Op-Ed Contributor - America Builds an Aristocracy - NYTimes.com

Interesting piece from Friday's New York Times on the use of Dynasty Trusts.

This is an estate planning issue that probably most people don't even know exists yet it has been used very successfully by some of America's most wealthy families to pass huge sums of wealth to other generations without paying taxes.

Here's an excerpt:

Dynasty trusts can grow much larger than the $3.5 million exemption amount would suggest. A couple can, for example, put $7 million (their two $3.5 million exemptions) into a life insurance policy owned by the trust. They apply their exemption at the start, and the trust is forever free from taxes — even when, after the death of the second spouse, the life insurance policy pays off at $100 million. Alternatively, a trust can use the $7 million as seed money for a profitable business that the trust then owns.

An ordinary trust dissipates as money is distributed to the beneficiaries. But a dynasty trust can avoid this by discouraging outright distributions and instead encouraging trustees to buy, for the use of the beneficiaries, things like houses, artwork, airplanes and even businesses. Because the trust retains ownership, the assets can pass tax-free and creditor-proof to the next generation.

Beneficiaries don’t pay taxes on the use of this property. In contrast, a worker whose employer provides housing or other benefits is taxed on those benefits.

But tax breaks are not the only special advantages that dynasty trusts provide. Even more troubling, they commonly include a “spendthrift clause,” which provides that trust assets cannot be reached by a beneficiary’s creditors. If a beneficiary causes a car accident, for example, the victim cannot be compensated with assets from the trust, even if they are the driver’s only resources. So beneficiaries are free to behave as recklessly as they like, knowing that their money is forever protected for themselves and their heirs.

Op-Ed Contributor - America Builds an Aristocracy - NYTimes.com

Wall St. Hiring in Anticipation of an Economic Recovery - DealBook Blog - NYTimes.com

The New York Times carried this article the other day on the front page. I'm not sure why this was such an important story, but perhaps the Times was trying to suggest that Wall Street seems to be recovering faster than Main Street.

However, I would note that historically Wall Street managements have done a pretty poor job in anticipating their needs for employees. Put another, it is an old axiom of the markets that you should sell stocks when Wall Street is hiring, or vice versa.

Stay tuned.

Wall St. Hiring in Anticipation of an Economic Recovery - DealBook Blog - NYTimes.com

‘The Time We Have Is Growing Short’ | The New York Review of Books

In 2005 Paul Volcker wrote an op-ed piece for the Washington Post. In the piece - entitled "An Economy on Thin Ice" - he warned that the apparently healthy U.S. economic recovery (which seemed to be in full swing at the time) was based on shaky grounds. Large current account deficits and rapidly increasing debt leverage were underpinning the U.S. economy's growth at the time, and Volcker warned that the day of reckoning would one day come.

At the time Volcker was dismissed as a tired old man fighting the last battle. He didn't seem to understand the new ways of the economy and of finance, it was argued.

Well, of course he was right. Three years after he wrote his piece for the Post the economy crumbled, and the worst financial crisis since the Great Depression ensued.

The reason I remember that piece so well was that I had printed it out and hung it on a board in my office for several years.

In my opinion, Paul Volcker was one of the most courageous public officials to serve in office. Appointed by Jimmy Carter in the late 1970's as Fed Chairman, Volcker inherited a financial system swamped with inflationary pressures. His predecessors had been totally ineffective - one chairman even joked that his friends thought that "Federal Reserve" was some sort of whiskey.

Volcker knew he had to do something, and in the infamous Saturday night massacre he did. After spending the week in Europe being lectured by other central bankers, Volcker flew home early from the meetings. On Saturday, October 3, 1979, he announced that the Fed would no longer target interest rates as a policy means, but instead would try to control money supply as a way to cut inflation.

Interest rates soared, and the economy buckled. By 1981, the bank prime rate was over 21%, and mortgage rates touched 19%. Still Volcker persisted, despite widespread protests (one favorite was to send Volcker a piece of wood to let him know that he was killing housing).

The medicine worked. Inflation was stopped, and the stage was set for one of the strongest periods of economic growth in U.S. history.

The reason I give you all of this background is because Volcker has always been willing to state what he believes is right, regardless of the political consequences. And at age 82, he doesn't really have any reason to hold back.

So when he gave these remarks a few weeks ago (I only found them on Twitter today) I thought they were worth a careful read.

One of the nice parts of Volcker's talk is the fact that ends with a note of optimism. He's not just a gloom-and-doom guy. Instead, he is arguing that, yes, we have problems, but properly addressed they might still be solved:

I referred at the start of these remarks to my sense five years ago of intractable problems, resisting solutions. Little has happened to allay my concerns. But, of course, it is not true that our economic problems are intractable beyond our ability to react, to make the necessary adjustments to more fully realize the enormous potential for improving our well-being. Permit me a note of optimism.

A few days ago, I spent a little time in Ireland. It’s a small country, with few resources and, to put it mildly, a troubled history. In the last twenty years, it took a great leap forward, escaping from its economic lethargy and its internal conflicts. Responding to the potential of free and open markets and the stable European currency, standards of living have bounded higher, close to the general European level. Instead of emigration, there has been an influx of workers from abroad.

But now Ireland has been caught up in its own speculative excesses and financial deficits, culminating in a sharp economic decline. There is a lot of grumbling, about banks in particular. But I came away with another impression. The people I spoke to had an understanding that the boom had gotten out of hand. There seems to me a determination to do something about the situation, reflected not just in the words of the political leaders but in support for action among the public. And there is a sense of what is at stake, that the gains they made in recent years have been placed in jeopardy. The urgent need to get back on a sustainable budgetary and economic track is well understood.

