of an evening Detroit-Phoenix trip. Houston-Raleigh-Durham in the evening now takes 15 minutes longer than in 1997, according to Continental Airlines' (CAL, news, msgs) schedule.
The first flight of the day from Salt Lake City to Seattle for Southwest Airlines (LUV, news, msgs) now is scheduled 10 minutes longer than it was 10 years ago. Southwest runs a shuttle service between Dallas and Houston that for many years was scheduled at 55 minutes gate-to-gate. Now those flights are blocked at one hour.
MSN Travel: 10 airports where a delay is a delight
About two years ago, Southwest stretched its operating day by 15 to 20 minutes -- flights started a bit earlier and shut down for the night a bit later -- to increase block times without buying more airplanes, said Alex Heinold, a lead planner in Southwest's scheduling department. The airline bases its block times on a two-year historical record for each flight.
"Delays get baked into our history," Heinold said.
More from MSN Money and The Wall Street Journal
How to win the airline bumping game
How to get money back when airfares drop
Find the cheapest airfare deals
Airlines add summer deals
A year in Paris -- for next to nothing
How to sleep cheap on your vacation
Airlines hate adding minutes to their schedules because they cost millions. Pilot and flight-attendant costs increase since many are paid based on scheduled time. Maintenance costs rise since many functions are based on how many hours that engines and airplanes are in service. Inefficient schedules can even mean more planes are needed to fly the same schedule. For Southwest to avoid elongating its day two years ago, the airline would have had to add eight to 10 airplanes, Heinold said.
To save fuel and speed up flights, Southwest decided this month to begin equipping all of its planes with an advanced navigation system that will allow more-direct routings to runways -- part of the FAA's modernization effort.
Alaska Air Group (ALK, news, msgs) pioneered use of the technology in Alaska, where bad weather at airports without precision landing systems often forces flights to divert to other airports. The new technology onboard airplanes helped Alaska avoid 980 flight diversions last year, the FAA's Blakey said. Now the program is spreading to the contiguous 48 states.
"We're getting there," Blakey said. "But there's a lot more to be done."
This article was reported and written by Scott McCartney for The Wall Street Journal.
Congestion at airports and in the sky is causing airlines to incorporate delays into their schedules. The cost to consumers and the carriers is high, and relief is slow in coming.
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By The Wall Street Journal
It takes 25 minutes longer to fly from New York to Los Angeles today than it did 10 years ago, and not because the head winds are stronger or the continental U.S. has stretched itself wider.
Dallas-Houston is now an hour-long flight instead of 55 minutes. United Airlines' 6 p.m. departure from Philadelphia to San Francisco is scheduled for 33 more minutes than it was 10 years ago. New York-Washington flights now get blocked out at almost two hours, even though you can fly it in about 35 minutes.
Travel delays get lots of attention for the pain of being trapped for hours, the inconvenience of missed connections and late arrivals, and the cost. About a half-million U.S. flights arrived late last year, and this coming summer may see record levels of delays, officials say. Estimates peg the cost at roughly $6 billion a year for airlines and more than $9 billion a year for passengers in terms of the value of time lost.
MSN Travel: Coping with flight delays
But that's only part of the problem. Many delays are now simply being incorporated into schedules, at high cost to consumers and airlines. Congestion at airports and in the sky have forced airlines to pad their schedules more than ever so flights have a better chance of arriving "on time," which the U.S. Department of Transportation defines as within 15 minutes of the airline's scheduled arrival time. Flights now arrive technically on time but with 30 minutes or more of delays written into the flight plans.
A check of two dozen flights from June airline schedules found that "block times" -- the times airlines allot in their schedules for the trip -- are about 10% higher than they were in June 1997. That kind of slowdown makes trips less productive for travelers, with more time spent sitting and waiting. It can also frustrate travelers who arrive "early" on days when there aren't slowdowns, only to wait for a gate to open at the scheduled arrival time.
More from MSN Money and The Wall Street Journal
How to win the airline bumping game
How to get money back when airfares drop
Find the cheapest airfare deals
Airlines add summer deals
A year in Paris -- for next to nothing
How to sleep cheap on your vacation
'It'll probably get worse before it gets better'
Even though some of today's airplanes cruise faster than the models they have replaced and are equipped with advanced navigation systems capable of flying the shortest route between two distant points, airlines have had little opportunity to take advantage of those improvements. Congestion in the sky and high fuel prices often slow the cruise speed of planes. A lack of modern equipment for air-traffic controllers means planes still fly from one radio beacon on the ground to another, hopscotching across the country instead of flying shorter, more-direct paths.
