Tax deal says we're deadbeats

The world has a fair deal of experience in dealing with small countries that can't pay their bills. And the world is gaining more experience by the minute. Ireland can't pay its bills? (Or actually its banks' bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can't pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.
But what about a huge country, one that is at the center of the world's economic and financial system, one that can be described as the world's greatest power, one that controls the world's supply of money? What do you do with such a country, one that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn't have a lot of experience working its way through problems like that. But I think that's the kind of problem that now confronts the world.  to extend the Bush administration's tax cuts for an additional two years at the cost of adding $1 trillion to U.S. debt says to the world that we have no intention of paying our bills.And it pugnaciously adds, "So what ya gonna do about it?"

Another deadbeat nation

I've actually been able to find just one example in Western history that sheds any light on the situation the United States and the world finds itself facing -- the multiple bankruptcies of Spain in the 16th and 17th centuries.In the 16th century, the Spanish Empire stretched farther across the globe than any previous empire. Starting from an Iberian peninsula unified under Castile and Aragon only in 1492, the Spanish empire grew to encompass first the island then known as Hispaniola, then Cuba, Mexico, the bulk of South America except for Brazil, and the islands of Guam and the Philippines. In Europe, Spanish monarchs ruled the Netherlands, Belgium, much of Italy and parts of Africa.
And it was a fabulously rich empire. The great silver mines of Peru and Mexico began to deliver a river of precious metal -- supplemented by gold from conquest and mining -- as early as 1511. Spain imported 260,000 kilograms of silver and 5,000 kilograms of gold from 1511 to 1550. And that was just the beginning. From 1591 through 1610, the country imported 4.9 million kilograms of silver and 31,000 kilograms of gold. The flood of gold and silver into Europe, a region previously starved for precious metals, was so great that the supply depressed the price for both metals and set prices for goods and services climbing.
But less than half of this silver and gold remained in Spanish hands. About a third went to China to pay for Spanish imports of silk, porcelain and other luxury goods. The remainder went to pay for Spanish imports from the rest of Europe. The Spanish economy itself was an increasingly uncompetitive hulk. Spain lived beyond its means, supported on that wave of New World silver and gold.
And that included the Spanish monarchy. Silver and gold poured in, but running an empire is expensive when it includes almost constant war in Europe with a constellation of national enemies that included France and England, plus local rebellions in the Netherlands and Italy, plus more than a century of land and sea battles against an Ottoman Empire that moved relentlessly westward after its capture of Constantinople in 1453.

Borrowed prosperity

The kings of Spain found it much easier to borrow money -- after all, what lender could afford to say no to the most powerful kingdom in Europe? -- than to reform the Spanish economy. But the seemingly inexhaustible flow of treasure from the Western hemisphere encouraged Spanish kings to think they could borrow and repay any sum -- and what bank would have had the courage to question the creditworthiness of the most powerful kingdom in Europe? The result was bankruptcy in 1557 that left the Fugger bank in Augsburg holding the bag.The circumstances of that 1557 bankruptcy may sound familiar. The bank made the classic mistake of mismatching assets and liabilities: The Fugger bankers took out long-term loans in Augsburg in order to make short-term loans to the Spanish king. Payments on the long-term loans were to come from payments on the short-term Spanish loans. Then, in 1557, Phillip II of Spain decided that he had more use for two payments intended for the Fuggers than they did. In effect, Spain declared bankruptcy, and the bank renegotiated its loans with reduced interest payments and a longer payment schedule.
The same thing happened again in 1575 when Spain again stopped paying on its loans, and in 1596. That last Spanish bankruptcy ended the Fugger bank and gave lucky Genoese bankers the opportunity to finance Spain.
In a desperate attempt to satisfy its creditors, Spain debased its currency, replacing silver and gold in its coins with copper in 1599. That led to runaway inflation in the first half of the 17th century. From 1625 to 1650, prices climbed by 40%.
By the second half of the century, the Spanish economy was in rapid decline as high taxes on peasant producers -- just about the only class that would pay significant taxes -- led to a decline of food and wool production, and high inflation made Spanish exports uncompetitive against imports from England, France and the Netherlands.
And by 1675 Spain, once the greatest empire in the world, was ready to be picked apart by the France of Louis XIV.

