Seychelles By The Seashore

March 16, 2012

 

There are 843,000 shades of blue in this picture

 

How far can your dollar go? About 8400 miles, if you start in New York.

We wondered which currencies have lost the most value in the last year against the United States dollar – in other words, which places provide a relative bargain for Americans just by virtue of currency fluctuations. Because we don’t have kids, we had enough time to sift through the currencies of all 200+ nations and dependencies and find the answers.

Which isn’t as much work as it sounds, for several reasons. There are plenty of multinational currencies; not only the euro, but the East Caribbean dollar and the CFA franc. At least a couple dozen of the remaining countries fix their currency to the U.S. dollar. As a rule, the more your economy relies on American investment, the tighter the relationship. The Bahamas* doesn’t even pretend: their dollar has been interchangeable with the U.S. dollar for decades. (Well, not everywhere. A U.S. dollar is more readily accepted in Freeport than a Bahamian one is in Chicago.)

Some other currencies are fixed to still other currencies – the St. Helena pound is fixed to the pound sterling for reasons that are hopefully obvious.

Here’s what we found, and we’re pretty sure we didn’t miss anybody:

 

% loss relative to
US$ in 1 year
Seychellois rupee13.65
Hungarian forint11.76
Ghanan cedi10.90
Gambian dalasi10.45
Turkish lira9.29
Malawian kwacha9.09
Zambian kwacha8.70
Indian rupee8.56
Serbian dinar8.09
Mosotho losi7.97
Swazi lilangeni7.91
Namibian dollar7.58
Argentine peso7.56
Nepali rupee7.09

 

“Mosotho” is the demonym for Lesotho. Don’t you people read? Rounding out
our countdown are the Czech koruna (5.75), Croatian kuna (5.74), Mexican peso (5.43), West African CFA franc (4.76), Central African CFA franc (4.55), and Albanian lek (4.08).

Well, that’s certainly diverse. Climbing up the list we find a bunch of African countries few of you could find on a map, and a central European country that everyone’s familiar with, but that no one’s ever thought of visiting unless they were planning to invade.

But wait, what’s that at the top of the list? Why, it’s a perfect storm of opportunity, that’s what it is. A nation that not only has the currency that declined the most relative to the U.S. dollar in the past year, but that was practically designed by God for you to visit and spend your money in.

Seychelles. The word even sounds paradisiacal. And it’s as good a place to visit now as anywhere, for what your dollar can buy. Just click that link and look. (This isn’t a paid post, by the way. We just started with a question – “What interesting financial data can we share with you, preferably something no one’s ever bothered to figure out before?” – and it led us here.)

We came within a few hundred miles of Seychelles a few years ago and are still kicking ourselves for not hopping on one more plane.

When buying a big-ticket item like a vacation, why wouldn’t you go somewhere that’s essentially holding a 14% sale on everything? Foreigners from places with correspondingly stronger currencies do it all the time, converting their kronor and renminbi to greenbacks and then spewing them all over Orlando, Vegas and Hawai’i before scuttling back to whatever soccer-playing nation they started in.

The same goes for starting a business, importing goods, finding child brides and so on. Depending on how large you want to go, a visit to Seychelles (or any of the other countries on the list) could end up being cheaper than a trip to Branson. Either way, putting an exotic stamp in your passport and getting out of your comfort zone will make your life far more interesting.

Hungary has tourism too, apparently. According to the websites, the big thing to do there is to see the Danube and walk around Budapest. What Hungary lacks in beaches, it certainly makes up for in architecture, war cemeteries, inclement weather and perogies.

Actually, that’s not fair. It turns out Hungary is the 13th-most visited country in the world, although that’s a little misleading. (When you’re surrounded by other countries, it’s easy to have lots of international visitors. To insular American minds, “international travel” often involves crossing an ocean. In Europe and much of the rest of the world, not so much.) 98% of visitors to Hungary are European, and we’d bet that an even higher percentage of visitors to Ghana and The Gambia are African.

To satisfy everyone’s curiosity (and our sense of completion), and seeing as we already did the work, which nation’s currency gained the most vs. the U.S. dollar in the past year?

 

New Zealander dollar+9.49

 

Let your Kiwi pals visit you, instead of the other way around. They can return the favor when/if the New Zealand dollar loses enough value to make it worth your while.

