Under a mattress, in the freezer: Why so many are hiding cash

A story about some cold hard cash:

Where to stash your cash? Some Americans are sleeping on it—literally.

While banks are still the go-to solution for most consumers, 29 percent say they’re keeping at least some savings in cash bills and coins, according to a new survey of 1,820 adults from American Express. Of those holding cash savings, 53 percent are hiding it in a secret location.

Millennials are even more apt than other generations to go the mattress or freezer route, with 67 percent of those saving cash saying that they hide it outside a bank account.

“We’ve long asked people about how they’ve planned to keep their savings, and for the past few years, we’ve seen an uptick in people saving cash,” said Kimberly Litt, public affairs manager at American Express. This is the first year the company has specifically asked Americans about tucking away cash.

The survey also found that about 1 in 4 consumers anticipates a financial emergency this year, and hiding cash at home could be one way people are preparing. “I’ve also heard of people using it as a budget technique, keeping cash in envelopes set aside,” said Litt.

AmEx didn’t ask where, exactly, that cash is stashed, but a 2012 Marist College survey of 1,080 adults found that the most popular place—with 27 percent of the vote—is the freezer. A little less than 20 percent of Americans hide cash in a sock drawer, while 11 percent put it under the mattress and 10 percent secure it in a cookie jar. Another 9 percent keep their cash somewhere else in the house.

Hmm.  In the days before ATM’s, holding cash made more sense since banks were not open 24-7.  However, if people feel a need to store some we don’t recommend keeping too much money in the house as insurance will only pay $200 maximum in case of a claim…theft, fire etc.

Straight Talk on ‘Sweatshops’

Factory workers in China and other developing countries do difficult jobs that most Westerners wouldn’t want to do, and the workers are compensated at the rate of only about $1 or $2 per hour, plus a tiny living space in a crowded dormitory. Many Westerners view these ‘sweatshops’ as a moral outrage because they believe that the workers are ‘exploited’ by their employers.

One of our students reports that he has a housemate who is one of those people who use the issue of sweatshops as an opportunity to express moral outrage. Perhaps our student should encourage his housemate to chill out and watch the TED talk by Leslie T. Chang. She went to China and befriended young women who work in the sweatshops. Her insightful and heartfelt report sets the record straight.

Across China, there are 150 million workers, one third of them women, who have left their villages to work in the factories, the hotels, the restaurants and the construction sites of the big cities. Together, they make up the largest migration in history, and it is globalization, this chain that begins in a Chinese farming village and ends with iPhones in our pockets and Nikes on our feet and Coach handbags on our arms that has changed the way these millions of people work and marry and live and think. Very few of them would want to go back to the way things used to be.

Certainly, the factory conditions are really tough, and it’s nothing you or I would want to do, but from their perspective, where they’re coming from is much worse, and where they’re going is hopefully much better, and I just wanted to give that context of what’s going on in their minds, not what necessarily is going on in yours.

Economic freedom: Hong Kong vs. India (Bumped)

In the first chapter and episode of Free to Choose, Milton Friedman spotlighted Hong Kong as a prime example of a relatively free economy. In the second chapter and episode, Friedman discussed the baleful effects of economic planning and control in India. In the video below, John Stossel makes the contrast between Hong Kong and India explicit and direct. Whereas Friedman focused primarily on the freedom to engage in international trade, Stossel asks the simple but very revealing question: How easy is it to start a business?

This ABC special dates from 1999, and includes a cameo appearance by an 87-year-old Friedman. The show runs over 40 minutes, but the best and most relevant portion is Part One, which consists of just the first 16 and a half minutes.

This show makes the case for economic freedom more powerfully than almost anything else we have seen. Indeed, Part One is perhaps the greatest 16 1/2 minutes in the history of television. Or at least the most truth-packed. And the rest of the show is pretty great too, in particular the point near the end when Stossel tells the Calcutta politician to his face that his policies are “stupid.”

Update: Another highlight was when Stossel explained the difference between freedom and democracy. India has more democracy than Hong Kong, but Hong Kong has more freedom.

