Friday, June 24, 2016

Britain's Exit from the EU and its Effects on the Global Economy

This week, Great Britain voted on a referendum that concluded with their decision to leave the European Union. With that decision, the international financial markets became a sea of confusion and the pound hit its lowest value since 1985. The European Central Bank is worried about the negative consequences this landmark decision will have on the general population as the devaluation could cause a nation-wide panic. Jonathan Kaiman, Don Lee, and Julie Makinen discuss in their latest L.A. Times article some of these potential effects, not just to Britain's financial future, but to the world.

Early this morning, the voting results had begun to show a not insignificant push for the "leave" camp of British voters: 52% had voted for the United Kingdom to leave the European Union. While the difference of 4% between the two sides may seem small, it represents a shocking turn that many policy-makers didn't expect.  Apparently, the general populace would prefer to be independent, no longer under the rule of the EU. Why are the British people so adamant about leaving the European Union?

The "Brexit" (British exit) is based on three main issues: economics, immigration, and identity. Under current practice, the members of the EU have a common market with a shared form of currency that makes the economy run smoothly. However, the UK is forced to send a sum of money to Brussels (the headquarters of the EU) each year, where the money gets redistributed to other member states, which can help to stabilize their economies and hopefully induce growth. Many of the "leave group" don't want to pay extra taxes to support another country other than their homeland.

The immigration argument comes down to the fact that anyone from an EU-member country is legally able to move to the UK and get a job without needing a work visa. According to economists, this is good for the economy, filling necessary jobs and helping the local housing market. Many UK citizens are against the free immigration, however, because they believe that non-citizens are coming in and using up already limited public resources. Finally, many voters in Great Britain don't see themselves as "European." They prefer to identify themselves as British above all else and dislike many of the laws and regulations that come with being a member of the EU. In all, those supporting the Brexit do it because they want Britain to have control over its own governance again.

Unfortunately, many economists believe that the Brexit will lead to massive, irreversible economic downturn around the world. Already, the pound's value has gone down by over 10%, the price of oil has taken a dive, and even stocks in Asia have suffered. Investors throughout Europe and the US are preparing for the worst. As everything unfolds in the UK, even countries as far as Singapore are feeling the effects due to the high degree of uncertainty as to what will happen next. No one knows for sure, but economists believe that Britain will not be able to avoid a hard recession with economic output dropping by 1-6% in the coming years.

The abounding fear and uncertainty have more strongly affected Asian markets than anywhere else so far. Japan's Nikkei index dropped 7.5%, Hong Kong's 4.7%, and Shanghai's 2%. All of Asia's markets have been feeling the significant effects caused by the upcoming Brexit. Fortunately, analysts believe that the worst of the Brexit will negatively affect the Chinese economy, but only in the short-term. In fact, economists believe that the financial instability will benefit China in the long-run. As Britain leaves, the power of the euro will decline, which could give the Chinese renminbi (RMB) a chance to replace the euro as the world's second-most-powerful form of currency. However, as a whole, it is expected that the global economy will not do well over the coming months and years. Only time will tell how things will end.

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Friday, June 17, 2016

How to Make a Successful Retirement Plan

Even for those people who love what they do, retirement is one of those things that constantly stays in the back of everyone's mind. To determine when you'll be ready for retirement, there are a variety of factors that have to be weighed. What percentage of your income can you be comfortable living on? Do you plan to retire completely or try out a new career? These questions and more help to determine how long you would have to work before retiring. Dave Rowan's L.A. Times article sums up some of the major points made by financial planning expert Craig Israelson on the finances behind a successful retirement.

The first topic he mentions is known as the "4% Rule." According to this rule, it is possible to withdraw 4% of one's retirement savings from an investment portfolio each year without ever running out of money. Financial planners set the optimal amount at 4%, but some retirees have to withdraw less, while others who have saved for longer are able to withdraw more without running out. This concept, however, doesn't really help people in their 40s or 50s, who are planning for a retirement in the distant future. For those closer to retirement, the 4% Rule helps because it allows them to determine if they have enough money in savings to combine with other sources of retirement income and have enough money to cover a projected budget.

Israelson has a different method called "RAM" that allows younger people to plan for retirement far down the line. This method involves a lot more mathematical calculations but gives future retirees a way to calculate how financially stable they would be at each age. RAM, or retirement account multiple, calculates the probability that a retiree would never run out of money if they retired at 65, lived to 100, and withdrew half of their final yearly salary (the salary being earned at 65 based on inflation rate of 3%) as an addition to other retirement income like Social Security. Based on Israelson's calculations, a RAM value of 7 or higher means that the retiree is in good shape and will have over 70% likelihood of never running out of money if they live to 100 years old. A RAM value of 18 or higher means that the retiree will never run out of money, no matter how the economy changes.

The RAM is calculated as follows:

First, the retiree's final salary is calculated based on a 3% inflation rate.
Final Salary = Current Salary x (1.03)^(65 - Current Age)

Next, the total amount the retiree will have in savings is calculated based on an average value of 7% as the increase in the value of their retirement portfolio.
Final Retirement Savings = Current Savings x (1.07)^(65 - Current Age)

Finally, the RAM value is calculated using those two values.
Projected RAM = Final Retirement Savings / Final Salary

The more you are able to save now, the better off you will be in the long run. However, it depends on the person. Some people are comfortable with spending money now to enjoy a higher standard of living, even if it means they will have a RAM score closer to 7. Others look for any way to reduce expenditures today in order to get a RAM closer to 18, to ensure that they won't have to worry about their future finances. Additionally, the previous RAM calculations didn't include additions to the retirement portfolio. If someone were to continuously save and invest more money toward retirement, they would find their RAM value increasing, based on the following calculation:
Extra Retirement Savings = [(Current Salary + Final Salary) / 2] x (Savings Rate) x (65 - Current Age)

Of course, these calculations aren't perfect, since the economy is constantly fluctuating and many assumptions have to be made about future income and changes in saving patterns. However, it should be able to give savers a good look at how well off they will be in their retired years. The RAM is simply an approximation method, not an exact science, but it should give people a sense of whether they will retire successfully and how long they may have to wait to do so. 