Experts say congested airports need more runways, and the modernization program that the Federal Aviation Administration has embarked on should eventually help speed up air travel. But "it'll probably get worse before it gets better," said Russell Chew, a former operating chief at the FAA who recently became chief operating officer at JetBlue Airways (JBLU, news, msgs).
Video on MSN Money
Taking the private route
Frustrations with flight delays as well as the hassles of heightened airport security since Sept. 11, 2001, has spurred a meteoric rise in private jet traffic.
FAA Administrator Marion Blakey says the modernization program is already producing improvements. New navigation routes have been added for the Dallas-Fort Worth and Atlanta airports, for example, using advanced navigation technology. That's allowed more than 10 takeoffs or landings per hour at each big airport, she said.
"We're creating more lanes in limited airspace," Blakey said. And that means planes move faster -- eventually.
The high price of delays
Consider the mess for flights between New York's Kennedy airport and Washington's Reagan National Airport. With congestion slowing Kennedy to a crawl most days, Delta Air Lines (DAL, news, msgs) now schedules its 8:40 p.m. flight with a Comair regional jet at one hour, 58 minutes. But in June 1997, Trans World Airlines had an 8:45 p.m. departure on that route with a turboprop airplane scheduled for 1:14 from gate to gate. It takes the faster plane 44 minutes longer.
It isn't just the Northeast corridor that is seeing the air slowdown. Northwest Airlines has added nine minutes to the length of an evening Detroit-Phoenix trip. Houston-Raleigh-Durham in the evening now takes 15 minutes longer than in 1997, according to Continental Airlines' (CAL, news, msgs) schedule.
The first flight of the day from Salt Lake City to Seattle for Southwest Airlines (LUV, news, msgs) now is scheduled 10 minutes longer than it was 10 years ago. Southwest runs a shuttle service between Dallas and Houston that for many years was scheduled at 55 minutes gate-to-gate. Now those flights are blocked at one hour.
MSN Travel: 10 airports where a delay is a delight
About two years ago, Southwest stretched its operating day by 15 to 20 minutes -- flights started a bit earlier and shut down for the night a bit later -- to increase block times without buying more airplanes, said Alex Heinold, a lead planner in Southwest's scheduling department. The airline bases its block times on a two-year historical record for each flight.
"Delays get baked into our history," Heinold said.
More from MSN Money and The Wall Street Journal
How to win the airline bumping game
How to get money back when airfares drop
Find the cheapest airfare deals
Airlines add summer deals
A year in Paris -- for next to nothing
How to sleep cheap on your vacation
Airlines hate adding minutes to their schedules because they cost millions. Pilot and flight-attendant costs increase since many are paid based on scheduled time. Maintenance costs rise since many functions are based on how many hours that engines and airplanes are in service. Inefficient schedules can even mean more planes are needed to fly the same schedule. For Southwest to avoid elongating its day two years ago, the airline would have had to add eight to 10 airplanes, Heinold said.
To save fuel and speed up flights, Southwest decided this month to begin equipping all of its planes with an advanced navigation system that will allow more-direct routings to runways -- part of the FAA's modernization effort.
Alaska Air Group (ALK, news, msgs) pioneered use of the technology in Alaska, where bad weather at airports without precision landing systems often forces flights to divert to other airports. The new technology onboard airplanes helped Alaska avoid 980 flight diversions last year, the FAA's Blakey said. Now the program is spreading to the contiguous 48 states.
"We're getting there," Blakey said. "But there's a lot more to be done."
This article was reported and written by Scott McCartney for The Wall Street Journal.
When Banks Turn Evil
We knew there were going to be fees. But booby traps? Here's how to fight back.
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By Liz Pulliam Weston
Banks have to make money to stay in business. I was an economics major, so I get that.
What I don't get is why so many consumers do nothing as banks get bolder and bolder about picking their pockets. It's no longer nickel-and-diming -- we're losing $10, $20 and $30 a pop as banks come up with ever-more-creative ways to "fee" us to death.
The banking industry collects more than $50 billion a year in various service charges, more than twice the total of a decade ago. It's time we pushed back.