 

*Trivia time: What do Russia and the Bahamas (and no other countries) have in common? They’re the only ones to share a sea border (but not a land border) with the U.S.

Filed Under: Economy, Healthy Living, Travel Tagged With: , , , , ,

We Learn Nothing

January 13, 2012

We’re going to need more chairs

 

Not that many years ago, real estate was regarded as a safe investment. Now it’s the butt of jokes. What happened?

Fannie Mae (formerly the Federal National Mortgage Association) is one of the government-sponsored enterprises entrusted with making it easier for people to afford homes. Its sibling, Freddie Mac (né Federal Home Loan Mortgage Corporation), is another. A cousin, Ginnie Mae (Government National Mortgage Association) does pretty much the same thing, the big difference being that Ginnie Mae doesn’t pretend to be a private company.

One-paragraph summary:

You borrow money from ABC Bank to buy a house. Now you have a house, and ABC has your promise that you’ll pay them, say, $250,000 (with interest) over the next 30 years.

(On second thought, there’s no way in hell we can do this in one paragraph.)

That promise, from ABC’s perspective, is an asset. Of course it is, it’s money coming in. An annuity, if you will. ABC can then sell that asset to a secondary lender (ABC is the primary lender, duh) such as Fannie Mae.

ABC now has cash from Fannie Mae, cash that ABC can loan out. Loaning out money is the very purpose for a bank’s existence, thus ABC is happy with this situation. If ABC loans that money out to someone else for a mortgage, then if all goes according to plan, now you and that other person will own houses, instead of just you.

Fannie Mae was founded by the federal government in the 1930s, under the principle that having as many people as possible owning houses (and, by extension, owing banks money) was a goal worth pursuing. The logic went that with more liquidity – i.e., more money to be loaned out – not only would more people be able to afford homes, but mortgage interest rates should lower, too. A self-perpetuating cycle of easy loans for everyone!

I don’t understand what Fannie Mae is getting out of this. Wouldn’t they have to pay a premium to ABC for the transaction to be worth ABC’s while?

Yes. Fannie Mae pays the bank a ¼% servicing fee for the life of the loan.

Oh, I see. So Fannie Mae loses money on every loan. Sounds like a great way to do business.

Fannie Mae gets to borrow from the U.S. Treasury at extremely favorable rates. Currently ¾%. So with the average 30-year mortgage going for about 3.96%, Fannie Mae comes out way ahead.

So it’s the U.S. Treasury that’s losing money on every loan.

Yes! Isn’t “capitalism” great?

Now, Fannie Mae doesn’t just hold onto that money. It assembles your $250,000, your neighbor’s $281,384.34, and several other mortgagors’ loans into a multimillion-dollar mortgage-backed security. Then it sells that mortgage-backed security to an underwriter. The underwriter pays a higher interest rate to Fannie Mae than the ¾% at which Fannie Mae borrows from the U.S. Treasury, so Fannie Mae is happy. The underwriter is happy, because it has cash on hand (again, to loan out) and is paying a fairly favorable interest rate. But that rate is artificially low, because it’s based on the artificially low rate that Fannie Mae borrows from the U.S. Treasury at.

Isn’t this creating money out of thin air?

It’s creating “liquidity” out of thin air, which is almost the same thing.

With the creation of Fannie Mae and its relatives, the federal government effectively lowered the requirements for a prospective homeowner to get a mortgage. To the point where people who weren’t yet ready to own houses were owning houses. Some of whom were never going to be able to pay their mortgages back, and who got foreclosed upon.

Well, couldn’t lenders just charge those people sufficiently high interest rates that it’d be worth the increased risk to lend to them?

Of course not, this is America.

In the ‘90s, the government ordered Fannie Mae to keep a minimum percentage of its loans in mortgages for “low- and moderate-income” borrowers. By 2007, fully 55% of Fannie Mae’s loan originations were with such borrowers. The government then prohibited Fannie Mae – which is to say, the primary lenders who sold loans to Fannie Mae – from charging “predatory” rates.

So lenders were left with two choices: continue doing business with Fannie Mae, and risk losing money on bad clients; or don’t do business with Fannie Mae, and set their own high rates for borrowers with poor credit histories who didn’t deserve to borrow money at prime rates (the infamous “subprime market”.)

If lenders went with option B, they could create their own mortgage-backed securities, with higher interest rates and higher volatility. Those privately fostered mortgage-backed securities then hit the market, at which point people stopped buying Fannie Mae’s mortgage-backed securities (at their comparatively low interest rates.)