5 people who peek at your credit

How much do you know about your credit scores? Those three-digit numbers are tied to our financial lives, yet many young adults haven't given them the attention they deserve.
Your scores can play a role in your ability to rent an apartment, qualify for a loan or even get a job. They can also affect how much you'll pay on interest charges, insurance and even cell phone contracts.Make building stellar scores a priority while you're young and you could actually save hundreds or thousands of dollars over your lifetime. However, if you don't take your credit seriously, bad scores -- or even nonexistent scores -- will cost you.

Who's keeping score?

Your credit scores are basically used to predict the possibility that you won't pay your bills. Scores are compiled by Fair Isaac and are sometimes called FICO scores. The top possible number is 850, but topping 800 is probably unrealistic. A median score usually falls in the 720-to-725 range, meaning half of consumers fall above that point, half below. Even if you haven't given your FICO scores much thought, there are plenty of others who have or will, so you'll want to aim for the mid-700s to make the best impression on: 1. Lenders. This group is the one most people associate with their credit scores. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small-business loan if you've got that entrepreneurial spirit. Nonexistent scores can make it impossible for you to qualify for a loan or credit card.
2. Insurers. The majority of auto insurance companies use your credit scores when determining your rates, and the practice is also common among home insurers. A survey by Consumer Reports among eight popular auto insurers found that drivers with top scores pay up to 31% less on their premiums than if credit scoring wasn't factored in, while those with bad scores pay as much as 143% more. 3. Landlords. Increasingly, you may need good credit scores to rent an apartment. Landlords view your credit rating as a measure of your responsibility to pay bills on time. If your rating is below par or you don't have credit scores yet, you may have to find a friend or relative to co-sign your lease, or you could be required to pay a higher rent or security deposit.
4. Employers. When you're applying for a job, potential employers can pull your credit reports as long as they notify you first. And, in fact, about 35% of them do, according to the Society for Human Resource Management. Why? Bad credit can be a signal of irresponsibility, or employers might be worried you'll spend more time fretting about your financial woes than concentrating on the job.
5. Cell phone carriers. Even cell phone service providers may check your credit before signing you up for a plan. They want to make sure you're responsible and will pay your bill each month. Some utility providers may pull your reports as well. If you have credit issues, you may not qualify for the best plan rates, you could be required to pay a deposit, or you could get turned down.

True cost of your scores

So, how much do your credit scores affect your finances? Say we have two friends, Jim and Mark. Both took steps right out of college to start building a credit report by getting their first credit cards and an auto loan. Jim made all his payments on time, never maxed out his credit cards and often paid more than the minimum required. Mark, however, frequently paid late, overextended his cards and applied for new credit to bail him out of his mismanaged debts.Now both are ready to buy homes, and each applies for a $250,000 30-year mortgage. Through Jim's responsibility, he's been able to build scores of 750, qualifying him for a loan with a 4.58% interest rate. Mark's scores come in around 650, netting him a rate at 5.40% interest. Jim's monthly mortgage payment is $1,279 while Mark pays $1,404 -- a difference of $125 per month. If they both live in their homes for 10 years before selling or refinancing, Mark will pay $15,000 more in monthly payments than his friend. Ouch.
Mark also gets burned on a new auto loan -- paying $2,340 more over three years on a $20,000 loan than Jim. Plus, Mark probably paid much more for his car insurance than Jim.