Sometimes just shining the light of scrutiny on these policies is enough to get banks to back down; read below about what happened recently with ING Direct bank. Other times, we need to protest, involve our lawmakers or even move our money elsewhere.
Here are some of the most egregious practices, and what you can do about them:
Checks clear almost immediately; deposits take days
In recent years, changes in federal laws have all but eliminated "float" -- the time it takes for a check to clear from the writer's bank account. What used to take days now often takes hours or less. What hasn't been speeded up is the time it takes for deposits to clear and be available for your withdrawal.
The Fed is required by law to reduce maximum deposit hold times as check-processing gets faster, but it recently decided against requiring banks to make deposits available sooner. Essentially, regulators concluded that even though money disappears from your account a lot quicker these days, it still doesn't disappear fast enough to warrant the extra costs banks might face from crediting you with your deposits more quickly. So: Heads you lose, tails the banks win.
More from MSN Money
Pricier stamps a boost for online bill payment
Credit card companies' evil tricks
A big lender's credit card trap
Debit cards: A good deal gets better
Your 5-minute guide to banking
What you can do: Kick up a fuss with your lawmakers. Banks make billions from consumer accounts; they should be required to invest some of that in speeding up deposits. (You can locate your U.S. representative here and your senators here. You'll find telephone numbers, addresses and e-mail addresses on their individual pages.)
Stacking the deck against you
Most big banks, and many smaller ones, process checks that arrive the same day in order of their size, with the largest check processed first. Banks say they do this to increase the odds that consumers' most important checks, such as mortgage and car payments, get paid. Consumer advocates say it's simply a way to jack up overdraft fees, which make up the majority of account service charges that banks collect. Here's how it works: Let's say you have $500 in your account, and you write checks for $10, $55 and $450. If the bank processed from smallest to largest, only one overdraft fee would be generated. By processing them from largest to smallest, two bounce fees can be collected.
What you can do: Obviously, you should try to avoid writing checks when there's not enough money in your account to cover them. But even the most conscientious consumer can get tripped up now and then (especially if there's a hold on your deposits, or if the bank messes up -- as mine did recently by processing a $403.50 transaction as $4,035.00). So sign up for overdraft protection that links your checking account to a savings account or line of credit; the fees and other costs involved are generally much lower than when you bounce a check. If you do get hit with an overdraft free, ask your bank to waive it as a one-time courtesy.
Charging for 'potential' overdrafts
(Note to readers: This section has been rewritten to clarify how Wachovia Bank assesses bounced-check fees.) A poster named haberschmidt recently alerted the blogosphere to the way Wachovia Bank increases bounced check fees. Some of the poster’s charges are incorrect, according to bank spokeswoman Mary Beth Navarro, including his assertion that Wachovia deducts bounce fees before processing transactions that overdraw an account. Each night, Navarro said, Wachovia first credits deposits, then deducts all transactions that have posted, and then finally assesses bounced-check fees.
But Navarro confirmed that the bank does assess bounced-check fees when transactions exceed an account’s “available” balance, even if the real balance in the account is actually high enough to prevent an overdraft.
Here's how it works: You use your debit card like a credit card at a store, signing your name to the transaction instead of entering a personal identification number (PIN). Because this is a signature-based transaction, the money is processed through the credit card payments system, which means the cash takes a few days to actually leave your account.
Banks typically don't wait, however, to deduct the transaction from your so-called "available balance" -- the money that's available for other spending. Where Wachovia differs from many of its banking brethren is what happens when other transactions are processed that exceed this "available balance." With many banks, you won't get a bounced-check fee unless you exceed the actual balance in your account. With Wachovia, you can wind up with a fee if you exceed the "available balance" -- even if you actually have enough money in your account to cover the transactions.
What you can do: As above, it's important to closely monitor your accounts and to keep a pad of cash in them (read "Why you need $500 in the bank" for more details). That said, banks shouldn't be allowed to charge for overdrafts before they happen. If you're a Wachovia customer, raise hell, contact your lawmakers and consider moving to another bank.
The oxymoronic 'courtesy overdraft'
Courtesy overdraft, also known as bounced-check protection, is a far cry from true overdraft protection. Instead of tapping into one of your own accounts, you're borrowing the bank's money and being charged hefty fees for the privilege. What's more, banks often sign you up for this "service" without your consent, and the sneakiest ones even add the amount of the "protection" to the balance you see when you check your account at an ATM. In other words, you're being told you have more money in your account than you actually do, which can lead you to overdraft your account and create more fees for the bank. (For more details, read "Don't be duped by bounced-check 'protection.' ")
What you can do: Call your bank and ask if you have "courtesy overdraft" or "bounced-check protection;" if so, try to get it removed from your account and replace it instead with real overdraft protection.
