Monday, October 07, 2013

Financial Literacy among the public and Congress

Well, another day and no real progress in DC.  The talking points from both sides of the aisle are so far apart I'm becoming increasingly worried that they might really test the waters re: the debt ceiling.

For example, a number of high profile investors (representing Democrats in this scenario) were quoted today as saying that a failure to raise the debt ceiling would be many magnitudes worse than the Lehman bankruptcy just 5 yrs ago.  On the other hand, the Republicans started floating the idea that we could still pay the interest on our debt without increasing the debt ceiling if we cut expenditures elsewhere.

This seems to ignore the fact that the US has close $450 billion in debt that needs to roll over in the next 4 weeks.  Historically, this isn't problem because everyone wants US debt (yeah, yeah, I know how that sounds, but it is the truth) however, if the merry-go-round stops because of our political infighting we could be in a tough spot VERY quickly.

Again, all of these worst case scenarios remain very low probabilities, but the fact that there is no panic in the markets is not forcing anyone to act.  The markets had a fairly orderly sell-off today of about 1% and until the end of the day there was very little activity in the markets.

I do have to note that we're about 10 points away from a real critical threshold for the stock market.  Again this only matters if you're a chart reader but we broke the 50 day moving average today and if we slip another 10 points we could test the summer lows pretty quickly.

Okay it's quiz time:

• Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have if you left the money to grow? More than $102, exactly $102 or less than $102?
• Imagine that the interest rate on your savings account was 1 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money?
• Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”?
If you have a basic understanding of finance you'll quickly know that the answers are more, less and false.  However, a recent survey of Americans over the age of 50 (yeah, boomers - I'm looking at you) revealed that only ONE THIRD OF ADULTS COULD ANSWER ALL THREE!!!

Perhaps this Congressman was one of the 2/3rds that would have missed one of the questions ---

Ted Yoho from Florida’s 3rd District, said the following about the possibility of the U.S. defaulting on its debt:
“I think, personally, it would bring stability to the world markets.”
As a comedian said today ---

"I wasn't happy about the country being controlled by the richest 1 percent, but I really hate it being controlled by the dumbest 1 percent."


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