12 Questions To Ask Your Partner About Money

Editor’s note: I really like the 36 Questions thing I read about in the NY Times a few years back, this idea that you could pose these probing questions to your mate or prospective mate in order to deepen the relationship. Riffing on that idea, I came up with a series of Money and Relationships questions that might play a similar role in your relationship, albeit for shared finances. Can you help me make these better?

 

Money_loveI need your help with this post. I haven’t really previously asked for help in developing my finance ideas, but in this case crowd-sourcing ideas may be the best approach. In exchange for your help (you have all already agreed to help, right?) I’ll offer a fun(ish) activity you can do with your significant other. Deal?

As a lead-in to the fun activity and request for help, I should mention that I’ve been informally polling friends in long-term relationships about money. Specifically, what kinds of arrangements do they have for managing their debts, creating savings plans, and all the other stuff involved in “managing the finances” for a household?

My first thought after asking a few friends how they manage things: Y’all are strange.

I mean, I have the experience of my own marriage, and how we do it. I had no idea that perfectly normal (seeming) couples have entirely different arrangements, and they do ok.

My second thought is that the problem of money and relationships is probably universal. While money is not necessarily the root of all evil, it is the root of tremendous problems in relationships.

A SunTrust bank study found that 35 percent of couples experiencing problems in the relationship cited finances as their number one concern. Only 25 percent of couples cited “annoying habits of the partner.” I mentioned that one to my wife while cracking my knuckles and she just looked at me in shock. That statistic must have surprised her.

A research study published in 2012 found a strong link between couples that argued about money before they were married, and the probability of later getting divorced. That study by professor Sonya Britt at Kansas State University found that money arguments predicted future divorce more than arguments about other topics like children, sex, or in-laws.

money_relationshipsMy third thought, and this is where you come in to help in exchange for my fun activity, is that dialogue and communication is probably a main antidote to money-stress in relationships. Speaking not as a couples therapist, but rather as one is who pretending to play that role today, it seems that if we could talk to each other more and more clearly about money, we might improve both our finances and our relationships. So that’s the premise for this activity, and the reason for asking you to help.

What if you set aside 30 minutes with your partner and committed to asking each other the following 12 questions? And then, what if you really listened to the answers?

 

  • What life lessons about money did you learn from your parents that make financial planning today difficult?
  • How would you feel if you knew you would only ever earn on average only one-quarter of what your partner earns, per year? Would that alter your personal identity, or your relationship?
  • If you won the lottery, such that you never had to work again to cover your lifestyle costs, would you quit your current job? (Entirely theoretical question because mandatory PSA: Never buy a lottery ticket.)
  • What secret belief do you have about money that you would be ashamed to share, except with your partner?
  • What would “being wealthy” look like for you and your partner? Be specific. What would it mean that you could do?
  • From a financial perspective, what worries you most about your partner?
  • If your adult children struggled financially to make ends meet, but were otherwise healthy and able-bodied, how much would you feel obligated to support them financially? Do you get or expect any financial help from your parents?
  • Does the idea of dying with unpaid debts bother you?
  • Do you believe you will be wealthy someday, but aren’t sure how to make it happen?
  • Imagine your partner proposes an investment opportunity that has a 10 percent chance of going to zero, but a 90 percent chance of doubling in value in a year, do you approve? What if this is a small portion of your investible assets? What if it is half your investible assets?
  • How would you respond if your partner suddenly told you about $25,000 of debt you didn’t know about before, and that they had hidden from you? What circumstances would justify you hiding the existence of debts from your partner?
  • Would you feel comfortable with your partner having a separate spending account and spending power that you never have access to and cannot monitor? Would you trust yourself to have a spending account that your partner never saw?

In addition to trying this experiment, could you help me make this better? These questions came from my own head, but I bet there are another 10 even better questions we should be asking our partners. Can you send me a few of your best ideas? What question do you wish you’d asked your partner before you got married? What question do you wish your partner would ask you, even now, about money? What money problems have plagued your relationship? Help me make this a more useful tool, and I promise to share the results. Anonymously, of course.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

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Hamilton And Sovereign Debt

Bastard_OrphanHow does a profane, hip-hop, hit of a show, and a chapter, dropped in the middle of a behemoth book on Alex Hamilton, by Ron Chernow capture the current zeitgeist, show us to treat our debt with sacred honor?