Your 15-point tax-return checklist

1. Get serious. Unless you're focused, you're going to see that receipt six times rather than the once you need. This is all mental now. Schedule a time to get to work and commit to that time. Then . . .
2. Get started. Remember that commitment to get to work? Keep it! This step requires action. Get your pencil and take the blank forms out of the envelope where you've been hiding them, praying that the tax fairies would make them go away. My father reminds me of the old Brooklyn proverb, "A trip of a thousand miles begins with a traffic jam." Get in that "jam," and your tax return will begin to jell. Now . . .
3. Get organized. Something has to go on those returns. Get your W-2s together to report wages, your 1099s to report interest and dividends, your 1099Bs for reporting stock and bond sales, and your 1098s for deducting your interest and taxes. The Internal Revenue Service and your accountant both want final numbers. It makes it easier for them and less painful financially for you. Bring either one a shopping bag full of receipts and you're going to feel the pain . . . especially in your wallet.

4. Get informed. Have you been following all the changes the U.S. tax code has seen in the past decade? How about the multiple new tax bills passed just this year? The adoption credit has been made refundable and extended. 2010 is the last year you can use your flexible spending money for nonprescription medications. Get them in while you can. Bush tax cut expiration anybody?Even better, have you looked at the new American Opportunity Tax Credit, which can give you as much as $2,500 in tax savings? If not, get educated! While you're getting enlightened, don't neglect the tax credits on energy-efficient improvements to your home. And if you're a new home-buyer (one who hasn't owned a principal residence for the last three years), you can get a refundable credit of 10% of the purchase price, up to $8,000, on a new principal residence. If you've been in your home for five of the last eight years, you can purchase a new principal residence and qualify for a 10% credit of up to $6,500. But to qualify for either home-buyer credit, you had to be under contract by April 30, 2010, and close by September 30, 2010.
If you're "tax simple," the IRS can actually do the return for you, or you can have your return done online -- sometimes even for free. Alternatively, if you're tax-savvy, do your own return after learning the new rules. A good place to start: the IRS' absolutely free Publication 17. It's hundreds of pages of everything you need to know about your 2010 tax return and your planning for 2011. If that's too much, go to a professional.
5. Get help. You might remove a splinter from your own finger, but you wouldn't perform heart surgery on yourself. A trip to a tax professional should at least tell you what you're missing. Don't hesitate to ask for help; it's deductible. But call for an appointment now! The later your accountant does your return, the more tired that tax preparer will be. You want your return done when she's at her best.
6. Get status. Decide how you're going to file. The lowest rates are with joint returns, but if there are potential high medical or miscellaneous deductions, married filing separate may yield a lower total tax. Do it both ways. Alternatively, a single mother may qualify for the head-of-household rates, which are better than the rates for filing as a single. Sometimes, when a joint return isn't practical, even a married person with a dependent child can qualify for head-of-household rates, which are much better than married filing separate. You need to know the rules.
7. Get adjusted. There are certain deductions that are allowed regardless of whether you itemize. Such deductions include IRA and qualified pension contributions, student loan interest, moving expenses, alimony, medical savings account deductions and, for the self-employed, the health insurance deduction and deduction for half the self-employment taxes paid. These are known as "above the line" deductions. The infamous "line" is your adjusted gross income -- line 37 on Form 1040.
8. Get itemized. Which is bigger -- your standard deduction or the sum of your itemized deductions? We're now "below the line." The chart to the left of line 40a on your 1040 form for 2010 lists your standard deduction. Compare this amount to your total allowable itemized deductions. That's the sum of your allowed medical expenses, taxes, interest, charitable contributions, casualty and theft losses, and miscellaneous itemized expenses. Always do it both ways . . . and, subject to the alternative minimum tax (and don't even try to get into that), always take the higher amount.

Keep an eye on gold, bonds in 2011

First, on Dec. 13, Dennis Gartman shared some gold data that I think tells an important story.
Back in the early days of the gold bull market, I remember arguing with people that, in my view, gold prices would be driven by demand for the metal as an investment, not by interest in using it for jewelry.
That was a novel thought in those days, as "analysts" used to focus only on what jewelry buyers were likely to do. In those days, that was deemed to be all one really needed to know about gold.In the wake of the tech-stock bubble bursting, I knew that, once it became clear the Federal Reserve was going to try to print money as a way out of that mess, the dollar would have problems and gold would be a beneficiary.
Of course, as the real-estate bubble inflated, leading to an even larger disaster, there was no question that even more money-printing would follow. This bolstered the case for gold. Thus, my argument was always based on investors being the drivers of the gold bull market.

