For Your Consideration

We all know the answer to that one: the stork (oops, right answer, wrong question). Really, have you ever considered where money comes from? Got visions of the US mint printing dollars or pressing coins? You’re not alone. I needed a legitimate resource for this question in preparation for my upcoming “Money and Investing” Girl Scout workshop.

Online research leads to many unsubstantiated conspiracy theories- not very helpful. And then I found a copy of “Modern Money Mechanics: A Workbook on Deposits, Currency and Bank Reserves”, originally written by Dorothy M. Nichols of the Federal Reserve Bank of Chicago in May, 1961. Now we were getting somewhere! I was able to obtain a pdf of the February 1994 revision and have made it available for download here. Sadly, this workbook is currently out of print. I would *love* to see the original 1961 edition for comparison purposes.

Without question, “Modern Money Mechanics” is a remarkable document. As a resource, it is “pure” and conspiracy-free. It quite adequately explains the basics of money creation and our modern fractional reserve banking system. It explains that money can be viewed “simply a tool used to facilitate transactions” and that in the US “paper currency nor paper deposits have value as commodities” and that, “Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries” (Emphasis mine).

In what makes money “valuable”, the text explains: “Money, like anything else, derives it’s value from its scarcity in relation to its usefulness” (Emphasis found in the original text). That makes sense: the more money that’s available, the less “scarce” it is and therefore the less “valuable” it is.

It further explains that “Control over the quantity of money is essential if it’s value is to be kept stable” (Again, the emphasis found in the original text). This is because “Money’s real value can be measured only in terms of what it will buy.” This time the emphasis was mine.

One can begin to understand why this document might no longer be available.

So where *does* money come from? According to “Modern Money Mechanics”, the “actual process of money creation takes place primarily in banks“.

Each time a loan is made, new “money” is created. Essentially, it is conjured into existence by the borrower’s promise to repay the loan and his/her pledged collateral. Taken to it’s logical extreme, if there was no debt, there would be no money.

In a recent issue of the “Journal of Indexes” (January/February, 2008), author Burton Malkiel (who’s book “A Random Walk Down Wall Street” can be found in the Reading Room) discussed the importance of culture on developing economies. He recalls that Nobel Laureate Sir W. Arthur Lewis used to tell him that “if you want to know why some countries develop economically and some don’t, look at the culture.” The four characteristics that drive economic development outlined in the interview?

• Reverence for education
• Entrepreneurial Spirit
• Risk Taking
• Hard Working

Malkiel’s point was that China, as a culture, fits this profile and is likely to be the “largest economy in the world in the 2020’s”. Of course, we don’t know what we don’t know and there are many possible outcomes. I would have liked to ask him if he felt the same way about the United States today. Thinking back 200 years, when the US was an “emerging market”, I think we fit the profile very well.

Today, however, I think well-reasoned arguments can be made that we don’t fit the profile quite as well as we did then. The entrepreneurial and risk-taking spirit remain, in large part, intact. Our workforce is, on the whole, very hard-working. Where I see a potential issue is in the “reverence for education” department.

But there exists a fifth issue that affects economic development: a country’s regulatory environment. We live in a country that includes the “pursuit of happiness” as an inalienable right, specifically enumerated in our Declaration of Independence. To the best of my knowledge, ours is the only country in the world that provides for and includes such a right in one of it’s founding documents. There is simply no other place in the world that offers individuals the opportunities this country provides daily.

What plays out in China’s relationships with Tibet, Taiwan and Hong Kong will be instructive, each for a different reason. It cannot become the world’s largest economy without trading partners. The world is looking for a normalization of relations with Tibet and Taiwan, not more violence. One can reason that Hong Kong’s capitalist roots will be helpful in tempering old habits.

In large part, if China *does* become the largest economy, it will *only* happen because the world has allowed it to happen. But I’m not ready count the US economic engine out just yet.

My wife gently ribs me from time to time, saying that I view the world as if the “sky was falling”. Well, blessedly the sky almost never falls (but the risk is there that it might), and sometimes it actually does. Well, it *feels* like it, anyway. I try to remind my children that life is messy business and no one gets out alive.

So, I promised some info related to my CRM Principles of Risk Management course that I recently attended. The instructors were bright, articulate and engaging and as a result, the 20 hours of instruction went by fairly quickly. As you may deduce from a “Principles” class, the essential focus was the basics of risk. The class was a fairly large one, with about 90 people. It was also a very highly credentialed group, with about 120 designations granted to these folks. Definitely no slouches here.

The first risk concept explored is an identification of the three generally accepted types of risk, each with their own unique characteristics. They are:

• Pure Risk;
• Speculative Risk; and
• Gambling.