Fat fees for using personal-finance software
One of the best ways to track your accounts and prevent problems like overdrafts is by using personal-finance software such as Money or Quicken. These programs not only allow you to easily download your recent transactions, but help you forecast your cash flow in the future so you can predict when you might need to get extra cash into your checking account. So naturally, some banks ding you for $6 to $10 a month for using the software to automatically download your transactions.
Do I have a dog in this fight? You bet I do. I'm a longtime user of this software, and I write for MSN Money, which is owned by Microsoft, maker of Money. Even if neither of those things were true, however, I'd find it awfully suspicious that the majority of financial institutions find a way to provide automatic downloads for free, yet a handful of large banks -- Bank of America, Citibank and Wells Fargo among them -- find it necessary to charge over $100 a year for the same service.
More from MSN Money
Pricier stamps a boost for online bill payment
Credit card companies' evil tricks
A big lender's credit card trap
Debit cards: A good deal gets better
Your 5-minute guide to banking
What you can do: You may be able to get around the charges by using a more manual download process that involves going to the institution's Web site and clicking a few buttons, but that's a hassle. A better solution if you like the more automated download feature may be switching financial institutions. Washington Mutual, Charles Schwab, ING Direct and others support the automatic downloads without charging for the privilege.
Closing accounts because of bad credit
ING Direct, an online bank, says it was all a mistake. But some 5,300 customers were recently sent e-mails telling them their checking accounts would be closed because of their low credit scores. Many of these customers were understandably disturbed, since there are plenty of ways your credit scores can plummet that have nothing to do with your ability to manage a checking account.
When I called ING Direct USA CEO Arkadi Kuhlmann to ask about this seemingly unprecedented move, he couldn't apologize fast enough. "That was obviously an error," he said of the mass e-mailing. "The letter was worded wrong. . . . We do not give or deny one of our accounts" based solely on credit scores. The bank does use credit scores, he said, to help determine the size of a customer's overdraft line of credit. Within hours of my phone call, ING Direct customers who received the original e-mails reported receiving e-mails from the bank's chief operating officer, Jim Kelly, apologizing for the mess and assuring them their accounts would be restored.
What you can do: If you run across an obviously unfair bank practice, don't keep it to yourself. Someone who received the original ING Direct e-mail posted a message about it on the Consumerist Web site; Wachovia's practice of "potential" overdrafts was highlighted on Wesabe.com. Shout about what you see on those sites, or on MSN Money's own Your Money message board. Draw enough attention, and perhaps we can head off some of the worst policies before they become "industry standards."
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
advertisement
Article Tools
E-mail to a friend
Tools Index
Print-friendly version
Site Map
Discuss in a Message Board
Article Index
By Liz Pulliam Weston
Banks have to make money to stay in business. I was an economics major, so I get that.
What I don't get is why so many consumers do nothing as banks get bolder and bolder about picking their pockets. It's no longer nickel-and-diming -- we're losing $10, $20 and $30 a pop as banks come up with ever-more-creative ways to "fee" us to death.
The banking industry collects more than $50 billion a year in various service charges, more than twice the total of a decade ago. It's time we pushed back.
Sometimes just shining the light of scrutiny on these policies is enough to get banks to back down; read below about what happened recently with ING Direct bank. Other times, we need to protest, involve our lawmakers or even move our money elsewhere.
Here are some of the most egregious practices, and what you can do about them:
Checks clear almost immediately; deposits take days
In recent years, changes in federal laws have all but eliminated "float" -- the time it takes for a check to clear from the writer's bank account. What used to take days now often takes hours or less. What hasn't been speeded up is the time it takes for deposits to clear and be available for your withdrawal.
The Fed is required by law to reduce maximum deposit hold times as check-processing gets faster, but it recently decided against requiring banks to make deposits available sooner. Essentially, regulators concluded that even though money disappears from your account a lot quicker these days, it still doesn't disappear fast enough to warrant the extra costs banks might face from crediting you with your deposits more quickly. So: Heads you lose, tails the banks win.