Hamilton, the musical by Lin-Manuel Miranda, swept through my household this Summer like a hurricane, buffeting us as if we lived in a forgotten corner of the Caribbean. While the beautiful nerds of my household joyfully sing about the Revolutionary War, I tackled Ron Chernow’s biography Alexander Hamilton, upon which Miranda based his amazing show. A story Chernow tells about national debt illustrates Hamilton’s particular genius.

Serving President George Washington as the first Treasury Secretary of the United States, when the new country flirted with financial ruin, every action Alexander Hamilton took carried particular weight. He faced a terrible choice.

Soldiers in the Revolutionary War had received state IOUs in return for their military service. Years after the end of fighting with the British, many of these debts remained unpaid. In addition, different states had repaid debts to different degrees. Virginia was nearly debt-free for example, while Massachusetts still owed tremendous amounts to soldiers.

Some believed this new federal government would not, and could not, pay off its debts to soldiers. Chernow writes that these debts traded at fifteen cents on the dollar as former soldiers sold early, in part because they needed the money, and in part because full payment seemed doubtful. Speculators bought the debt at extreme discounts, hoping to make money if the young government could restructure the debt somehow. At that price, even a settlement of thirty cents on the dollar offered a financial windfall to debt-buyers.

What kind of deal would Hamilton, as Treasury Secretary, offer on the debt? Should he restructure it and offer a lesser amount? Should he seek a way to punish the speculators? Could he track down the former soldiers who had sold their IOUs, to compensate them, instead of the investors? Wait for it…

Let’s pause for a moment and really wallow in the awful optics and politics of Hamilton’s choice. Nobody deserved more respect than the first patriots who suffered and died under Washington, when his “ragtag volunteer army in need of a shower” defeated a global Superpower, in Miranda’s purposefully anachronistic phrasing. But most of the government debt issued to soldiers wasn’t owed to them anymore, but rather to buyers of their debt. These were some of the least sympathetic people. You know, Wall Street-type people.

jefferson_madison
Jefferson and Madison

The most powerful member of Congress, James Madison, and the Secretary of State, Thomas Jefferson, vehemently opposed rewarding the speculators. As Virginians, they also argued that consolidating the debts at the federal level would reward less prudent states at their state’s expense.

Picture, as well, Hamilton’s childhood as a near-destitute orphan in the Caribbean. He was not a natural friend of Wall Street. He’d served as a captain of an artillery company under fire in the Battery in Manhattan and the Battle of Kips Bay; he had personally led a bayonet charge on an entrenched position of Redcoats at Yorktown. Was Hamilton prepared to honor commitments that would enrich these greedy speculators who bought government debt at pennies on the dollar from his fellow soldiers? Wait for it…

He was, and he did. He consolidated the states’ debt into federal debt. On his first and second days after confirmation as Treasury Secretary in 1789, he took out fresh federal loans from the Bank of New York and The Bank of North America in Philadelphia.

Hamilton understood the value of communicating a policy of honoring one’s debts, a policy that strengthens the nation. “In nothing are appearances of greater moment than in whatever regards credit. Opinion is the soul of it and this is affected by appearances as well as realities,” he wrote in his 40,000-word Report on Public Credit, delivered to Congress in January, 1790.

He further set the precedent that the government does not interfere in private transactions of its public securities, even if the optics and politics would make it expedient to change terms, after the fact.

As Chernow reports, Hamilton reframed the moral issue into one of honoring private property and “security of transfer.” The soldiers were not as heroic as they seemed, nor the speculators as greedy. Investors after all, had risked their capital. The ex-soldiers, in turn, had shown little faith in the government. That the buyers of soldiers’ debt made extraordinary short-term fortunes was, in the far-seeing perspective of Hamilton, irrelevant to the more important work of establishing a solid financial footing for the country. Meanwhile, Madison and Jefferson fumed.

The United States has never defaulted on its debt. Not through the ruin of a burned capital in 1812, nor through a crippling Civil War, nor the World Wars and Depression of the Twentieth Century. Hamilton’s honoring of national debts – against all the political, fiscal and moral pressure of his day – bolstered us as a nation. It set us up for national prosperity.

As the fictional Jefferson of the Hamilton musical ruefully admits: “I’ll give him this: His financial system is a work of genius. I couldn’t undo it if I tried, and believe me, I tried.”

Or the fictional Madison: “He took our country from bankruptcy to prosperity. I hate to admit it, but he doesn’t get enough credit for all the credit he gave us.”