Video: The Tyranny of Control (Bumped)

Here is the video corresponding to chapter 2 of Free to Choose.* The “high-tech” consumer goods displayed around the 23-minute mark are not too impressive by today’s standards, but remember that the film was produced over 30 years ago. The Japanese weaving machinery, however, still seems impressive even after all these years, and the contrast with the trade-protected and primitive hand-loom industry in India is astonishing. The example of the Indian weaving industry demonstrates vividly that trade protection stifles innovation and in the long run creates an industry that is weaker, not stronger.

Another vivid example is provided by the protected Indian auto industry, as shown in the second video embedded below, an excerpt from The Commanding Heights, a PBS documentary from 2002. Some of the remarkable take-away facts about India:

  • Trade-protected Hindustan motors was founded the same year as unprotected Toyota. Fifty years later, Toyota produced 5 million cars per year; Hindustan motors, 18 thousand, and to an antiquated design that never changes.
  • 12-24 months, and 50 visits to the capital city, required to obtain a permit to import a single $1500 computer.
  • A 15-year waiting list to buy a car.

*Bonus points if you can identify the classical piece that plays at about 24:05. And in case you think the question absurdly recondite, note that 50 years ago, before the baby boomers destroyed the culture, many students would have known it.

A Modern ‘Petition of the Candlemakers’

Our students are currently (supposed to be) reading and thinking about the effects of restrictions on international trade. Domestic producers argue that trade protection is necessary and just and economically beneficial. In point of fact, trade restrictions have the effect of lowering the wealth of the nation as a whole. The more that trade is restricted, the poorer the nation will be.

Import-competing producers continue to make the same self-serving arguments in favor of trade restrictions, even though those arguments were refuted by economists hundreds of years ago. A classic satirical skewering of protectionist arguments is A Petition of the Candlemakers, written in 1845 by the French economist Frédéric Bastiat. Bastiat’s fictional candlemakers argue for protection from an unfair, low-cost, foreign competitor–The Sun.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion…

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

Bastiat’s parody has apparently been dramatized by somebody on youtube. The script has been updated and modernized to account for contemporary boondoggles like ‘green jobs.’ Well done.


Why are Baseball Contracts Guaranteed?

Reader Craig Purpus brings to our attention a New York Times piece about the new $210 million contract signed by baseball pitcher Max Scherzer. Baseball contracts usually run five years or so, but Scherzer’s contract is unusual in that it promises to pay him for the next 14 years–probably well past the end of his pitching career. Indeed, the contract calls on Scherzer to pitch only for the next seven years.

Under the contract, Scherzer’s salary is fixed at $15 million per year. The contract provides no annual salary increases, not even to compensate for inflation. The author of the article takes this fact as evidence that people expect very little future inflation. While that inference is not unreasonable, the same inference can more reliably be deduced from the fact that inflation-adjusted bonds are not currently selling for much of a premium. The more interesting question is why the contract spreads the payments over such an unusually long period. Unfortunately, the article offers no answer.

One aspect of Scherzer’s contract that is not unusual is that the payments are guaranteed. That is, Scherzer will get payed the same whether he pitches well or poorly, or even if he suffers an injury and cannot pitch at all. Some of the New York Times’ readers questioned why the club would offer such a guarantee.


The answer probably has something to do with risk. A purely performance-based contract would impose the cost of injury risk on the player–if he got hurt and couldn’t pitch, he wouldn’t get paid. In contrast, a guaranteed contract relieves the player of this risk and transfers the risk to the club. This transfer of risk to the club is probably efficient because the club is in a better position to bear the risk. Compared to the player, the club is invested in a more diverse set of assets and also likely has a greater tolerance for risk. Essentially, the club is less risk averse than is the player, so it makes sense for the risk to be borne by the club.

Tax Time

I just spent 3 painful hours completing my federal and state income tax returns.  It really amazes me that it takes so long given the relatively simple nature of my return.  I have no employees, private business, foreign bank accounts, large inheritances or anything else out of the norm. The compliance burden of dealing with the complex tax code includes the total time and money wasted on filling out tax forms, keeping records, learning tax rules, and other tax-related (e.g. Turbotax) expenses. I was amused by some of the choices available for your refund money.  They include pre-paying next year’s taxes and, my favorite, making extra contributions to the treasury to pay down the federal government debt.  What I wanted the IRS to do instead was….