More from MSN Money
Pricier stamps a boost for online bill payment
Credit card companies' evil tricks
A big lender's credit card trap
Debit cards: A good deal gets better
Your 5-minute guide to banking
What you can do: Kick up a fuss with your lawmakers. Banks make billions from consumer accounts; they should be required to invest some of that in speeding up deposits. (You can locate your U.S. representative here and your senators here. You'll find telephone numbers, addresses and e-mail addresses on their individual pages.)
Stacking the deck against you
Most big banks, and many smaller ones, process checks that arrive the same day in order of their size, with the largest check processed first. Banks say they do this to increase the odds that consumers' most important checks, such as mortgage and car payments, get paid. Consumer advocates say it's simply a way to jack up overdraft fees, which make up the majority of account service charges that banks collect. Here's how it works: Let's say you have $500 in your account, and you write checks for $10, $55 and $450. If the bank processed from smallest to largest, only one overdraft fee would be generated. By processing them from largest to smallest, two bounce fees can be collected.
What you can do: Obviously, you should try to avoid writing checks when there's not enough money in your account to cover them. But even the most conscientious consumer can get tripped up now and then (especially if there's a hold on your deposits, or if the bank messes up -- as mine did recently by processing a $403.50 transaction as $4,035.00). So sign up for overdraft protection that links your checking account to a savings account or line of credit; the fees and other costs involved are generally much lower than when you bounce a check. If you do get hit with an overdraft free, ask your bank to waive it as a one-time courtesy.
Charging for 'potential' overdrafts
(Note to readers: This section has been rewritten to clarify how Wachovia Bank assesses bounced-check fees.) A poster named haberschmidt recently alerted the blogosphere to the way Wachovia Bank increases bounced check fees. Some of the poster’s charges are incorrect, according to bank spokeswoman Mary Beth Navarro, including his assertion that Wachovia deducts bounce fees before processing transactions that overdraw an account. Each night, Navarro said, Wachovia first credits deposits, then deducts all transactions that have posted, and then finally assesses bounced-check fees.
But Navarro confirmed that the bank does assess bounced-check fees when transactions exceed an account’s “available” balance, even if the real balance in the account is actually high enough to prevent an overdraft.
Here's how it works: You use your debit card like a credit card at a store, signing your name to the transaction instead of entering a personal identification number (PIN). Because this is a signature-based transaction, the money is processed through the credit card payments system, which means the cash takes a few days to actually leave your account.
Banks typically don't wait, however, to deduct the transaction from your so-called "available balance" -- the money that's available for other spending. Where Wachovia differs from many of its banking brethren is what happens when other transactions are processed that exceed this "available balance." With many banks, you won't get a bounced-check fee unless you exceed the actual balance in your account. With Wachovia, you can wind up with a fee if you exceed the "available balance" -- even if you actually have enough money in your account to cover the transactions.
What you can do: As above, it's important to closely monitor your accounts and to keep a pad of cash in them (read "Why you need $500 in the bank" for more details). That said, banks shouldn't be allowed to charge for overdrafts before they happen. If you're a Wachovia customer, raise hell, contact your lawmakers and consider moving to another bank.
The oxymoronic 'courtesy overdraft'
Courtesy overdraft, also known as bounced-check protection, is a far cry from true overdraft protection. Instead of tapping into one of your own accounts, you're borrowing the bank's money and being charged hefty fees for the privilege. What's more, banks often sign you up for this "service" without your consent, and the sneakiest ones even add the amount of the "protection" to the balance you see when you check your account at an ATM. In other words, you're being told you have more money in your account than you actually do, which can lead you to overdraft your account and create more fees for the bank. (For more details, read "Don't be duped by bounced-check 'protection.' ")
What you can do: Call your bank and ask if you have "courtesy overdraft" or "bounced-check protection;" if so, try to get it removed from your account and replace it instead with real overdraft protection.
Fat fees for using personal-finance software
One of the best ways to track your accounts and prevent problems like overdrafts is by using personal-finance software such as Money or Quicken. These programs not only allow you to easily download your recent transactions, but help you forecast your cash flow in the future so you can predict when you might need to get extra cash into your checking account. So naturally, some banks ding you for $6 to $10 a month for using the software to automatically download your transactions.