Contemporary debates

Shifting to 2016 for a moment, what would Senators Bernie Sanders or Elizabeth Warren have done with Hamilton’s conundrum? Historical hindsight isn’t necessarily fair, but I’ve listened to their views on Wall Street, the industry where I previously worked, and which they consistently attack as a cesspool of greed, corruption, and speculation.

unhappy_trumpWe also have GOP presidential candidate Donald Trump’s views on the record on our national debt. In stark contrast to Hamilton, Trump presented his approach in an interview with CNBC in May. He explained “I’ve borrowed knowing that you can pay back with discounts. [As President,] I would borrow knowing that if the economy crashed, you could make a deal.”

See, that’s not really how the bond market works. Hamilton had the foresight to know that once you default on debt – which is what “pay back with discounts” means – you set a precedent for how lenders view your credit in the future. I would even argue that once you even say that out loud – if anyone takes you seriously – you risk submarining your nation’s future ability to borrow.

Think about how lucky we are to be alive right now, with Hamilton on our side.

A version of this post ran in the San Antonio Express News.

 

Please see related post:

Trump: Sovereign Debt Genius

 

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I Took Out PayDay Loans

payday_loansThis is the most expensive post I’ve ever written, as it cost me over $80 to conduct research. I took out two payday loans this month in downtown San Antonio, TX.

The natural joke to make here is “something, something, the death of journalism,” when finance columnists/bloggers need to take out monthly payday loans. Maybe instead the joke is on a different industry, as a former Goldman Vice President (“just a heartbeat away from the Presidency” as the thousands of us used to joke) ends up taking out payday loans. Or maybe you should just stop making jokes because this is how millions of your fellow citizens get money in between pay checks – like 12 million Americans per year, according to The Pew Charitable Trusts.

The Good

My basic starting assumption was that banks don’t really make personal loans anymore – credit cards kind of took over that niche market. A teller at my business bank – where I’ve had an account for twelve years – confirmed my assumption, saying they wouldn’t do it, and that few banks do. After the fact, I found out my personal bank does in fact make personal loans on good terms – 9 percent APR (Annual Percentage Rate) for 3 years on a $2,500 minimum, available in my checking account on the same day. But I believe they are the exception. And all that good deal of course depends on having good credit, which not everyone does.

So, assuming the payday lending filled a niche that banks vacated, I went on my quest for personal experience of the payday loan industry.

I borrowed $200 from Courtesy Loan Service on Broadway. The whole process took 90 minutes, start to finish. Much about this experience, in a strange way, suggested a quaint throwback to the Bailey Brothers Building and Loan from It’s a Wonderful Life. I mean that in the sense that a nice teller recorded my personal information in pen, by hand. She asked for three personal references and the name of my supervisor at work. I saw almost no evidence of computer technology. They appeared to use 5×7-inch paper notecards in a recipe box for tracking clients’ loans. Seriously. They ended up printing my loan on carbon copy paper, using what looked like a dot matrix printer.

bailey_building_and_loan

I almost told them that 1983 called, and it needs its technology back. But of course the joke’s on me, because I’ll pay an equivalent of 102.31 percent annual interest on their loan, if I pay it off in installments over the next eight months as suggested. So who’s laughing now?

I also walked into Ace Cash on San Pedro Ave and borrowed $200. When I arrived, the teller behind the window pointed me to an electronic kiosk, where I could enter my application in just 5 minutes. These folks, by contrast, operate in 2016.

I filled in my personal information on screen, and then spent another 15 minutes on a three-way phone call confirming my identity with my personal bank. Finally, I walked back to the teller with my bank information confirmed, and showed her my driver’s license. I provided a reference – my wife – and my phone number, which the teller confirmed as legitimate by ringing me while I stood in front of her. She couldn’t have been nicer. In a clocked time of 32 minutes, I walked out the door with $200 cash in my hand. They have impressive technology, automation, and fraud-mitigation techniques.

The Bad

The interest rate here is not only absurd, but cruel. My $200 Ace loan cost me $51.52, for an APR of 336.72 percent, as clearly stated on my receipt. The effective interest rate will be even higher if I pay back the money faster than one month. That’s not a good look, to say the least. I say not good because one would expect these loans – like Courtesy’s Loans,’ violate usury laws, if such laws actually existed.[1]

The Ugly

But the fine print is also interesting.

Within my automated email from Ace – titled “Your Loan Document Enclosed,” – my loan document stated clearly “We do not make loans, but instead provide credit services.”

ace_cash

Then “In consideration for the credit services that we provide you under the Credit Services Agreement, you will agree to pay us a fee (the “CSO Fee”) equal to 25% of the Amount Financed of any Loan you accept from Lender. For example, if we arrange a $200 Loan for you, the CSO Fee would be $50.00.”