From baubles . . .

That, in fact, has been the case. But I was still surprised to see just how potent investment demand has become. According to Gartman (the data likely originated with the World Gold Council), in 2000, investment demand accounted for approximately 2% of demand for gold, while about 80% of demand came from the market for gold jewelry.By 2005, the jewelry share had declined to about 60%, while investment demand had risen to about 20%. Nowadays, jewelry usage is about 40% and investment demand is just over 40%. (Gold also has industrial and other uses, which accounts for the remainder of demand.)
As Gartman notes, "The ETFs are having their very real impact."

However, that is not quite accurate. The gold-based exchange-traded funds themselves aren't what made such an impact. It is the investment demand that has had the impact; the ETFs are merely the conduit by which much of that demand is expressed. What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute.
Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world. Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that.

It can't be bad news, so it must be good

As a lead-in to my second point, I wanted to comment a bit on Best Buy, which announced its results Dec. 14. Not only did the electronics retailer miss estimates, but it was also forced to lower guidance prospectively, as demand has not materialized the way the company had hoped. As a consequence, its stock price was smacked for 15%, although the market itself impressively fought off more rising bond interest rates to close about even (the Dow Jones Industrial Average ($INDU) closed with a 0.4% gain).
Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).
However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems reported its results Nov. 10.
I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.
The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment.

Treasury misery loves company

A variation of that same theme seems to be what has stopped the bond-market rout from being regarded as bad news. Apparently, a school of thought has "evolved" that the decline in the bond market is not about the Fed losing control of the printing press, as I have maintained, but about economic activity surging. Thus, the weakness in bonds is (supposedly) good news.
How anyone can conclude that, given the data, I don't know. But even if you agree, you can't escape the reality of higher rates. So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas.

10 ways to guard against ID theft

Identity theft is often in the news, but there are a lot of misconceptions swirling around about how to best protect yourself.
While some identity thieves focus on getting your credit cards and maxing them out before you even realize they're missing, an increasing number are using one piece of information about you -- often a credit card number -- to steal your entire identity. Though many folks worry about keeping their credit card information secure when shopping online, the top methods that identity thieves use to steal personal data are still low-tech, according to Justin Yurek, the president of ID Watchdog, an identity theft-monitoring company. "Watch your personal documents, be careful to whom you give out your data over the phone, and be careful of mail theft," he says.
No one is immune to identity theft, but a little knowledge about how identity thieves operate -- and a little common sense -- can help you stay a step ahead of them.
1. Thieves don't need your credit card number in order to steal it. Conversely, they don't need your credit card in order to steal your identity. Identity thieves are crafty; sometimes all they need is one piece of information about you and they can easily gain access to the rest. As a result, says Heather Wells, recovery manager at ID Experts, an identity protection company, today it's crucial to lock up important documents at home. "Secure birth certificates, Social Security cards, passports, in a safe deposit box or in a safe hidden at home," she says. "And that includes credit cards when not in use."