So Fannie Mae started offering higher, more competitive interest rates. The free market at work, right?

Sure, except Fannie Mae and Freddie Mac only pretend to be private corporations with stockholders and everything. The federal government goes to great lengths to explain that Fannie and Freddie are not branches of itself. Functionaries can quote you the 1968 act that led to Fannie Mae being named an “independent” company. In reality, the government wanted to remove Fannie Mae’s obscene levels of debt off the national balance sheet (cf. Abraham Lincoln, a tail ≠ a leg). Investors and customers alike continue to treat Fannie Mae as a branch of the government, with an implicit government guarantee if not an explicit one. Put it this way: if your elected representatives committed billions of dollars of your tax money to AIG, General Motors and Chrysler, they’ll do it for Fannie and Freddie. Again.

Which would you rather invest in, assuming each had the same credit rating: private or Fannie Mae mortgage-backed securities?

The latter offered returns similar to the former, only with that implicit guarantee. Therefore people bought more of them. To create more mortgage-backed securities, Fannie Mae made more and more low-interest, sketchily underwritten loans. A private bank like Lehman Brothers can die a quick death and leave the remaining banks healthier. But there’s no concept of culling the herd when it comes to Fannie Mae.

(There is nothing government can’t ruin. Vote Ron Paul.)

Meanwhile, because of the low mortgage rates Fannie Mae was responsible for spawning in the first place, millions more people bought houses than otherwise would have. Too many people chasing too few houses means prices rose. A “bubble”, if you will. Then borrowers started defaulting, and lenders realized that they didn’t have enough collateral to cover debts.

When there’s downward pressure on primary mortgage loans, and upward pressure on secondary mortgage loans, something has to give. Add to that the underqualified people who couldn’t make their mortgage payments, and thus got foreclosed on, and the result was even more houses sitting empty. By 2008:

  • Fannie Mae and Freddie Mac either owned or guaranteed half the residential mortgages in the country.
  • As “independent businesses”, “free of governmental control”, and publicly traded, their stocks began to drop. In the case of Fannie Mae, 99.66%:

 

It’s almost impossible to lose a higher percentage than that, yet Freddie Mac managed:

 

 

  • As investments, Fannie Mae and Freddie Mac were effectively worthless.
  • The Secretary of the Treasury, operating under the orders of his boss, lied through his teeth and told the public that Fannie Mae and Freddie Mac were financially sound. No one who’d examined the issue could possibly believe this, but the public at large might have.
  • Someone owned Fannie Mae’s and Freddie Mac’s mortgage-backed securities. Actually, lots of people. Foreign governments, retirees’ pension funds, etc. The argument went that if Fannie Mae and Freddie Mac were officially deemed worthless, disaster would occur. As if requiring half a trillion dollars from American taxpayers didn’t qualify as a disaster.

So the federal government did exactly that, putting you on the hook for every horrible decision made by entities that created no value in the first place, and distorted the market by their very existence. It would have been less damaging to have simply cut a five-digit check to each family that wanted a house and didn’t have the money for it.

Fannie Mae and Freddie Mac aren’t subject to the same capital and diversification requirements that private banks are. Nor do Fannie and Freddie ever have to worry about having their loan portfolios reviewed by regulators, nor rely on those same regulators to give them a safety and soundness rating.  

Today, Fannie and Freddie continue to have a hand in most residential mortgages. They still lose staggering amounts of money – $14 billion and $22 billion last year, respectively. And as we’ve seen, their stocks now trade on the over-the-counter bulletin board, the Canadian Football League of securities trading.

Fannie Mae’s chairman made $6 million (of your money) last year, Freddie Mac’s $4 million. Yet none of those Occupy Wall Street vermin protested outside their respective headquarters. Merry Freaking Christmas.

This article is featured in:

**Top Personal Finance Posts of the Week: Apple is Kicking Google’s Tail Edition**

**Totally Money Carnival #51**

Filed Under: Bad Examples, Consumer Debt, Economy, Education, Newsflash

Warren Buffett is a Hypocrite, Part I

September 23, 2011

Amass an 11-digit fortune, and you should probably forgo a name tag

We’ve never done a post on The Oracle of Omaha, which makes us unique among personal finance blogs. We also didn’t misspell his name as “Buffet”, which also makes us unique among personal finance blogs.