Which is, exactly, what we did.

Ok, so, to be clear, on top of the usury problem, there’s the whole lying problem. In Texas, unlike 19 other states where Ace Cash operates, Ace is not a “lender,” but rather a “Credit Services Provider,” and my $50 in interest is not “interest” but rather a “credit services fee.”

I’m not a lawyer and this is not a legal opinion, but obviously that’s a complete lie. And I understand legal fictions happen all the time and for good reasons explained by lobbyists over lobster bisque and that I shouldn’t trouble my pretty head about it. I’m just noting things.

I tend to think I’m more creditor and finance-industry friendly than my average fellow citizen. I usually think a competitive loan market provides the best chance for the best service, and interest rates reflect a reasonable combination of people’s personal credit and the true risks taken by the lender. I can make a strong case, for example, for the existence of sub-prime mortgage loans at elevated interest rates.

But Holy Bejebus Batman! 300%+ interest?

That’s some dark, exploitative, medieval shit right there.

High_interest_rates
Medieval Shit

The good news is they don’t actually kneecap you when you don’t pay, right? I hope.

But I’m not going to put that to the test. My paycheck arrives soon and I’ll pay these things off then.

 

A version of this ran in the San Antonio Express News

[1] It’s super-difficult to tell if usury laws are even actually a thing. I know theoretically even the national credit card companies cap their rates at 29.99 percent. States seem to all set top interest rates, and then state lawmakers create giant loopholes through which payday lending companies can waltz. Your state, like mine, might say personal loans are capped at 24 percent, or commercial loans top out at 28 percent, or whatever. But there are massive categories of seeming exceptions that give the lie to whatever usury laws are supposed to limit.

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Ask An Ex-Banker: Use Savings Or Debt To Pay For School?

Note: An ex-student of mine reached out to ask a question many face… Is it best to use savings and investments for graduate school, or to take out loans?

Dear Banker, 

I saw you answered  a question from a former student about paying down debt and being unemployed on your blog. So I thought I would give it a shot! I am going back to school in January for 1  year accelerated program that will cost 40k-50k, I am not quite sure yet.
Side note: I thankfully do not have loans from undergrad. 
Betterment_app
So I will have to take out student loans but I am unsure if I should take out the whole 40k-50k or use some of my assets to have less debt after I finish.  
I currently have $9,000 in Betterment.com and individual investments with Capital One, $12,000 in Mairs and Power mutual fund that my parents put money in since I was a child. I also have $3,000 dollars in my savings account. I know I shouldn’t use all the money I’ve invested and saved but I was thinking maybe $10,000 dollars to have less students loans to pay back? I’m not sure what is a better decision financially. What would you suggest?
As well, I am going back to school to be a nurse so I can assume that my salary will be around 50k-60k a year. According to this website http://www.allnursingschools.com/nursing-careers/registered-nursing/salary/
I saw your blog on Facebook and thought I would ask!
Thanks,
M.C. (San Antonio, TX)

Hi MC,

Thanks for your question and for thinking of me. I’d like to think a few of the things we talked about in class were helpful.

I hope post-College life is treating you well. Congrats on having real savings and investments at this point…this is really commendable. Plus, no undergrad debt is also a blessing. A good place to be! About your future decision to use savings vs. take out debt for a nursing degree:

I don’t think there’s a single obvious solution. You could approach this various ways and still be making the ‘right’ choice. Also, I’d probably need more info on your situation to give more confident advice. But, here’s the principles I would keep in mind:

1. Student loans – especially for a professional upgrade in skills – are not “bad debt.” Mostly they have low interest rates, with generous payback terms. If they help you achieve a good salary and life-satisfaction, they are “good debt.” $50K of nursing school debt is a lot, but manageable in the long run. The fact that you’ve got some savings and investments already also suggests that you are able to live below your means, which bodes well for your ability to pay back debt over time after you get training and when you are earning money again.

2. If any of your Betterment, Capital One, or Mairs & Power accounts investments are in retirement accounts –  tax advantaged accounts like an IRA – don’t take any money out of there to spend now. You might pay taxes and penalties to extract the money, so its better to leave those for the next 40 years to accumulate compound returns.

3. For invested money not in retirement accounts, its ok to take the money out and spend some on a worthy project like a professional upgrade. BUT…if you’re able to resist taking money out, it’s better for you in the long run. It’s so very difficult to actually accumulate savings and investments – especially when you’re in your twenties – that I think you should try extremely hard to preserve it, invested in the markets. This will mean more debt (and therefore more risk) but it seems justifiable, at least to me.