2. The nonfinancial personal information you reveal online is often enough for a thief. Beware of seemingly innocent personal facts that a thief could use to steal your identity. For example, never list your full birth date on Facebook or any other social-networking website. And don't list your home address or telephone number on any website you use for personal or business reasons, including job-search sites. 3. Be careful with your snail mail. "Follow your billing cycles closely," says Lucy Duni, the vice president of consumer education at TrueCredit. "If a credit card or other bill hasn't arrived, it may mean that an identity thief has gotten hold of your account and changed your billing address." Al Marcella, professor at Webster University's School of Business and Technology in St. Louis, and an expert on identity theft, suggests when you order new checks, you pick them up at the bank instead of shipping them to your home. "Stolen checks can be altered and cashed by fraudsters," says Duni. And never place outgoing mail in your post office box or door slot for a carrier to pick up. Anyone can grab it and get your credit card numbers and other financial information. Take it to the post office yourself.
4. Review all bank and credit card statements each month, preferably once a week. Watch for charges of less than a dollar or two from unfamiliar companies or individuals. Thieves who are planning to purchase a block of stolen credit card numbers often first test to check that the accounts haven't been canceled by aware customers by sending a small charge through, sometimes for only a few pennies. If the first charge succeeds, they'll buy the stolen data and make a much larger charge or purchase. They're guessing -- often correctly -- that most cardholders won't notice such a tiny charge. In addition, many of the fraud alerts you can set on your accounts aren't triggered by small dollar amounts. Reviewing your credit report on a regular basis is also a good idea, although by the time a fraudulent transaction reaches your credit report, it's often too late.
5. If an ATM or store terminal looks funny, don't use it. "Make sure there is no device attached to any ATM card slot you use," says Wells. "As a general rule, the mouth of a card receptacle on an ATM machine should be flush with the machine or have only a very slight lip." If it looks or feels different when you swipe your card, or has an extra piece of plastic sticking out from the card slot, it may be a skimmer, an electronic device placed there by thieves that captures your credit card information when you swipe it. If you notice it after you've already inserted your card, you should alert your bank so they can watch for any fraudulent charges to your account.
6. Identity thieves love travelers and tourists. Scott Stevenson, the founder and CEO of Eliminate ID Theft, an ID-theft-protection company, cautions travelers to be alert to strangers hovering around whenever using a credit card at an ATM or phone, and to avoid public wireless Internet connections unless their laptops or PDAs have beefed-up security protection.

Best Vanguard funds for your 401k

When it comes to investing for retirement through 401k's, investors have a lot of options. Investment management company Vanguard continues to use its heft and low costs to pick off competitors. It has been winning investors with new funds (up to 20 in 2010), free trading in Vanguard's exchange-traded funds, lower minimums for its low-cost Admiral shares and other consumer-friendly features.
Yet, while all this will help Vanguard gather assets and reduce costs for you and me, the longer the fund list grows, the more confusing it can be to separate the winners from the losers.
To make matters worse, the major drawback to investing in a 401k is that your options are limited to the funds made available by your plan's administrators. Typically, they choose middle-of-the-road funds deemed safe enough to keep employees from losing their shirts, and the administrators from losing their jobs.

