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Personal Finance Blog By MoneyRates - March 2013

BRICS and stones: Should an emerging alliance worry the US?

March 28, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Leaders of Brazil, Russia, India, China and South Africa, collectively known as the "BRICS" nations, met at a financial summit in South Africa this week to discuss the formation of a global bank to act as an alternative to the traditional institutions dominated by North American and Western European countries.

Only time will tell whether that alternative turns out to be a rival or a partner in nurturing worldwide development and financial stability.

A modest proposal… so far

The summit was a meeting of heavyweights that produced only modest results for the time being. The nations involved represent about 40 percent of the world's population and 20 percent of global GDP. The priority these nations place on exploring economic cooperation can be seen by the level of the attendees, which featured the president or prime minister of each nation, including Russian President Vladimir Putin and Chinese President Xi Jinping.

Despite all the political and financial firepower present at the summit, it produced no breakthrough announcement. The BRICS nations did decide to enter into negotiations on the formation of a development bank controlled by the five nations, but the actual formation of such an institution would require an unprecedented level of cooperation among nations that historically have been fiercely independent. The proposal is, however, an intriguing possibility.

Competition for the dollar and the euro?

The potential for financial cooperation among these nations could have an immense impact. By making a new source of funding available to developing nations, it could accelerate economic growth. In turn, creating a new source of money supply could introduce a new force for global economic stability.

On the other hand, the possible impact of a BRICS-dominated global financial institution is not all positive. By funding development, the BRICS nations would be angling for the inside track on supplies of natural resources and trading arrangements from emerging economies, which would be in direct competition with European and U.S. interests for those relationships.

Also, one long-running speculation has been that the BRICS nations ultimately want to form their own currency as an alternative to the U.S. dollar and the euro. This could reduce demand for the dollar as a reserve currency, which could lower the dollar's value relative to other currencies. A strong currency is a double-edged sword -- it makes imports cheaper but makes a nation less competitive on an export basis. Also, a weaker dollar would somewhat tie the Federal Reserve's hands on policy decisions, such as the current low-interest-rate approach.

It's possible that with stronger currency competition, the U.S. would have to offer higher interest rates to support the dollar. Depositors in savings accounts, CDs and money market accounts might love that outcome, but if it came about too suddenly it could be very disruptive to the economy.

Fortunately, multi-national financial cooperation is too complicated to come about quickly. For now, the BRICS summit is primarily a reminder that the future may be very different from today's world.

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Cyprus troubles cast a shadow over deposit accounts

March 21, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Cyprus is a small country, but the prospect of a Cypriot bank bailout made international headlines because of a disturbing proposal by European Union: It suggested Cyprus should pay for part of the bailout through a seizure of a portion of the country's bank deposits.

The proposal could not have done more to increase anxiety about the safety of banks, and to heighten tensions between the haves and have-nots of Europe.

The bailout proposal

At first blush, the proposal seems outrageous: The government of Cyprus would seize a portion of all bank deposits on the island to help finance the bailout. However, it becomes easier to understand when you realize that this is no ordinary banking system.

Cyprus has less than a million inhabitants, yet it attracts a disproportionate amount of bank deposits because it provides an offshore shelter for foreigners (in this case, largely Russians) who want to hide their assets from their own governments. Cypriot banks have been so attractive to foreigners that total deposits equal roughly eight times the island's Gross Domestic Product.

In one sense then, you could say that many of those who would pay the levy on Cypriot deposits were people who were trying to game the financial system in the first place. That may or may not be justified, but the bigger problem is that the notion of deposit seizures raises global doubts about the banking system -- exactly the kind of panic that bailouts are designed to avoid.