Pure Risks are those where there’s a chance of loss *only* with no possibility of gain. An example of this might be an airplane falling out of the sky wiping out a city block or the death of a loved one. With respect to individuals, insurance does a good job of protecting against many pure risks we face in our daily lives.

Speculative Risks are those where there is a chance of a loss OR a gain. These risks include a *variation* of outcomes where profit is possible. An easy example of this is investing. We invest money in stocks, bonds, commodities, etc. with the hope of a positive result (profit), but where exists the possibility of loss. To spin this concept to financial academia, having the majority of your investments in one company or one industry group, is called “speculating” (and not investing), and we all know how dangerous that can be!

Starting and operating your own business is another form of speculative risk. For my money, this is, for most individuals,  the most “risky” speculative financial risk. Since I have been a “serial entrepreneur” (stop me before I start another business again!) all my adult life, I guess this is why stock market investing seems nowhere near as risky as the commitment and deployment of capital in my own business.

The last risk group is gambling, where there is the chance of loss or gain, but the probabilities strongly favor a loss. I highly doubt this type of risk needs any explanation. Anyone who has ever been to Las Vegas or Atlantic City (or watched CSI: Las Vegas on television) understands this type of “risk”. In the real world, I’m not sure that gambling is really a form of risk. I don’t consider shooting craps or “putting it all on red” to be forms of risk, as I think it’s a virtual certainty that a loss will occur.

I think it’s fair to say that one of the areas traditional risk management gives short-shrift to is the area of “personal” risk management. Sure, major corporations employ risk managers and teams of experts to assist them survive the myriad of risks present to the “enterprise” but where’s the love for individuals?

Even the risk management educational material I’ve reviewed focuses almost entirely on corporate risk management (I guess it’s because that’s where the money is). This lends credence to my point of view, but my position isn’t set in stone. If there is a wealth of personal risk management educational material available that I’ve somehow missed, let me know. When the data change, so do I.

Let’s face it, the general public depends on insurance salespeople to act as risk managers because:

• A. The general public (and most insurance salespeople) thinks “risk management” is the same thing as “insurance”; and
• B. Most people, who are busy living their lives, don’t consider risk management concepts and techniques.

Professional risk managers wince and take a real dim view of the perception that “risk management = insurance”. They’ll tell you that insurance has a role to play in risk management, but as a financial tool to be used, nothing more. If you can only solve risk management problems with insurance, you ain’t much of a risk manager!

There’s a problem, though - insurance salespeople aren’t particularly versed in risk management techniques. (There, I said it.) They can talk to you all day about life insurance, car insurance, house insurance (you get the point), but to have an intelligent discussion on how to apply risk management techniques to *your* LIFE is not one you’re likely to be engaged in any time soon.

There are exceptions of course, but not many. While a person can obtain a Masters degree or Ph.D in insurance, they’re usually relegated to academia (or locked away, somewhere far away!). These are not your garden-variety insurance salespeople types. The industry attempts to compensate for this education gap, in part through designations such as CPCU, CLU, CIC and CRM. Admittedly, it’s a confusing alphabet soup for the general public.

I would urge you when choosing your next insurance broker or representative, strongly consider those people who have passed the rigorous education and testing requirements required to obtain the designations shown above. You’re much more likely to be able to have a conversation on risk management concepts and techniques if you do.

I first considered an insurance career in the months between 1987 -1988. Like 99.999% of all insurance industry workers, I didn’t grow up *wanting* to be in the insurance industry. Perhaps that’s the reason why so many in our industry are so seemingly dispassionate, they’re not in it ’cause they love it. But that is a subject for another day.

In the late 1980’s I was running several trucking companies: a messenger service, an airfreight cartage operation and a hazardous materials hauler. (No wonder I was tired!) During that time the transportation industry was in the midst of severe regulatory change and I wasn’t sure we were capitalized well enough to keep up. I also wasn’t sure if I wanted to dedicate the next 20 years to the industry. I was burned out and run completely out of ideas. To stagnate is to slowly die. So I started talking to my insurance agent, Richard Augustyn, about his business.

By the end of October, 1989 I started my insurance industry career in sales (on a $450/week draw against commissions) with a small retail agency on the cusp of great things. I was able to leverage my transportation industry and small business ownership experience for the benefit of my new customers immediately. Those were fun days, but I was dangerous by what I *didn’t* know. A new insurance license can be roughly equated to a motor vehicle learner’s permit. I was so “sure” of everything in those days and it is only in hindsight that I understand how much incomplete (not necessarily “wrong”, just incomplete) counsel I gave.

I learned how to run an insurance agency: operational aspects, the special accounting methods, premium finance, policy marketing, sales and service (they are all different skill sets) and the absolute importance of renewal business to agency survival. It was a brave new world for me and I enjoyed learning *everything*.

