Monday, November 1, 2010

Why Everyone Should Vote No on MA Question 3

I've been remiss in my posting for a while.  So, what better way to get back on the horse than to ride that horse directly into a political fire?

Let's talk about taxes, particularly the ballot question in Massachusetts proposing that we lower the state sales tax from its current 6.25% to 3%.  I argue that citizens of the Commonwealth of Massachusetts should vote No on this proposal, regardless of your political leanings.  This is why:

A state has to generate revenue through taxes one way or another.  Options include income tax, property tax, corporate tax, alcohol tax, cigarette tax, hotel tax, automobile excise tax, many other smaller taxes, and sales tax.  In Massachusetts, income, property, auto excise, and sales are the best known among the typical voter.

Here are some examples of voter ideologies, and why they should all vote No on Question 3.

Voter Opinion: The state should provide the same amount or more services as it does now.
Vote No Because: Any decrease in state revenue will hamper this goal.

Voter Opinion: There should be as few taxes as possible or "I can't afford all these taxes."
Vote No Because: If you want to cut taxes as much as possible, going after the sales tax is not the most effective route.  The state income tax is the biggest part of your state tax burden, which costs you 5.3% of all your earned income.  The sales tax is 6%, but only on money spent on applicable goods.  Your rent/mortgage and groceries, for example, are not subject to sales tax.  You spend much less money on sales tax than you do on income tax.  Also, for bigger purchases (dishwasher, tv, computer), you can utilize the yearly sales tax holiday in August.

Voter Opinion: MA residents get taxed more than their neighbors (like New Hampshire)
Vote No Because: While it is true that NH residents don't have income tax or sales tax, the MA sales tax is one of the few ways that we level the total tax playing field.  The sales tax is paid by everyone buying goods on our fair state, not just MA residents.  Consider all the revenue generated by tourists buying Harvard t-shirts and business people eating at restaurants while at a conference.  Cutting the sales tax has a larger marginal cost to the state for a smaller marginal benefit for its residents.

Tomorrow is election day.  Don't know where you vote?  Look here.  Go vote, and vote No on Question 3 in Massachusetts.

Saturday, September 4, 2010

What's Next?

I've neglected the blog for the past month, because I have been super busy with my new part-time permanent job and a new client in my technology consulting business. 

Matt asked me to tell him "what's next" for him to work on financially.  I will post more meaty (or soyey?) entries soon.  I expect life insurance to be an upcoming topic, as Nicole and I recently went through this process.

An observation:
The best way to build financial security and wealth is to be employed.  All the other tools I mention are supplementary to a stable and sufficient income stream.

Tuesday, July 13, 2010

Example of Currency Arbitrage

So at a party recently, I hijacked an otherwise pleasant conversation to explain currency arbitrage.  I created this blog to provide a venue for this sort of thing so I wouldn't do it at parties.  I failed, clearly.  The example I used was a good one, though, so I'll repeat and refine here.

Imagine a big multinational company like Toyota needs to make payroll on Friday.  They have to make a $500 million dollar payment to the US bank that pays their US employees on Thursday night.  The cash that they have to make this payment is in their Japanese bank, though, in Yen.  They arrange to use Yen to buy the $500 million that they need.

Now, suppose that before this trade, anyone engaging in relatively small amounts can trade 1 US Dollar for 90 Yen.  They can also trade 1 Euro for 109.8 Yen, and 1.22 US Dollar for 1 Euro.

When Toyota executes this large trade, though, it pushes the price of dollars up in relation to the price of Yen (it takes more Yen to buy a Dollar).  I touched on the reasoning behind this in the liquidity miniseries.  If an asset is suddenly desired more (less) than it was a moment ago, it's price will go up (down).  Dollars and Yen are simply assets being bought and sold.  So, instead of getting their $500 million Dollars for 45 billion Yen, the exchange rate changes, and Toyota has to pay 45.25 billion Yen.

Meanwhile, Euros are trading with Dollars and Yen at the same rates they were before.  This is where an arbitrageur makes some money.  A trader in Boston sees the Toyota trade go through the market, and she does the following:
  • Borrows $100,000 from her firm's trading account.
  • Sells 100,000 Dollars to Buy 9,050,000 Yen (moving the opposite direction as Toyota).
  • Sells 9,050,000 Yen to Buy 82,423 Euro.
  • Sells 82,423 Euro to Buy 100,556 Dollars.
  • Pays back the $100,000 to her firm's trading account.
  • Takes her husband out on a hot $556 date.
Arbitrageurs do this until the three currencies move back into equilibrium.

Friday, July 9, 2010

Broker versus Market Maker

I'm reading a book where the main character's father owns a book store and specializes in rare books.  He is also known around the world as someone who can find extremely rare books for those who want them.  I think this literary example might help some of you understand the difference between brokers and market makers.

He is acting as a broker when he helps find extremely rare books.  A buyer comes to him and says, "I want a first edition 'On the Origin of Species.'  Can you find one for me?"  He then works his network and keeps an eye out for that book.  When he finds one that someone is willing to sell, he assists in the negotiation of a price between the buyer and seller.  He takes a cut of the deal for his services as a broker.  A broker helps connect potential buyers and sellers so they can exchange goods.

His shop, with its stock of books (less rare of course), is a market maker.  He buys books that he thinks will sell at some point, puts them in his store at a higher price, and waits for buyers to purchase them.  The buyers and sellers never interact with each other, they only deal with the shop, the market maker.

Friday, July 2, 2010

We're the Red One, Redux

In We're the Red One, I mentioned that I couldn't find the original graph that was on the cover of Investor's Business Daily.  Then Nicole said she really preferred that graph, and I would find it if I loved her.

With this alignment, you can see that we eased into this recession more slowly than most previous recessions, but then it just kept getting worse.

When you hear people worrying about a double-dip recession, they are talking about something like what happened in 1948.  In that recession, the first bottom was at month 10, followed by a short recovery and a deeper bottom at month 13.