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Friday, June 10, 2016

Moon Express Decision Could Jump-Start Privately-Funded Space Exploration

On July 20, 1969, a team of astronauts including Neil Armstrong and Buzz Aldrin made history when they became the first humans to ever step on the moon. Ever since the late 1950s, the United States has been working on ways to explore our solar system and find out more about other galaxies. In 2011, the Space Program was discontinued, mainly because of the exorbitant costs and inherent danger present in space travel. Up until recently, private companies were still allowed to send up satellites into orbit for commercial and research applications. However, according to Samantha Masunaga's L.A. Times article, the US government may be preparing to grant permission for a company to send a spacecraft to the moon.

Until now, only countries have been allowed/able to conduct space missions beyond Earth's orbit. Moon Express, a Mountain View, California-based company, will set history if regulators grant them permission to send their MX-1 lander on the moon for a two-week operation. The Wall Street Journal seems confident that Moon Express will receive their approval from the Federal Aviation Administration within the next few weeks, potentially restarting the Space Program. In some ways, a Space Program run completely by private companies could be better than one run by the government. When the Space Program first started, it was mainly about national superiority and being the first country to achieve certain milestones, which meant that sometimes costs and risks took a backseat. For private companies, it will be mainly about profit, which means that they will certainly keep within specified budgets and will be more risk-averse.

While Moon Express has been pretty secretive about its major plans, it has released some information about what they're looking for on the moon. The MX-1 lander will be carrying out both scientific and commercial research. Moon Express will be partnering with a Los Angeles-based company called Rocket Lab and plans to blast off into space in 2017. The MX-1 and other moon landers will be looking for valuable resources such as platinum and rare earth elements, which scientists believe can be found on the moon and in asteroids. Another company, Planetary Resources, is looking to asteroids as a source of water that can be converted into rocket fuel.

One of the main regulatory issues standing in the way of Moon Express's exploration is the Outer Space Treaty of 1967, which states that nongovernmental entities have to get approval from the US and Russia before performing activities in outer space. Experts believe that if Moon Express receives their expected approvals, however, it will set a precedent for future private commercial activity. Several companies dedicated to moon mining and asteroid mining have sprung up in recent years but have not held for very long, probably due to the high-cost, high-risk type of business. However, Moon Express has been generating significant interest in the world of commercial space exploration, and analysts expect this company may be the one to finally jump-start the industry.

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Friday, June 3, 2016

CFPB Proposes New Regulations on Payday Loans

In an attempt to avoid situations in which borrowers get stuck in an endless cycle of debt, the Consumer Financial Protection Bureau (CFPB) released a set of new proposals this Thursday to regulate the market for payday loans and certain types of credit known as being "debt traps." James Rufus Koren, in his L.A. Times article, discusses the new rules and the effects they may have on the economy.

A payday loan is a special type of loan with very high interest rates that is made on the condition that the borrower will pay it back as soon as they receive their paycheck. Unfortunately, according to CFPB Director Richard Cordray, lenders often make the loans knowing that borrowers can't pay them back and will end up stuck in a never-ending cycle of debt. The new rules aim to limit the number of loans a consumer can take out in a year and make the lenders review the finances of potential borrowers much more thoroughly before making a loan. In a healthy credit market, lending and borrowing money should be a win-win situation. Both parties, not just the lender, should benefit from the transaction, and that is the situation the CFPB is trying to remedy.

Lenders have been outraged by the proposed changes, claiming that it will make their business more costly and will cause most of their loans to become unprofitable. The CFPB has responded that it isn't looking to put lenders out of business. Rather, the organization is trying to make sure that customers don't get stuck in debt traps, where they pay off a loan just to find out that they need to take out another loan to have enough money for day-to-day living costs. The new regulations will force the lenders to do in-depth analysis on income and living expenses to determine whether they will be able to make the payments every month without running out of money.

Already, the CFPB has enacted similar regulations for banks and mortgage lenders, but payday lenders may be right in complaining that the new rules are unfair or insensible. Many claim that the process will add time and cost, which hurts everyone. Under current practice, a borrower can walk into a loan branch and leave 20 minutes later with a $250 loan. A detailed analysis of "take-home pay" and expenditures would probably add a lot of cost in the form of fees, which could drive away potential borrowers. Those borrowers could end up going elsewhere to find their loans.

It is likely that the new regulations will naturally stop some people from getting loans. Some people worry about where those people will have to turn to make ends meet. Perhaps some will be forced to get a handle on their finances and will end up much better off in the long-run. Others will have to go to pawn shops or family members for help. Still others may turn to installment lenders, which are not covered under the new rules. The installment lender gives much larger sums of money, with smaller monthly payments over a long period of time, but the borrowers often end up paying more in interest on the loan than the actual value of the loan itself. Analysts believe that the regulations will help somewhat, but only in that they will stretch the debts out onto a longer time line, rather than reducing such debts altogether.

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