Then the agency opened an insurance “program” division, writing inland marine business countrywide. I learned about program and broker administration, managing insurer expectations, policy creation and insurer underwriting guidelines and standards, the “why’s” behind the insurance contract.

Well, all heck “broke loose”. Staff grew from 7 to about 35 in less than 12 months. My role had morphed from operational VP and sales to what amounted to being “mother-hen” and “fireman”, keeping tabs on all my chicks and responsible for putting out all the fires in the office.

Ugh. I began not enjoying it.

nataliedee.com

That’s how I felt. Within 2 years, the small business ownership bug had bitten me again and I had the *audacity* to open my own retail insurance agency in July, 1991. The parting of ways was not amicable as I recall. It’s always been a regret, although in hindsight there was probably no way to avoid it. I must admit I was amused and flattered (in a really weirded-out way) when I found out my ex-boss went through the trouble and expense to put me under surveillance after I left. That being said, I am especially grateful to Richard Augustyn for being my friend and guide in those years. It is not an overstatement that without him I would not be where I am today. That experience laid the foundation for all that was to come and is today.

In getting ready for the “Got Money?” Girl Scout workshop, I thought it might be neat for the girls to look at stock market volatility and returns in action. I chose (at random) six NJ publicly traded companies: Campbells, Bed Bath and Beyond, Commerce Bank, Johnson and Johnson, A&P and Prudential Financial.

I’ll ask the girls to “team up” for each company and tell me why they think the company is a good stock “pick”. Should be illuminating to hear the thought process. After we go through a little discussion, we’ll take a look back to 12/31/2005 where they’ve been “given” $1000 to “play” the stock market. We’ll chart the progress of each stock through March 12, 2008. This simple chart will illuminate the way:

GS - Value of $1000 Example

The main points I’d like to address:

• Volatility: What’s the likelihood of them holding Bed Bath and Beyond past 2006 (where the decline in value was of over 22%);

• Uncompensated Risk: Buying one stock or a few stocks is very risky as you do not get “compensated” by the stock market for holding a non-diversified portfolio; and

• Returns: Only 1 of our 6 stocks beat the Wilshire 5000 (Campbells) during this period. All others lost. How likely is Campbell’s out-performance likely to continue?

After about a decade of trying to get me involved in Girl Scouts, my wife can *finally* claim victory! She has been a troop leader, “nut” and “cookie” mom, service unit manager…. Ugh! I had valiantly evaded previous attempts to get involved due to other pressing involvements, but I couldn’t in all good conscience evade any longer. I had the time, the knowledge and the inclination. Recently I was asked by the Girl Scouts to teach 2 workshops for teen girls, one on money and investing and the other on business ownership - topics I am no stranger to and I believe we are not adequately teaching young people.

This lack of financial education has far-reaching effects. One of the problems of course is that parents (at least of my generation) lack basic financial literacy themselves. The learning has all been “seat of the pants” and it isn’t always pretty to watch. Consider the increases not only in credit card usage but in average credit card balance amounts. Consider our appalling low savings rates. Consider that once America was the world’s largest creditor nation and are now it’s largest debtor nation.

I think one of the answers is financial literacy.

The Girl Scouts have 2 workbooks for use in these workshops entitled “Got Money?” and “Mind Your Own Business”. While they provide a good overview of the topics, they’re awfully dry. I have a couple of ideas on ways to make the topics more interesting so I don’t lose my “victims”, oops I mean “students” and I’ll share them here in the coming days. Maybe they’ll be of help to you.

Yes, I updated the site’s “look and feel” to make it a little more easy to read. I also tweaked a few words here and there. Sorry for the lack of posts, I’ve been busy attending at my first Certified Risk Management professional designation course in Windsor CT last week. I look forward to sharing some of that experience in the coming days.

I think I know how you feel: everyone wants a piece of you and you can’t trust a soul. I bet you’re not feeling like you’re in a good place.

It struck me recently that while you make news for just walking down the street and everyone says “they hope you get better”, no one to my knowledge has ever offered a plan to help you. Except maybe Dr. Phil, but that just smacked of being self-dealing. Well, that struck me as a bit unfair, really. The other day my wife and I were doing a little shopping and this subject came up as a topic of discussion. I had been thinking of ways you could take control of your life again. It will take time. It will take work. I outlined my plan to my wife over a hotdog and coke lunch. Perhaps you could consider the following:

1. Sell one hour blocks of your time to all the media outlets willing to pay $250,000 per hour for a print interview. If they want to videotape it, the cost would be $500,000 per hour (No limit!). Have them make the checks out directly to your favorite charities. I look at it this way: They’ve been making all this money off of you for years, it’s time to make them pay up. I figure this is good for several million dollars in a very short period of time.