4. Leaving money invested in stocks/ mutual funds is tax efficient (meaning, every time you sell you’ll owe taxes on the gains.).

5. It’s also slightly riskier (stocks/mutual funds can lose value). But the longer you can leave them alone untouched, the better your prospects for building wealth with that money.

6. I think, psychologically, its easier to save and invest if you already have something saved, rather than zero. So I wouldn’t want you to go to zero on your investments.

Those are my thoughts. Feel free to write back or call if you want to discuss/clarify/argue about any of this.

acorns_app

By the way, how do you like Betterment? I haven’t really explored it but it seems like the targeted solution for your demographic. I’ve been enjoying an app called Acorns which I quite like. I wrote about it here: http://www.bankers-anonymous.com/blog/check-out-this-acorns-thing/

Michael

MC’s response:

Thanks so much for getting back to me! I’m sorry it took me a while to respond I went away for a week right when you wrote me back. 
I was thinking that it would be better in the long run to not touch my investments but taking out such a big loan does make me nauseous when I think about it. However, I think I will stick with that strategy because I know if I leave nursing school with no savings I won’t feel good about that either.  Thanks for going through the pros and cons its way more helpful then my internet searches have been!
I don’t have an IRA right now but I know I should set up a Roth IRA soon but I wasn’t sure yet if I wanted to use that money for school.
As for Betterment, I really like it! I started an account in August 2011 and just give about 60 dollars a month. According to my performance chart my return rate is 37% with an allocation of 100% in stocks. If I had 80% stock and 20% bonds it would be 44% right now. My original allocation was actually 70% stocks and 30% bonds but after your class I decided to try 100% stocks which, just like Acorns, Betterment refers to as ‘aggressive”. The majority of the investments are in different Vanguard funds and iShares. I like that part of it as well because if I’m not mistaken to open these account individually sometimes you need 1,000 or up to 3,000 dollars. I think Betterment is great for people my age! I always tell my friends to sign up who don’t know anything about investing. 
Thanks again for responding and teaching a great class I think all students should be required to take it!
MC
 —
MC, Ok good luck! You’re going to do great, because you’ve already done the hard part, which is to begin saving and investing in your early 20s.
–Michael

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Donald Trump – Sovereign Debt Genius

USA_Debt_to_GDPOne of The Donald’s great strengths is that he latches onto a partial truth – or an unspoken but widely held belief – and then expands upon it for his own purposes. Obviously this can veer into disgusting territory, when it comes to expressing sexually insecure men’s feelings about women, or insecure workers’ feelings about economic threats from China or Mexico. As Matt Taibbi eloquently expressed, he effectively uses this same talent of partial truth-telling to bash government and media elites who do, in fact, disdain, misunderstand, or ignore ‘regular Americans.’ Trump scores these points against Establishment elites because really, we sense some truth in what he says, that others before him won’t say.

Earlier in the week Trump stepped in a pile of it when he expressed truths about US sovereign debt which political leaders cannot openly discuss. Unconstrained by good taste, judicious character, or political consistency – he can pop off in any direction, occasionally hitting on an important point that more people should understand.  The Donald said:

“I’ve borrowed knowing that you can pay back with discounts. I’d borrow [as President, on behalf of the US] knowing that if the economy crashed, you could made a deal.”

This is so crazy that he said it – as a person running for President – that you kind of have to laugh at his gall. On the other hand, he’s right. This is what happens when countries borrow too much. And also, we don’t really know – or have any kind of open discussion in this country – about what constitutes too much national borrowing.

trump_fingers
Those fingers tho…

When I worked as an emerging market bond salesman in the late 1990s – slinging bonds from places like Pakistan, Ukraine, Ecuador, Argentina, Russia, and Ivory Coast – we used to put out economic research for our clients that pointed out that a 70% Debt/GDP ratio marked a kind of scary ‘Do Not Cross’ line. If the total amount of sovereign debt exceeded 70% of the economic output of country, you might have to start worrying about whether that country could reliably pay back its bonds. Once you hit 100% Debt/GDP, history seemed to show, emerging market countries would enter a red-zone of risky sovereign renegotiation, or possible default. Their cost of new borrowing would rise, which in turn would hurt their ability to service their existing debt. At between 70% and 100% Debt/GDP, countries could get into a vicious death-spiral of borrowing, ending in sovereign debt restructuring.