Do I have a dog in this fight? You bet I do. I'm a longtime user of this software, and I write for MSN Money, which is owned by Microsoft, maker of Money. Even if neither of those things were true, however, I'd find it awfully suspicious that the majority of financial institutions find a way to provide automatic downloads for free, yet a handful of large banks -- Bank of America, Citibank and Wells Fargo among them -- find it necessary to charge over $100 a year for the same service.
More from MSN Money
Pricier stamps a boost for online bill payment
Credit card companies' evil tricks
A big lender's credit card trap
Debit cards: A good deal gets better
Your 5-minute guide to banking
What you can do: You may be able to get around the charges by using a more manual download process that involves going to the institution's Web site and clicking a few buttons, but that's a hassle. A better solution if you like the more automated download feature may be switching financial institutions. Washington Mutual, Charles Schwab, ING Direct and others support the automatic downloads without charging for the privilege.
Closing accounts because of bad credit
ING Direct, an online bank, says it was all a mistake. But some 5,300 customers were recently sent e-mails telling them their checking accounts would be closed because of their low credit scores. Many of these customers were understandably disturbed, since there are plenty of ways your credit scores can plummet that have nothing to do with your ability to manage a checking account.
When I called ING Direct USA CEO Arkadi Kuhlmann to ask about this seemingly unprecedented move, he couldn't apologize fast enough. "That was obviously an error," he said of the mass e-mailing. "The letter was worded wrong. . . . We do not give or deny one of our accounts" based solely on credit scores. The bank does use credit scores, he said, to help determine the size of a customer's overdraft line of credit. Within hours of my phone call, ING Direct customers who received the original e-mails reported receiving e-mails from the bank's chief operating officer, Jim Kelly, apologizing for the mess and assuring them their accounts would be restored.
What you can do: If you run across an obviously unfair bank practice, don't keep it to yourself. Someone who received the original ING Direct e-mail posted a message about it on the Consumerist Web site; Wachovia's practice of "potential" overdrafts was highlighted on Wesabe.com. Shout about what you see on those sites, or on MSN Money's own Your Money message board. Draw enough attention, and perhaps we can head off some of the worst policies before they become "industry standards."
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Friday, 25 May 2007
10 nasty money habits to kick
Stop making the same mistakes every year and wondering why you can’t save. Break the cycle and change your life.
Remember the movie "Groundhog Day," the one where Bill Murray kept reliving the same day? Some people live their financial lives like that, making the same mistakes over and over.
But you don't have to be one of them.
To help you avoid being a repeat offender, here are 10 of the common money errors that many of us make repeatedly, along with the real-world cost of each and a better way to handle each situation.
- Spending without a budget.
- Carrying a balance on credit cards.
- Ignoring interest rates.
- Not investigating disability insurance.
- Failing to see how little purchases add up.
- Not matching employer's contribution to retirement.
- Waiting until the last minute to fund IRA.
- Paying everyone else, saving "what's left."
- Not managing your investments.
- Getting emotional about your investments.
Spending without a budget
Many times when people think of financial planning, they think only in terms of investments, says John K. Ritter, CFP, co-owner of Ritter Daniher Financial Advisory in Cincinnati. But if you have income and bills, you also need a budget. Too many times, "there is more outgo than income," he says.
The cost: Your financial peace of mind and the ability to plan long-term. "Easily, I would think people misstate what they think they are spending by every bit of 15% to 20%," says Ritter.
Instead: Keep track of what you spend to get an idea of where your money is going. "The key is to account for those things that aren't regular bills -- groceries, entertainment dollars," he says.
And set a little aside for one-time emergencies, like car repairs, a broken washing machine or a trip to the emergency room. People tend to leave those kinds of expenses out of a budget because they tend to be one-offs. "What they don't tag is that there are always one-time expenses," says Ritter.
Carrying a balance on credit cards
Interest rates can be 18% to 21% or more, says Annette Simon, CFP, principal with Mosaic Wealth Management in Bethesda, Md. "People making minimum payments never get the thing paid off," she says.
Another way to think of it: Treat yourself to a nice dinner, and 20 years from now you'll still be paying for it. "In general, carrying a balance on your cards is a terrible idea," she says.
The cost: If you have a $5,000 balance on a card with an 18% annual percentage rate, or APR, it will take 26 years to pay if you just make the minimums. Including interest, you'll end up shelling out more than $12,000. (And that's assuming you never use it again, make every payment on time and don't incur any fees.)