I hope my quick impressions of Irish attitudes and policies will be borne out and that that small country will not be caught up by a European crisis beyond its control. In the United States, we don’t seem to me to share the same sense of urgency. We view ourselves as a huge and relatively self-sufficient country, in control of our own destiny. We have time to sort out our priorities, to decide what to do, and to do it. There are elements of truth in those propositions, but the time we have is growing short.

‘The Time We Have Is Growing Short’ | The New York Review of Books

LeBron James and After-Tax Salaries

I've never heard of "Reason.com" until I read it in this morning's Wall Street Journal, but they had a pretty interesting take on James moving to Miami (for the record: I didn't watch the ESPN show, and I'm not really much of a NBA fan).

Here's the video, with the excerpt from the narrative below

But LeBron is only doing what more than half of Cleveland's population has done over the in the last 60 years: Getting the hell out of the place.

He didn't leave because of money, though some analyses show that he can take home more in pay in Florida despite a lower salary. Ohio used to be one of the lowest-tax states in the country. Now it's one of the highest.

That's what Clevelanders should be outraged about. Their economy has enough to deal with already without being put in a full court press by high taxes.

Cleveland needs to get rid of its savior complex. LeBron James could never have saved Cleveland--no single sports star or entrepreneur or bailout can--but there are definite, proven steps that any city can take to improve
life for its citizens.

I grew up in Toledo, Ohio. Toledo also has suffered a large decrease in population since the 1970's, including me and most of my high school buddies. Unfortunately there's just not much opportunity anymore in Ohio, so perhaps Reason.com has a point.

Gold: Store of value | The Economist

I still get lots of calls from clients asking about gold as an investment.

I am not a big fan. I know gold historically has served people well during inflationary periods, or when governments do silly things like debase their currencies, but I think gold has several drawbacks.

First, it doesn't give you any yield.

Second, it really has no value other than for jewelry. As The Economist's article notes, even India is reducing it demand for gold jewelry, and they represent a quarter of the world's demand.

Third, it is almost impossible to analyze. Since most of the demand and supply of gold is based on human emotions, projecting gold prices in futures is even more futile than predicting the economy.

Fourth, even if Armageddon arrives as the gold bulls predict, what good would gold be then? Would someone be willing to take a metal for goods or services - or are they more willing to demand something more tangible, like food or shelter.

Finally, the track record of gold in modern times has been mixed, at best. As the chart in the attached article indicates, although in nominal terms gold has risen dramatically in recent quarters, on an inflation-adjusted basis gold's price is unchanged in nearly 40 years. Even stocks - after a decade of futility - have done better.

As the article notes:

But the {gold} price surge has had others shaking their heads. As an investment that does not produce income, its attraction lies solely in the hope that its value will rise or at least be maintained. As a metal, its main use is in jewellery. It defies logic, say the bears, that its price should remain so high without any fundamental change in the sources of demand or constraints on supply. Willem Buiter, a former professor at the London School of Economics who is now the chief economist of Citigroup, has called gold the subject of “the longest-lasting bubble in human history”. He says that he would not invest more than a sliver of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”


Gold: Store of value | The Economist

Walking Away From Million-Dollar Mortgages - NYTimes.com

When you hear or read about problems in the housing market, usually the discussion is focused on the lower end, subprime mortgages. But it appears (judging from this article in the New York Times this morning) that people are walking away from their mortgages on the upper end as well.

Here's an excerpt:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Even more disturbing:

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

Think about that: roughly one out of every four homes in ritzy vacation spots like the Hamptons or Nantucket that have huge mortgages are at least delinquent. Given the fact that if they can't sell vacation homes in the middle of summer, I would bet that by this time next year they are in foreclosure.

Walking Away From Million-Dollar Mortgages - NYTimes.com

Now the tone of the article is one of mild outrage. And while I am not suggesting that we should have any sympathy for these folks, I would also take a step back and ask whether their behavior is any different than what goes on in corporate America.

Corporations walk away from their debt obligations all of time: just look at the airline industry as a prime example. When a company files for Chapter 11 bankruptcy, it is usually thought to be the act of thoughtful managements trying to figure out a way to save jobs (including their own).

Even countries will default - I mean, how many times has Argentina defaulted on its debt over the last century, only to come back to the markets and be greeted with open arms (and open wallets)?

From a purely economic standpoint, then, these borrowers who owe over $1 million on their primary or secondary homes are doing a very rational act: cutting their losses.

Problem is, we don't expect individuals to act as corporations. But if this starts a trend, it could have very serious implications for the housing market.

Downsizing - Making a Condo Into a Stylish Container for a Downsized Life - NYTimes.com

Maybe it's just my age, but I seem to know more people that are thinking about selling either their primary home or vacation home to try to simplify their lives.

This makes sense to me. Houses take a lot of work to maintain, not to mention the expense, and at some point it seems logical to spend your time and energy elsewhere.

The same holds true for getting rid of the clutter in your house. My wife Christina and I have been on a major campaign to clean out all of "stuff" that has accumulated in our house over the years.

As someone once said, the more stuff you own, the more it owns you.

(My secret agenda is to get rid of most of our books in favor of Amazon's Kindle, but so far Chris isn't buying it).

In this morning's New York Times there is a story about a couple selling their home in favor of a condo. It's an interesting story from a design standpoint, but the part that really caught my eye was the following:

Her own mother, she said, had been an inspiration: she died at 101 with only two small boxes to her name. “She gave away things for years,” Lydia said. “You have to stop accumulating, and start clearing out early.”

Downsizing - Making a Condo Into a Stylish Container for a Downsized Life - NYTimes.com