At that time, Japan alone among rich countries represented a weird exception to that guideline, with seemingly ‘safe’ bonds offered at very low interest, while maintaining a Debt/GDP ratio of around 100%. Post 9/11, the US and Europe embarked on a new low-interest era, and developed countries seemed to be able to borrow a greater amount than ever before, without adverse consequences. Debt was cheap, borrowing levels rose, and many more countries – developed, and emerging – breached ‘the red zone.’

Present-day debt levels

These days, the US (seemingly comfortably) shoulders a 100+% Debt/GDP ratio, while Japan’s ratio has climbed to 180%. Are either of these ratios too high?

By way of comparison, Greece – which effectively restructured its debt with the rest of Europe in recent years – only had a 150% Debt/GDP ratio. The US now enjoys a previously unthinkable Debt/GDP ratio, seemingly without consequences. I point out these ratios to say that it’s also not impossible that the US would have to renegotiate its debts at some point. Which is why, crazy as Trump is, he’s sort of inadvertently pointed out an important thing.

trump_eats_chicken

Don’t get me wrong. In no way do I ‘predict’ a US sovereign debt crisis is imminent.1 Permabears and goldbugs like Peter Schiff like to talk about a coming US debt crisis like it’s a guaranteed future – like it’s a rational reason to:

1. Start buying gold and

2. Buy empty farmland and build bomb shelters.

It’s not. Shortly after the 2008 Crisis in particular, commentators tried to argue that increasing our national debt at our post-Crisis rate would lead to financial Armaggedon.  It didn’t.

I just think that – without any current limits on US sovereign borrowing, we might have the impression that we could borrow indefinitely.

Trump’s comments recently made explicit the problem of excessive borrowing that other countries have dealt with on a semi-regular basis. Greece, Pakistan, Ukraine, Ecuador, Argentina, Russia, and Ivory Coast – to name a few – have faced the problem of excessive debt in the past two decades and done exactly what Trump talked about. You sit down with your creditors and have a difficult, adult conversation. We “US exceptionalists” think this is ‘unthinkable’ but really it shouldn’t be. It happens and has happened on a regular basis with many countries. Plenty of unpleasant but semi-banal developments (war, recession, political instability, a Kanye/Miley Cyrus Democratic Party platform in 2024) could put the US’ ability borrow and pay its debts at risk.

Currency control

One of the great advantages Japan and the US hold over Greece (and the rest of the Eurozone) and many emerging market countries is that we control our own currency. Here again, The Donald is our resident genius, in explaining why this is such an advantage:

“First of all, you never have to default, because you print the money. I hate to tell you, okay, so there’s never a default.”

Again, this is totally irresponsible of him to say this out loud as a person running for President, but he’s technically correct and therefore to be credited with bringing complicated unspoken semi-truths to the surface. Dollar-denominated debt becomes only half as expensive in real terms, if you just double the amount of available money, or experience a quick bout of 100% inflation.

There are some nuances here that would make that harder than it sounds coming from Trump’s mouth. Like, you don’t get to trick your lenders more than once this way, because they (the lenders) quickly raise future interest rates to adjust to inflation.2 Also, significant sovereign debt obligations like Social Security, Medicare, federal pensions, and TIPS (an inflation-linked type of bond) adjust payments upward with inflation. But like I said, I admire Trump for bringing up an important unstated half-truth about currencies and sovereign debt.

The US also enjoys another huge advantage relating to its currency – the fact that everybody in the world still wants dollars as a preferred method of trade, and store of value.

The ‘Reserve Currency’ Advantage

In addition to our ability to inflate away too much debt, we enjoy the advantage of a special ‘reserve-currency’ status in the world which acts as an amazing kind of subsidy for our profligacy.

What do I mean by that? I mean something kind of like that joke about the two hunters and the hungry bear. We don’t have to run a great economy or run a great political system, we just have to run our operation better than all the other choices.3 So if you can create (at least the illusion of) the Rule of Law (China and Russia can’t), Growth (Europe and Japan can’t), and Political Predictability (Africa and Latin America can’t) at a Big Scale (Canada, Switzerland, New Zealand can’t) then you get to be the country that controllers of massive amounts of capital want to be invested in.

We attract excess Chinese, Saudi, Singaporean and Norwegian money into our bonds because where’s else can they park huge amounts of wealth? We may have deep structural problems, but so does everywhere else, to an even greater extent. From a sovereign debt perspective, we can outrun the bear better than the others. At least for now.

That’s the part, unfortunately, with which The Donald is not actually helping, though.