Instead: Pay balances in full each month. If you need to use a credit card to handle an emergency (medical bills and car repairs, not a quickie vacation), use it, then stop using credit until you have that bill paid.
Ignoring interest rates
Whether it's your money market rate or what you could get on a mortgage refinancing loan, it pays to keep up with the current prices of borrowing and lending money, says Beth Gamel, CPA/PFS, an executive vice president with Pillar Financial Advisors in Waltham, Mass.
The cost: Lost income if you could have been getting a higher rate of return on your CDs or money market account. Higher mortgage payments if you don't take advantage of lower mortgage rates.
Instead: Stay abreast of the interest trends that impact your personal finances.
Not investigating disability insurance
"Anyone earning an income and supporting themselves needs disability insurance," says Simon. More than 20 million people sustained disabling injuries in 2002, according to the National Safety Council.
The cost: If something keeps you out of work for a few weeks or months, disability insurance could mean the difference between cutting back on a few expenses while you get back on your feet or moving in with family or friends.
Instead: Coverage can be expensive, so find out if your employer offers any kind of plan. If not, do you have the savings to support yourself for a couple of months if you couldn't work? If the answer is no, shop around, and see if you can find a policy in your price range.
Failing to recognize how much little purchases add up
Small amounts, like small leaks, can really drain your wallet. Analyze everything from those nonessential snacks to out-of-network ATM charges to those extra phone plan minutes you're not using.
The cost: If you're like most people, this costs a good chunk of your paycheck.
Instead: Take the records of your cash purchases and lay them side-by-side with your debit and credit card statements to get a complete picture of where you're spending, says Jill Hollander, CFP, president of Financial Connections Group Inc. in Berkeley, Calif. The questions to ask, she says, is: "Where are you spending that money, and does it make sense?"
Not taking advantage of an employer match for retirement funds
One of the biggest mistakes that lots and lots of people make, especially young people, is not investing in their employer's retirement plan at least up to the point where they get the employer's match," says Simon. "By not doing that they're leaving additional income on the table."
The cost: An additional 3% to 5% of your salary annually. Plus a few decades of compounding interest.
Instead: Figure out how much you can afford to contribute, and have the money taken out of your check.
Waiting until the last minute to fund your IRA
"A lot of people wait until April instead of setting aside throughout the year, then they don't have the money," says Hollander.
The cost: A more comfortable retirement. Contributing $4,000 annually to a Roth IRA (and estimating a 5% return) will result in roughly $89,000 in 15 years. With the same terms, $1,000 a year leaves you with a little more than $22,000.
Instead: Put away a certain amount regularly until you hit the contribution limit, Hollander says. "We have clients who put away $500 a month until they reach the maximum," she says.
Paying everyone else then saving 'whatever is left'
The cost: If all you've saved is scraps here and there, that's what you'll have at retirement.
Instead: Pay yourself first, say Hollander. Take at least 5% to 10% of your check to max out your retirement plan, she says. After that, save outside the retirement plan. Unless you're starting young, "the reality is that just saving in a 401(k) today is not going to potentially be enough money to retire on," says Hollander.
Not managing your investments
You're saving the money. But you also want to make sure your nest egg is diversified and that you have earning goals for various aspects of your portfolio. "Everyone's target is going to be different," says Ritter. The problem is that too many people aren't making the attempt.
The cost: Balancing and managing your investments can mean the difference between a good year and a bad year, Ritter says. He recalls reading one study of mutual fund investors who focused solely on blue chip investments and saw a 2.5% return on their money in 2005, while those who were more diversified earned almost 6%. Add in compounding interest year after year and that gives you an idea of the real cost, he says.
Instead: Look at your holdings like the pieces of a puzzle. Why do you have various assets, and what purpose do they serve toward your goal? What are your goals for each asset, as well as your investments as a whole? Is your portfolio meeting those expectations?
Getting emotional about your investments
Two big mistakes: People fall in love with their investments and hang onto them "beyond the point where they should," or, when the investment starts going down in value, "greed kicks in" and they want to hang on until it bounces back, says Simon. Neither strategy is smart.
The cost: "In a down market, like 2000 to 2002, people lost a lot," says Simon. "It wasn't unusual for people to come in and their portfolios were down 50% to 80%."
Instead: When it comes to timing the market, "nobody can do it," she says. "The smart thing is to invest in a very diversified way. It isn't sexy, but it works."
Source: Bankrate.com
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