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Surprising Economic Facts


Mark Twain said that there are "Lies, damn lies and then there are statistics." But sometimes careful ferreting can produce numbers that are surprising, interesting and even useful.

I know, I know, Mark Twain said that there are "Lies, damn lies and then there are statistics." But sometimes careful ferreting can produce numbers that are surprising, interesting and even useful.

I was recently surprised to learn that there is approximately $130 billion in actual currency circulating in the entire U.S. at this time. In an era where the trillion number is thrown around a lot, this seems small. But what is further illuminating is that there is about $260 billion, double the domestic amount, abroad in other countries. And this amount constitutes an interest free loan to the U.S., because whether stashed in mattresses or in foreign circulation, it is not being presented to the U.S. for our goods and services. Remember, a dollar is essentially an IOU for a subsequent claim against the U.S. Treasury, historically gold, then silver and now...have a nice day!

A recent survey of millionaires revealed that 95% think that they got to that status by "hard work," presumably not digging ditches. Furthermore, 83% "smart investing" and 41% said "luck" were factors in their wealth accumulation, which often works out to be the same thing. At least the luck claim has the ring of honesty. In that same category of honesty is 81% who claim frugality as a factor. That's a fair tactic in this age of hyper-consumption. But 67% claiming “risk taking” as key to their wealth refers back into the luck category. I've always said that if you ever have a choice between smart and lucky, pick lucky.

Speaking of "lucky," most of us probably don't realize that in 2011 our Social Security payroll tax rate was reduced to 4.2% from 6.2%, up to the $106,800 income level. That works out to $2,136 of good news this year for each earner and a deeper hole for the pending Social Security calamity. If you feel patriotic about boosting the economy through spending your $2,136, knock yourself out. Some will no doubt hunker down and put their mini-windfall in the mattress. But at least be aware that this found money is there and don't let the $2,136 disappear without a thought.

Further on the subject of Social Security, every American is relatively "wealthy" because of, depending upon interest rates, this Congressional promise to pay amounts to everyone holding the equivalent of a $400,000 bond. By chance, the Medicare promise is also worth about $400,000, over time, in rising health care costs that we don't have to pay out of pocket. If we have the $400,000 from other sources in our pockets we are free to spend it elsewhere. A third coincidence is that $400,000 is also roughly what it costs the average American to care for an aging parent overall. That amount comes from uncovered out-of-pocket expenses, but more significantly lost wages. Lost wages also mean a decrease in pensions and Social Security payments because they are both figured on your income at the end of your career, which should be the highest, not abbreviated by your need to work less which will pull down your average. And the $400,000 you pay to care for your aging parent also mirrors the fourth coincidence; it’s the amount the stat pundits tell us it takes to raise a middle class child to adulthood nowadays and put him/her through college.

While we are talking about too little money, I just saw that over the last 20 years the average investor earned a sad 3.27% while the S&P averaged 9.14%. Why is that? Simply put, we individuals are too emotional in investment decision making, buying as the market rises and overreacting by selling when the market tanks. Even though Warren Buffet, among others, has talked often about making a lot of money by courageously doing the opposite — that is, buying low and selling high — we listen, but we don't learn.

One other factor that we can control more easily (without emotion) is the cost of our transactions. Every study ever done on the subject shows that we trade too much, as well as at the wrong time, but more to the point, do not pick the cheapest route to do so. When you do the math, over a 30-year investing career, the cumulative cash cost and opportunity cost of transaction costs end up being as much as six figures. This is all a strong argument for the average investor buying a diversified spread of index funds, letting it sit and not following the market's gyrations every day. Oh, but you say that we are not the average investor that everyone studies and writes about?

More evidence of how little effect we have on the market itself is the fact that over 2,000 (!) physicists/mathematicians are now employed on Wall Street to establish and manage computerized financial algorithms. These "black boxes" trade constantly, automatically and at the speed of electricity. No one actually knows, but I saw one estimate that market volume might be as much as 70% of the total by these things! Am I the only one who feels that the world is advancing faster than anyone can stay abreast of or plan or predict?

On this last subject, did you realize that on January 1, 2012 paper EE and I savings bonds will be no more? You will only be able to buy them directly through treasurydirect.gov, your tax return if a large refund is due to you or a short-term government bond fund. It's another marker of the end of an era. Some of us remember when no gift-giving occasion for a child was complete without a paper bond from a well-meaning relative in lieu of the much more desired toy. Years later, we would take them out of dusty storage and actually use them toward college, as the long-ago relative intended. But that toy would have been cool.

Well, so much for economic facts. To close, I am reminded that Friedrich Nietzsche buttressed Twain's cynicism mentioned above when he said, and I paraphrase, that facts are only as good as their interpretation, and that depends more upon power than truth. I guess the old saw that you are entitled to your own opinion, but not to your own facts, could be false.

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Victor J. Dzau, MD, gives expert advice
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