Yes, he’s the greatest investor of all time. No one disputes this. The problem is when he starts talking about topics he either knows nothing about, or is being deliberately obtuse about. Amassing wealth doesn’t make you an authority on every subject. Case in point, his recent lament about taxes.

Buffett wrote in The New York Times that the current progressive tax system in this country, in which rich people bankroll most everything, just isn’t progressive enough. He pointed out, yet again, the absurdity of his secretary paying a higher percentage of her salary in taxes than he does.

Summarizing, Buffett claims that at least one of his employees allegedly pays an effective tax rate of around 41% on income, while Buffett himself pays 17%.

First, the former claim is a lie. The highest marginal tax rate in this country isn’t even 41%, let alone the highest average tax rate. The highest marginal tax rate is 35%, and given the income level at which the IRS administers it, to pay an effective tax rate of 35% you’d have to make $6 million a year.

So Buffett’s not comparing himself to the woman who answers phones at Berkshire Hathaway. He’s comparing himself to a manager who makes a higher salary than almost everyone in America, even more than your average NBA or major league baseball player.

We’re giving Buffett the benefit of the doubt here, assuming that he meant 35% instead of 41% even though those numbers are easy to distinguish. No one knows where he got the 41% figure from.

Furthermore, that 35% maximum rate is on taxable income. Anyone who’s ever filled out a 1040, or had someone else do it, knows that taxable income is considerably less than total income. There are these things called deductions and credits, which Buffett is presumably familiar with (and which any manager who makes $6 million a year must be familiar with, too.)

It makes for a great class warfare talking point: every dollar that I fail to make is somehow some richer person’s doing. And who better to inspire envy among the poor salaried millions than a tycoon who’s finally seen the error of his ways?

Buffett – and we salute him for this – has spent a lifetime earning money via capital gains, rather than salary. Do we think this is a good idea? Hell, we wrote a book about it.

Capital gains are taxed at lower rates than salaries are. The people who write the tax code, and make it the most cumbersome and impenetrable thing on the planet, ensure this. Of course they do. Legislators write the code to accommodate and exploit this, because they derive most of their income through capital gains.

Let’s assume that Buffett indeed has employees who are paying twice the proportion of their income in taxes as he is. What’s the fairest way to make things fair? Again, multiple-choice.

  1. Further soak the rich.
  2. Get government’s foot off the throat of the poor.

Raise the rich people’s taxes to make things even, or lower the poor’s? Rich people seem to enjoy being rich. Why not reduce rates on the salaried masses to put them in line with whatever Buffett’s definition of “rich” is, instead of the other way around? Instead of creating prosthetic limbs for amputees, Buffett wants to break the right arms of the able-bodied.

The reactionary answer is “Because it’ll reduce much-needed tax revenue.” It wouldn’t. People respond to incentives, and will have incentive to work harder, longer hours if they get to keep more of what they make. When I can keep 84¢ of my next marginal dollar, there’s a better chance I’ll work for that dollar than if I only get to keep 67¢.

It’s the height of arrogance to complain about the tax system not because it hurts you, but because it benefits you. Especially when there are so many ways for Buffett to fix this perceived injustice. Sure, he could cut Washington a check for whatever amount he feels he should be paying. He could increase his employees’ pay enough to offset any tax advantage.

Or, and this is the least likely of the three, he could rework the dividends that flow through his corporations so that he could receive all his income as salary, rather than capital gains.  The chance of this happening is roughly equivalent to the likelihood of Buffett running a 4-minute mile.

————————-

We’ve been pushing the concept of a diagonal tax since we were old enough to understand the concept. Everyone gets a basic personal deduction – say $20,000 – and pays some percentage – say 17 – on the rest.

The guy making $6 million would thus pay 16.94% of his income in taxes. The guy making $30,000 would pay 6% of his income in taxes. The guy whose net worth increases $10 billion in a year would pay 16.99997% of his income in taxes.

People who want to soak the rich should love this system. It treats the rich and the hyper-rich almost identically, biting them almost 3 times as hard as the working stiff, relative to what all three make. If that’s not enough, just manipulate the deduction and percentage numbers until it all makes sense.

 **This article is featured in the Yakezie Carnival-October 2, 2011 Welcome Fall Edition**

Filed Under: Bad Examples, Economy, Education, Estate Planning Tagged With: , , , ,
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