For parents, now begins the anxious waiting game for college financial aid

A Washington Post story on the cost of college:

For the many high-school seniors who already have submitted their college admissions applications, the season of waiting for an acceptance letter has begun. For their parents, there’s a different anxiety-ridden waiting game: For the financial-aid offers that will spell out just how much this is all going to cost.

Paying for college is now a lot like buying a plane ticket. You have no idea how much the person sitting next to you is paying because most schools discount their tuition to maximize their enrollment numbers and revenue. It’s no different than the airlines trying to fill as many of their seats at the highest prices.

The average discount for first-year students at private colleges is now a staggering 46 percent. But who gets a discount and how big of one a student gets is less straightforward than ever before. It used to be that colleges awarded their own aid dollars based mostly on a student’s finances: the more your family made, the more you usually paid, unless you were an exceptional student the school really wanted.

But with more and more colleges widely employing the practice of“enrollment management” during the past three decades, the distribution of financial aid has become a lot less predictable. Now everyone, regardless of income, believes they deserve some sort of financial help. Half of colleges “front-load” their aid, meaning they give more to students the first year of college than in the subsequent years, hoping an emotional attachment will keep students enrolled.

Seems like a key difference between paying for college and buying an airplane ticket is that Expedia or Priceline don’t require you to document the value of your bank accounts and provide several years of Federal tax returns before giving you the ticket price options.

QE Draghistyle

From the Wall Street Journal:

FRANKFURT—The European Central Bank said Thursday it will purchase eurozone countries’ government bonds, a landmark decision aimed at combating stagnation and ultralow inflation in a region that has emerged as a top risk to the global economic recovery.

ECB President Mario Draghi said the ECB will buy a total of €60 billion ($69 billion) a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds. The purchases of government bonds and those issued by European institutions will start in March and run through September 2016, Mr. Draghi said. The risks associated with the bonds of EU institutions will be shared, but purchases of other government bonds won’t be subject to loss sharing, Mr. Draghi said.

The ECB also lowered the interest rate it charges on its four-year loans to banks by 0.10 percentage point.

The decision marks a new era for a central bank that was modeled on Germany’s conservative central bank in the late 20th century—at a time when fighting inflation was more of a priority than combatting stagnation, weak consumer prices and recurring financial crises.

The euro slumped and was recently at $1.1530, from over $1.16 just before the announcement.

The announcement to buy government bonds, a policy known as quantitative easing, or QE, was made Thursday by Mr. Draghi at a news conference following the ECB’s policy meeting. Officials kept its main lending rate unchanged at 0.05% and a separate rate on overnight bank deposits parked with the central bank at minus 0.2%, meaning banks must pay a fee to keep surplus funds at the ECB.

Wow. Although we think that more liquidity is not a long term solution to sovereign credit and European structural economic problems, the current policy is setting up some interesting incentives. For example, if the ECB buys bonds from a bank and pays it “cash” and the bank wants to hold the extra deposits at the central bank it will be taking a .2% haircut!  What happens if -.2% turns out to be the highest return on a risk adjusted basis?  Anyway, as we head towards dollar parity you might want to book a Euro land vacation.

Manager ‘truly sorry’ for blowing up hedge fund

Here is the story via CNBC:

A hedge fund manager told clients he is “truly sorry” for losing virtually all their money.

Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm’s capital—down from the roughly $100 million it ran as of late March.

“I take responsibility for this terrible outcome,” Li wrote in a letter to investors, which was obtained by CNBC.com.

“My only hope is that you understand that I acted in an attempt—however misguided—to generate higher returns for the fund and its investors. But even so, I acted overzealously, causing you devastating losses for which there is no excuse,” he added.

The existence of the hedge fund industry actually presents an interesting puzzle.  Why would very rich people be willing to pour money into a fund that steals their money and doesn’t tell them what they do? Is it the financial market equivalent to getting your fix by spending a week at the craps or blackjack tables in Vegas? If 70% of mutual funds with the managers paid 1% of assets per year and 0% of the profits can’t beat their appropriate index, there is no way a hedge fund charging 2% of assets per year and taking 20% of the profits will ever beat out index funds.