Social Security Tax Cut

Social Security taking in less than it is spending? No problem - cut the payroll tax, run up the debt. After all, China and Russia et al. are still (as of this writing at least)willing to lend to us. Now we can go back to wondering and debating why interest rates are rising.

For Treasury Secretary Geithner et al. here's some news: the economy doesn't respond to temporary measures. Those whose spending we need are scared and will save the 2% break on the payroll tax. For those who aren't scared, it won't make a hill of beans in their overall spending. Stop scratching your heads and wondering why the "cash for clunkers" program was a bust and why the temporary tax breaks didn't resuscitate the real estate market. Businesses understand better than our legislators the folly of hiring on the basis of temporary measures.

We can come up with reasons to support our agendas no matter what the circumstance. We can cut taxes because we have massive "surpluses as far as the eye can see" and we need to give people back "their money" or we can cut taxes because the "Great Recession" is the worst economic downturn since the 1930s. It doesn't matter, either way - Goldman's bonuses are intact.

Let our children worry about the sinkhole. As yields rise and the interest on the national debt climbs, the slice of the pie going to other countries will grow.

Food for thought: next year, this bill's social security tax cut will expire. Will we be able to let it expire? After all, it will be a tax increase at that point; and with high unemployment, who wants to raise taxes?

Much, much better to borrow. And please do me a favor - save the pontifical speech making when we hit up against the debt ceiling.

Why Do They Take Food and Energy Out of the CPI?

When the Bureau of Labor Statistics reports the monthly consumer price index (CPI), two numbers are the main focus - the overall CPI and CPI ex Food & Energy. For example, this morning's report showed that, overall, the CPI was up 0.2% (implying roughly a 2.4% annual inflation rate) and ex Food and Energy was up 0.1% (or at roughly a 1.2% annual rate ). The ex Food and Energy annual rate of 1.2% is below the Fed target for inflation of 2% annual rate, whereas the overall number at 2.4% is above the annual target.

Why do they even take out food and energy? After all, we need to eat and we use energy in everything we do. The party line is that food prices are volatile because of the weather and energy prices are heavily influenced by world oil producers as well as the weather. Thus, monetary policy actions by the Federal Reserve won't necessarily counteract those price pressures. Thus, to assess whether inflation is on the right track or not, according to the Bureau of Labor Statistics, it makes sense to pull out food and energy. One thing for sure - if you take out a number of things, you'll eventually arrive at a number you like.

This takes on even more importance today because the Fed's stated goal is to increase inflation. They believe that inflating the economy will lead to job creation.

Are You Over 70 and 1/2?

If you are over 70 and 1/2 or have inherited an IRA you need to take a required minimum distribution (RMD) before year end.

A calculator is at

http://apps.finra.org/Calcs/1/RMD

The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive. (Source: IRS)

Failure to take the RMD before year-end will result in a 50% tax.

QE2 a Success?

The nation's biggest bond managers weighed in today on the Fed's QE 2 program - the buying of longer-term Treasuries to inflate inflation expectations. That it has, in fact, pushed up inflationary expectations was noted and in the process the yield on the 10-year Treasury note has also spiked 90 basis points. The sharp push-up in yield bothers Steve Liesman (CNBC chief economist) not to mention Rick Santelli the excitable on-the-exchange floor CNBC reporter.

The bond managers (Gross of PIMCO and Volpert of Vanguard) deemed QE 2 a success. CNBC was aghast, given the sharp rise in yield and the fact that today's FOMC (Federal Open Market Committee) meeting statement didn't even mention the rise in yield. It also interests me that the stock market, which has risen sharply in anticipation of improving business conditions, was not mentioned. Committees have the habit of selectively choosing evidence to support their view. They are lawyerly in nature.

Is it or was it a success? I disagree with the bond managers and have to side with CNBC on this one. For one thing, I have to ask if the rise in rates is good for a housing market that is still struggling to get its bearings. Continuing to push longer term rates higher raises the risk of short circuiting a nascent recovery. The Austrian school of economics preaches that the economy on its own will recover from a down turn if given time. A lot can be learned from this body of knowledge. The Fed should swallow its arrogance and back off, IMHO.

A Few Minutes Can be Worth Big Bucks

Ed Slott is the #1 expert on IRAs. He is on public television whenever they are in their fund-raising period and has written several excellent books on retirement issues of interest to DIY Investors. If you know someone who has just turned 70, inherited an IRA, is trying to lower the value of their estate, or even wondering about their beneficiary designations, this year-end check list is valuable.

I suggest that, if some of these issues are applicable, you may want to consult a professional. For example, retitling an inherited IRA is tricky and even many bankers get it wrong and, thereby, end up generating a big tax bill.

Ed Slott Year End Checklist

Disclosure: I am not associated with Ed Slott and receive no compensation for any recommendations on this page. Post is solely for informational purposes.

Prepaid Credit/Debit Card for Teens - The Right Way

As an investment person, I tend to focus on a small but essential portion of the financial literacy spectrum.

Still, I am often asked about financially literacy in general and, in particular, about financial literacy for young people. As a result, I am constantly on the outlook for tips, books, and good posts in this area.

This is one of the best I've come across in a long time:

TEACHING TEENS ABOUT MONEY

The best thing I like is that it is hands on. For many teens, financial literacy taught in a class room doesn't work. Simply, balancing a hypothetical checkbook is boring compared to one's own checkbook. Also, I find it interesting that the post recommends USAA. I constantly hear about their superior customer service.

If you have a teen at home or know of someone who does, I would recommend this approach. It can go a long way towards building financial literacy as well as self-esteem. Help your teen learn the basics, and it will pay tremendous dividends down the road.

As an aside, if you can point out the ridiculousness of the Kardashian offer, it even increases their knowledge of what they will come up against as they enter the adult world and the kinds of offers that get people in financial difficulty.

Bernanke Printing Money? Jon Stewart's Take

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