2. Invite the press to cover you hand-delivering each of these checks as you receive them. Spend at least a day or so with each charity, doing additional fund-raising on-site. You’ll not only get positive press for each check, but you’ll be turning their industry on itself, using that machinery to generate more positive publicity! Even better, invite your kids and ex-husband as well! You’ll gain continued strength and the press will lap it up.

3. Advise the court through your legal representatives that you will not fight your father for conservatorship of your estate. Cease any current or planned litigation. It’s a time, life-force energy and money waster which is why you’re not likely to get this advice from the attorney handling that aspect of your legal issues. Listen, your Dad has a legal obligation to “conserve” the money in the estate so you need not worry that he will blow any of your hard earned wealth. Consider that it might be better in the long run while you get other things in your life sorted out. You’ll be sending a strong message to the court that you’re starting to “get it” and most people will begin to believe that your growing up. Make sure your publicity people get this out the press. Let the paparazzo know that they could get an exclusive to discuss this issue with you for $250,000. See #1 and #2 above for what to do with the money.

4. Advise the court through your legal representatives that at this time, you accept the terms of present parental visitation situation. Your antics are making people believe your ex-husband Kevin is the father of the decade! Have the good sense to stop giving your enemies ammunition to use against you. Popular opinion and consensus says you’re not well enough to take care of your kids at this time. I’m not saying they’re right, but at this point, you’ll have to prove them wrong. It’ll take time and effort. I promise you this, it will be worth it.

5. Get up to date with any outstanding legal issues. It’s a noose around your neck and time to get rid of it. If the court asks that you attend counseling, attend counseling. If they ask you to appear for deposition, appear for deposition. Again, it’s not going to be easy, but in order to get control of your life, you’ve got to give in. In time, these issues will disappear. Stop feeding the frenzy around you.

6. Cautiously and adamantly guard your privacy. This may seem to be in contradiction to what I’ve previously written, but it’s not. You have a personal life and it’s time to reclaim it. Your path is a public one and it was created at your choosing. You cannot expect that the industry that’s been built up around you to suddenly go away because it won’t. But you can start the process. After the media outlets have paid their millions for exclusives with you, send out a press briefing that for the foreseeable future, you will live in a local Southern California hotel (with a large enough meeting hall) and invite them to an 8 hour press conference every work day (less one hour for lunch) for the foreseeable future. That’s right: 5 days a week, 7 hours per day. It’s your new job: making them sick of seeing you. Britney, at it’s core, it’s supply and demand theory. Now that you’ve made them pay for access to you, give it away now! Nothing will make you less attractive for the paparazzo than access to you for 35 hours a week! Put no timetable on how long you will continue this. Basically, keep it up until they get tired of being there. It is in doing this that you begin to control your image and through it, your life. Few things will be as empowering.

7. Make certain you make clear in this time with the media, that you are looking forward to reconciling with the loved one’s in your life: your parents, your kids, even your ex-husband. As you begin to look like you’re regaining your balance, it will soon become a self-fulfilling prophecy. You will begin to regain the balance you’ve lacked in your life.

8. Begin to understand that we all have a role to play. Yours is unlimited access to media. With that, you can make a difference in many people’s lives. Instead of fighting against it, embrace it. Enjoy it. Accept it. Use it to make other people’s lives better. You can do it. It will make you stronger, it will make you feel better about yourself.

9. After the paparazzo have grown weary of you in your hotel meetings, tell them you’re going to travel abroad for awhile. Invite your kids and ex-husband along. Maybe even your parents - Invite them to join you, too. Gain strength from your family. Be forgiving to the point of selflessness. You can arrange it so that additional fund-raising can be done. You’ll see the world like few have ever seen it. Take your time. No one owns you and over time you’ll learn to be focused on the moment.

10. Consider additional creative outlets. Return to music and acting. You will be in a different place than where you started. You’ve changed, you’ve grown in experience and in life. Embrace the changes. The well of goodwill you’ve filled is important and no one will be able to take it away from you. You’re wiser and will be better equipped to tell the difference between those that care about you and those that are inclined to use you.

11. Consider learning about your own finances. Be mindful of your abilities but lessen your need for alleged financial professionals. It’s not all that difficult and you’ve already attained “critical mass”. You don’t need to worry about getting it all correct, you just need to make sure you miss the big mistakes.

If you’ve followed this bouncing ball to this point, your legal issues will be minor and manageable. By this point, you’ve understood that it is a “process” to be completed so make the best of that meat-grinder with the knowledge that in terms of a lifetime, it’ll be over soon.

Britney, I wish you the best of luck!