Some Ways In Which The Donald Isn’t So Genius

He’s perfectly correct in saying that if the US got in trouble with too much borrowing, we could sit down and renegotiate our obligations. Lots of countries have done this. He’s also perfectly correct that our control over our own currency allows us to ‘inflate away’ the problem, to some extent. What he’s absolutely putting at risk, however, is our special ability to ‘outrun the bear’ in the form of maintaining (at least the illusion of) the Rule of Law, Growth, and Political Predictability.

The following policies will not help our reserve currency status, which is really the key to the US’ sovereign borrowing advantage:

  1. Building giant walls along our border
  2. Threatening to default on our bonds
  3. Threatening to massively devalue our currency
  4. Forbidding entrance to and/or deporting people based on their religion
  5. Threatening aggressive trade wars with major bond funders, like China
  6. Promising to rewrite libel laws in order to quell journalistic enemies
  7. Encouraging violence against political enemies during public rallies

Now, of course, The Donald will probably say he’s just kidding about all these things. He’s really a more serious person than that, you know he went to a really good school, and he’s really smart and handsome. Lots of women, and even the hispanics, you know, they like him. Maybe bond investors don’t take his little jokes and threats that seriously. Fine, maybe he’s just kidding about all that stuff.

But in my experience, the people who control real capital – the few thousands of wealth managers and bond traders on this planet who ultimately decide whether to continue to roll over the US debt every month – until now rolling it over like clockwork at attractive, low interest rates – in my experience they don’t fuck around.

And by “not fucking around,” I mean they really don’t appreciate heavily-indebted countries, led by hucksters, pushing trade wars and closed borders. They can choose whether – or not – to invest in bonds of countries led by an unserious racist xenophobe who jokingly threatens debt restructuring and inflation. Believe me, they don’t appreciate the joke.

I like our reserve currency advantage. We’ve built a good track record over time of responsibly handling our massive national debts. We’ve been a good bet, and just as importantly perceived to be a good bet up until now, for paying everyone back.

There’s quite a bit at stake here.

 

 

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  1. predictions like this are always made by cranks and people with things to sell you
  2. As our poet-President W. Bush once mumbled “Fool me once, shame on…shame on…You…fool me, can’t get fooled again.”
  3. At the risk of over-explaining the joke/analogy: We just have to outrun the other hunter.

Non-Bank Lenders For Small Business

Note: This post has a Texas bias and a version of it ran in the San Antonio Express News. However, there is no open-carry here on this blog, so you can bring your children.

 

I suggested in a recent post that it’s nearly impossible to fund a new business and there’s really no good way to go about it. The best thing you can hope for is just to be born rich.[1]

However, in the interest of keeping the American Dream alive (at least until Trump wins in November) I’ll mention a few non-traditional avenues to investigate if you’re starting a new company and looking for funding.

Each of the following non-bank options are lenders, meaning you’re getting a loan rather than a direct investment in your business.

Prosper.com

prosper dotcomProsper is not a small business lender per se, but rather an online source of 3-year fixed interest rate personal loans of up to $35,000. You can apply with them online for a variety of needs, including for your small business. You create a profile, describe the size of the loan you need and your planned use of the funds, and what interest rate you’d be willing to pay. The ‘lender’ will be numerous individual investors[2] grouped together by Prosper. They agree to fund you at your proposed interest rate, for as little as $25 per lender, or up to the full amount of your request. Prosper handles all the online mechanics of funding and payback of the loan. Since there’s no traditional bank involved, but rather thousands of individuals making decisions, I see Prosper as a reasonable, small-size, alternative for startups to consider.

In my state, Texas, you cannot be a lender on Prosper, but you can be a borrower. In the mid-2000s – back when Prosper first came out and I lived in New York – I funded a bunch of small loans, including small business loans. As an investor, Prosper worked fine for me.

Back in 2007 I also once tried to borrow $10,000 and was ‘funded’ by the collective interwebs at a reasonable 7.7% rate, but could not ultimately get through their due diligence process, which included a credit check (that part was fine) and review of my taxes (for some reason that befuddled them.)

Prosper reports $5 billion worth of loans funded since their inception, so I assume my own problems were idiosyncratic. So check it out.

LiftFund

lift fundNon-profit microlender Liftfund lends money to small businesses in 13 states, although they are headquartered in San Antonio.

[Important disclosure: I do periodic consulting gigs for LiftFund, so anything nice I might say about them should be filtered appropriately.]

They may, in fact, be your startup business’s only hope of getting a loan.