Lessons from Cyprus

The solution to this bank crisis is still to be determined, but already there are at least three lessons that can be gleaned from it:

  1. Asset seizures destabilize financial systems. Free market advocates preach over and over again that there are long-lasting negative effects on investment when countries nationalize corporate assets or otherwise arbitrarily seize property. It's ironic, then, that the economists of the European Union should make a proposal that amounts to something similar.
  2. It's never a good idea to let people see the sausage being made. All this worldwide angst and market disruption occurred not because these deposit seizures actually took place, but simply because they were proposed. It was probably premature to publicize something that had not yet been agreed to, because it triggered a run on the banks and a great deal of ill feeling without ultimately raising one penny toward the bailout.
  3. People -- including Americans -- may want to rethink offshore deposits. All savings accounts are not created equal. From the Cayman Islands to Cyprus, offshore accounts have been popular for everything from political reasons to tax evasion. However, leaving the stability and regulatory protections of the American financial system can have consequences.

Bank savings accounts are supposed to be the ultimate in stable and secure places to put money. With one proposal, the European Union has forced people the world over to question that assumption.

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Job growth swims against the tide of budget cuts

March 14, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Last Friday, the Bureau of Labor Statistics report on February job growth provided a sliver of hope for the economy. Can that thin bit of hope survive sequestration?

A trend toward stronger employment could put some real momentum behind the economic recovery. That would be good news for a wide range of people, including those looking for work, employees wishing for better wage growth, and savers who've been living with microscopic interest rates on savings accounts and other deposits. However, there have been false hopes before, and this time the economy will have to overcome the obstacle of Federal budget cuts.

Strong job growth

Total non-farm employment grew by an estimated 236,000 jobs in February. That's nearly double January's number, and one of the best job growth figures in the past seven years. Of the past 84 monthly jobs reports, only six have shown stronger employment growth.

That sporadic job growth is part of the problem, though. The employment market got off to an even stronger start last year, but soon faded. This year, the job market will have to sustain its momentum against the tide of sequestration.

Behind the grandstanding of sequestration

There is a certain amount of hype associated with sequestration. The automatic budget cuts that went into effect on March 1 will cause belt-tightening across a range of government departments, and the people in charge of those departments have a vested interest in making sure the public feels their pain.

At the high end, there's the Obama Administration's persistent publicity campaign, including calling a halt to White House tours, in an attempt to avert sequestration in favor of a negotiated package of less immediate budget cuts and tax increases.

This effort is then echoed by a series of individual departments, each trying to make it clear to the public that the country simply cannot live with cuts to their budgets. After all, while an efficient administrator could simply look for ways to make do with less, the fact is these departments are fighting to preserve their budgets, and have no interest in implying that any expense is unnecessary.

The resulting PR blitz may be designed to hype the impact of sequestration, but behind the grandstanding there are a couple of realities that genuinely could slow the economy. The first is that all the publicity about sequestration could have a negative psychological effect on the private sector. Stories about the dire effects of budget cutting don't exactly make individuals spend optimistically, or encourage businesses to get aggressive about hiring.

Beyond the psychology, there is the reality that the deficit will have to be addressed. Whether it's spending cuts, tax increases, or both, some kind of drag on the economy is inevitable.

In short, February's employment growth was good news for job-seekers, and possibly good news for interest rates on savings accounts and other deposits. Whether it can survive both the hype and the reality of the budget mess remains to be seen.

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Stock market high creates challenges for investors

March 7, 2013

| MoneyRates.com Senior Financial Analyst, CFA

On March 5, the Dow Jones Industrial Average reached a new record high. This might seem like cause for celebration, but it actually just makes the investment environment even tougher.

The Dow's close at 14,253.77 broke the previous high close of 14,164 on October 9, 2007. In between these dates, of course, investors have endured a harrowing ride. The financial crisis and the Great Recession saw stocks lose half their value. As is always the case during market panics, it was hard to envision the stock market turning things around. It seemed as if prices were in a free fall.

A shaky recovery

Given that history, why isn't it good news that blue-chip stocks have now fully recovered? In some ways it is good news -- at least, it's good for investors who stayed with stocks at the bottom, though not for those who have only recently clambered back onto the stock bandwagon. Still, even for investors who have ridden stocks all the way back up, this recent success creates new challenges.