So unless you use your 401k plan's brokerage option, you aren't likely to be able to invest in any Vanguard fund you like (and even the brokerage service may not have access to all Vanguard funds). In the case of Vanguard Precious Metals and Mining Fund (VGPMX), that's a good thing. The fund is incredibly volatile, with a maximum cumulative loss of 69.8% in the most recent bear market versus 50.9% for Vanguard Total Stock Market (VTSMX) and 51.0% for Vanguard 500 Index (VFINX). So much for gold funds being a safe haven.On the other hand, you also aren't likely to have access to some funds that you probably should have in your portfolio, such as the Vanguard Emerging Markets Index Fund (VEIEX), which I highly recommend for 401k investors (not for all of your money, of course, just a 5% portion).
In fact, I believe that as the global economy continues healing, having an allocation to emerging markets will become a virtual requirement for investors with long-range objectives, including retirement. That's why I'd suggest you ask your plan administrator to add this fund to the mix of choices your company includes in its 401k plan. (I'm also doubtful your 401k gives you access to the terrific Vanguard Health Care (VGHCX) fund, which offers investors exposure to the growing demand for medical products and services in emerging economies.)
Below are several additional Vanguard funds I'd like to see in your 401k portfolio. Use them if they're available to you. If they're not, request them. You might need to enlist your colleagues to persuade your benefits department to add them, but remember that what's at stake is your retirement. Your 401k plan should be serving you.
As a retirement savings vehicle, a 401k is inherently geared toward the long term. You don't want to just save your money, you also want to see it grow. Consider that even at a retirement age of 60 to 65, you could live at least an additional 30 years. Invest too conservatively and you could outlive your money.
To prevent this, my first recommendation is a trio of Vanguard funds run by the redoubtable team at Primecap Management: Vanguard Primecap (VPMCX), Vanguard Primecap Core (VPCCX) and Vanguard Capital Opportunity (VHCOX).
All three funds are closed to new investors outside of established 401k plans, but they may be available to you. If so, consider yourself lucky and place some of your money with this group of managers who take a value-oriented approach to growth stocks. Their funds are the largest single component of my retirement and nonretirement accounts, as well as those of my wife and kids.
If the Primecap funds are closed to you, Vanguard Wellington (VWELX) is an excellent choice as the core fund for your 401k. Since its inception in July 1929, it has aimed for strong relative returns in good and bad markets by focusing on one very important investment discipline: diversification.
It's a balanced fund, so approximately 60% to 70% of Wellington's assets is in high-quality blue-chip stocks and the remainder is in top-notch investment-grade government and corporate bonds. You can easily get the entire bond exposure you need in your 401k portfolio from this fund. Vanguard Wellington has the flexibility to invest as much as 20% of its equity assets in foreign securities, an important part of a diversified portfolio.

How to Protect Your Credit After Divorce

The end of a marriage is often associated with heartbreak and emotional upheaval, but your former soul-mate could also be walking away with half of your assets and leave you in a bad credit situation.
However, there are many ways to protect and rebuild your credit after a divorce, several of which require little effort but help significantly. Here are a few tips to help you rebuild your credit score after divorce:

Review Your Credit Report
The first step to rebuilding your credit is to get a copy of your credit report and thoroughly review the report. You want to ensure that your ex’s debts are not showing up on your credit report. If any do, you should contact the creditor to have your name removed from the account so that the debt comes off of your credit report.
Cancel All Joint Cards and Accounts
The last thing you want after your divorce is for your ex-partner to go on a shopping spree with a credit card in your name. Therefore, make sure you cancel all joint credit card accounts after making sure that everything is paid off and cleared. While closing your account can lower your credit score it is a worthwhile trade-off. You want your credit and your ex’s credit to be as separated as possible.
Apply for a Low Limit Credit Card
If you don’t have any credit in your name because you shared most cards and loans with your spouse, apply for a credit card with a low limit. The low limit will help you avoid temptation to spend money you don’t have, while helping you to rebuild your credit. Begin by purchasing low cost items throughout the month and pay your balance in full and on-time at the end of each month to build good credit history.
Open a Checking Account in Your Name
Opening a checking account solely in your name is a smart decision to make while you are going through a divorce. You need an account to hold funds that your spouse does not have access to, plus it can also help you protect your credit by ensuring that you have funds available to make at least the minimum payments on credit card and other debts held in your name.
Make Timely Payments on Your Accounts
This might seem obvious, but many people forget how important it is to make your payments on time. A “slow pay” credit history (one where the payor habitually fails to pay the creditor on time) can dramatically lower your credit score. When you receive a bill, have a system in place to remind you to pay it by the due date.
If Necessary, Consider Bankruptcy
If you are so deep in debt after your divorce that you cannot keep up with monthly bill payments, then you may need to consult with a bankruptcy attorney. While bankruptcy is extremely damaging to your credit in the short-term, it can be used to deal with being the situation of being so far in debt that it will be nearly impossible to recover from. Once you have had your slate wiped clean after bankruptcy, you can work on rebuilding your credit and avoiding the problems that created the excessive debt you had in the first place.


While a divorce has the potential to significantly damage your credit, it is possible to emerge from a divorce with your credit rating intact. By following these suggestions, you will be on-track to rebuilding your credit after your divorce.