Whereas your traditional bank will not talk with you about a loan until two years have passed – and frankly your bank isn’t in the business of coaching small businesses – LiftFund not only will talk to you but considers supporting startups with educational resources a key part of their role.

When I say banks will neither coach you nor even talk to you about a loan for your startup, I’m not judging banks. Some of this, including the coaching part in particular, is not a money-maker.

I guess LiftFund can do this because of their not-for-profit mission. Like other non-profit business lenders they can do things which don’t maximize their bottom line. Loans range from as small as $500 to as large as $250,000. A bunch of friends of mine in business for less for than two years have gotten loans from LiftFund and their predecessor Accion, so I know this is a legit source.

Able Lending

able lendingFile this one under “This is a really cool theory but it’s too new for me to have experience with it yet.”

Able Lending relies on a classic microcredit lending theory – that we won’t fail to pay back friends and family – to lend to startups less than two years old.

I recently met up with Mario Cardona – the one-man San Antonio branch office for 2-year-old Austin-based startup Able Lending.

Cardona explained that business owners seeking a loan from Able must first tap their own personal networks (Uncle Bob, your college roommate Janet, and your hair stylist Sam) and get a commitment from at least three different ‘backers’ for your loan. Step two, Able funds up to three times that committed amount, at a rate between 8 and 16%, for between $25,000 and $500,000. So after Bob, Janet and Sam together agree to lend you $25,000, Able funds $75,000. If you do a 3-year business loan, Able gets its portion of the loan paid back faster than your backers do, which is kind of a neat mechanism for ensuring that your backers are taking some risk on you. I think Able Lending depends on the feeling that you really, really, don’t want to let your personal backers down, so they feel more secure with your business loan.

Does it work? I don’t know yet, but would somebody please let me know if they have experience with Able Lending? I like the idea.

NextSeed

nextseedLike Able Lending, Next Seed is a total startup, so it’ll take some time to see how it goes. Also, like Able Lending and LiftFund, it’s based in Texas. Unlike those two, it is only registered right now to do business in Texas. Finally, like Prosper, it’s a crowd-sourced platform for borrowing money.

NextSeed is taking advantage of newly liberalized national and state laws to allow companies to raise debt and equity from non-accredited (meaning, non-wealthy) investors. Small businesses can sign up with NextSeed to raise between $25K and $1 million at a set interest rate. Investors/lenders – that could be you and me – lend in increments as small as $100 via this platform. NextSeed handles the funding and regular monthly payments.

I spoke with the founders, who believe they offer a more personal, fun mechanism for investing on the one hand, and an alternative source of capital for entrepreneurs on the other. They are currently doing deal number four, so it’s early days yet. I’m thinking about signing up and sending in a small amount of money to be a lender, partly to figure out the mechanisms and partly because Texans right now are shut out of participating in Prosper.

Crowd-funding thoughts

I’ve been reading and learning lately about the liberalization of crowd-funding rules to allow for non-wealthy people to participate. I remain concerned that

  1. a) This is a not very-efficient way for business owners to access capital and
  2. b) Some non-wealthy people, at some point, will lose their shirts. There will be tears.

Right now I’m of the mind that liberalizing laws to make more types of investments available for non-accredited investors is probably a net gain for society and the economy – principally that entrepreneurs get more opportunities to access capital. But given the nature of things like this, some people will bear the brunt of the “costs” of this liberalizing – via catastrophic, unexpected, losses. We’ll have generalized, socialized gains and concentrated, private losses. Sort of the exact opposite of the 2008 crisis and bailouts of TBTF banks.

 

Please see related posts:

Funding for Small Business – All The Terrible Ways

Entrepreneurship – Getting started is the hardest part

 

 

[1] If I wrote the bible for small business owners I’d say that it’s easier for a camel to fit through the eye of a needle than it is to convince an affluent person or institution to back your startup company. I feel your pain. To take a more 21st Century analogy, raising money can be heavier lifting than you’ll find at 5:30am Crossfit gym. Traditional banks just don’t want to talk to small businesses until they’ve been in business for two years, with the tax returns and profit to show for it.

[2] Although I kind of assume that by now individual investors have been replaced, somewhat, by Prosper bots. Meaning, institutions or high-net individuals have profit-optimized the algorithm for funding X amount at Y credit rating and Z interest rate on Prosper, so things are pretty automated. An amateur individual lender like me – without an algorithm – is going to end up accepting a non-optimized interest rate for any given risk. Which is still probably fine.

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