Successful investors always have to focus on the next battle rather than on past wins and losses, and looking ahead, here are three difficulties that investors face:

  1. The questionable support behind the stock rally. With the stock market hitting new highs, you might expect the economy to be firing on all cylinders, but that's hardly the case. There was virtually no economic growth in the fourth quarter of 2012, and the federal budget dilemma looks likely to put a damper on 2013's growth. With the economy remaining sluggish, unemployment has shown only sporadic improvement. Ultimately, it's not enough for investors to be optimistic. Business owners need to be optimistic enough about the conditions they see to start hiring consistently, and the economy just can't seem to get to that point.
  2. The dearth of alternatives. When stocks get a little pricey, investors should think about transitioning into alternatives. Unfortunately, the options aren't too attractive these days. With rates on most savings accounts below 1 percent, there is little reward for staying on the sidelines, and bond yields are almost as low, plus they come with a risk of losses if interest rates rise. European stocks are clouded by the long-running euro crisis. Prices on commodities such as oil and gold are often inflated by speculation, and developing economies are facing similar concerns.
  3. The added pressure on personal savings. With minimal rates on savings accounts and a stock market that seems prone to cool off, the pressure comes back on personal savings. The retirement math only works if people save more to make up for lackluster returns.

Perhaps the best thing that can be said about the full recovery of stock prices is that it indicates the financial system is more stable now than it was in the dark days of 2008. That's good for now, but the more prices continue to rise without fundamental support, the more that stability will be threatened once again.

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The good, the bad and the ugly of sequestration

March 1, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Whether they wanted to or not, Americans have learned a new word in recent weeks: sequestration. Most probably wish they still didn't know it.

The fact is, these budget showdowns between the White House and Congress are getting tiresome. It's like a television show that was bad the first time, and now is already in repeats. It's no wonder the powers that be scheduled all this to occur after the last election: If they knew then what they know now, it's doubtful the voters would have renewed this turkey of a melodrama.

There are actually both good and bad aspects to the $85 billion in automatic budget cuts known as sequestration. Ultimately though, the American people will find it is more than just the process that is ugly about this approach to budget-cutting.

Here are the good, the bad and the ugly aspects of sequestration.

The good

Drastic though the plan is, sequestration would represent a concrete step toward addressing the budget deficit. The national debt has to be addressed, but Washington rarely has the political will to implement specific cuts. Perhaps putting budget-cutting on auto-pilot is the only way to get it done.

Also, budget-cutting needn't necessarily decimate the services government agencies provide. Ask most business managers about the budgets they've dealt with in the economic environment of the past five years. Good managers know how to make do with fewer resources when necessary.

The bad

The bad news is that managers of government agencies aren't as motivated as business managers to make do with less. Their incentive isn't a bottom line, but simply preserving the size of their budgets. From that perspective, the last thing they want to do is demonstrate that they could get by with less money. That explains all the recent news releases dramatizing the impacts the sequestration budget cuts would have on various government agencies. They want to make sure the public feels their pain.

Meanwhile, yet another budget showdown, coming just two months after the fiscal cliff showdown, casts one more shadow over the economy. Consumers and businesses cannot be expected to show much confidence when the government forces them to make plans in an atmosphere of disruptive uncertainty.

The ugly

A recent survey by the National Association for Business Economics found that most economists feel that sequestration would shave less than one-half of a percent off of U.S. Gross Domestic Product this year. That wouldn't be so bad except that the economy has already shown signs of faltering. The additional drag of sequestration could kill any remaining momentum the economy had.

That means continued weakness in the job market, which in turn means prolonging the conditions that have led to near-zero interest rates on savings accounts. Perhaps the ugliest part is that by scheduling all this to occur after the election, the folks in Washington made sure they wouldn't be the ones losing their jobs over this -- at least not right away.

MoneyRates.com has always searched interest rates to find you the best rate. Savings interest rates may be low, but that's all the more reason to shop for the best rate. Check out the top savings interest rates from Ally Bank, American Express and others.

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