All the money in the world - Part 2

To continue the thread we started in the earlier article, there are certain statistics that we did not cover. Thus we need to collect more information about how much money there is and how much is used and how much is created. Sometimes this is like comparing apples to oranges as data is available from different years. But hopefully the scale of the issues will become clear or clearer based on this information.

Also the information presented deals with the US as a whole, we did not present a state by state debt totals. These are probably very significant given the size of the economies of California, New York, Texas, etc.

The information that was not covered includes the budget of the US. Here is the tax revenue for the federal government for the year 2007.

It is about $2,691,538,000,000 or about $2.7 trillion in 2007 before refunds.

[http://www.irs.gov/taxstats/article/0,,id=102886,00.html]

On Feb. 12, 2010, President Obama signed into law an increase to the federal borrowing limit by $1.9 trillion The federal government can now borrow $14.3 trillion. This is evidently what the federal government needs to function for the rest of the year. The House had already approved this several weeks ago.

US Budget
Mandatory spending: $2.184 trillion
Discretionary spending: $1.368 trillion

[http://en.wikipedia.org/wiki/2010_United_States_federal_budget ]

The following article from Bloomberg discusses the nature of public debt in order to finance growth. This has been the success story of America's economy till now. The problem is that
there is too much debt already. In the past when a recession is occuring, the government goes into deficit spending in order to jumpstart the economy. This has worked well in the past. There is concern that the current debt just does not allow for the same type of measures as in the past.

[http://www.bloomberg.com/insight/america-tied-up-by-record-debt.html]

Private Debt

Mortgages

The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007, and again to2.8 million in 2009, a 21% increase vs. 2008. This is a little dated, but it only has gotten worse.

[http://www.federalreserve.gov/newsevents/speech/Bernanke20080505a.htm]

Student Loans

There is an estimated $730 billion in outstanding federal and private student-loan debt, says Mark Kantrowitz of FinAid.org, a Web site that tracks financial-aid issues—and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means that payments and interest are halted, or in "forbearance," which means payments are halted while interest accrues.
http://online.wsj.com/article/SB10001424052748703389004575033063806327030.html?mod=WSJ_hp_mostpop_read

Credit Cards

There were 26.5 billion credit card transactions in 2008, totalling $2.1 trillion. That's up from 21 billion transactions totalling $1.4 trillion in 2003. (Source: Nilson Report, December 2009)
At the end of 2008, Americans' credit card debt reached $972.73 billion, up 1.12% from 2007. That number includes both general purpose credit cards and private label credit cards that aren't owned by a bank. (Source: Nilson Report, April 2009)
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php

Six Interesting Books on the Financial Crisis

OK, so I have a personal list of books to read to better understand what is going on with the financial issues of today. Feel free to add your favorite list. Some are of historical interest, others are current, while still others are informational. Why 6, because 6 is a "perfect" number. I have a few others but this is a good start.

So here goes:

1) "Changing Fortunes, The World's Money and the Threat to American Leadership" by Paul Volker and Toyoo Gyohten. [http://www.amazon.com/Changing-Fortunes-Worlds-American-Leadership/dp/0812922182/ref=sr_1_1?ie=UTF8&s=books&qid=1266111684&sr=1-12]

This was actually written in 1992. But now that Paul Volcker has some influence it is interesting to get a perspective of his thinking then. There are more contemporary Paul Volcker books that you may check out. This describes more of a macro level as opposed to the rest that deal with financial markets. So more from government policy issues as opposed to market issues. Explains the Bretton Woods era, the place of gold.

2) "When Genuis Failed, The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein. [http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259/ref=sr_1_1?ie=UTF8&s=books&qid=1266111402&sr=8-1 ]

This has become a classic in understanding how brilliant minds, Nobel Prize winners almost brought down the financial system. How the Fed gathered the leading bankers of the time for a Sunday meeting and told them that they would bail out LTCM. A story of how a "David" hedge fund can bring down a "Goliath" financial system.

3) "Against the Gods, The Remarkable Story of Risk" by Peter L. Bernstein [http://www.amazon.com/Against-Gods-Remarkable-Story-Risk/dp/0471295639/ref=sr_1_1?ie=UTF8&s=books&qid=1266111436&sr=1-1 ].

This is a historical narrative on, of course, risk and how we should not fear it. Ha! It explains from a historical perspective of how risk came under control over the years. It start with the Greeks and ends in the modern era. The book was written before the current crisis.

4) "Stabilizing an Unstable Economy" by Hyman P. Minsky [ http://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997/ref=sr_1_1?ie=UTF8&s=books&qid=1266111482&sr=1-1 ]

This is tough read. From the cover (Wall St Journal) it says basically that Minsky fostered the idea that financial system are inherently flawed and thus susceptible to speculation leading to crises. As if we haven't learned that lesson the hard way. Anyway, if you have the will power this is a good read. This is by far the most technical of the books in this list, but well worth it, I think.

5) "The Panic of 1907, Lessons Learned from the Market's Perfect Storm" by Robert F. Bruner and Sean D. Carr [http://www.amazon.com/Panic-1907-Lessons-Learned-Markets/dp/0470452587/ref=sr_1_1?ie=UTF8&s=books&qid=1266111523&sr=1-1 ]

The 1907 Crisis lead to the creation of the Federal Reserve System (the Fed). In this story, the government stayed out and J. Pierpont Morgan came to the rescue. It all started with the San Francisco earthquake. This is a great read from a historical perspective. Nice historical "novel", by that I mean it is a relatively easy read.

6) "A Demon of our own Design, Markets, Hedge Funds, and Perils of Financial Innovations" by Richard Bookstaber [http://www.amazon.com/Demon-Our-Own-Design-Innovation/dp/0470393750/ref=sr_1_1?ie=UTF8&s=books&qid=1266111561&sr=1-1 ]

Not well understood by mere mortals are hedge funds, derivatives and other machinations and so this book hopefully explains some of those concepts. For me, it made me shiver as it started talking about Jack Grubman and WorldCom. Having lived through those times, it brought back memories. It does revisit LTCM.

Verizon to offer Managed Security Services

Security services seem to be catching up to business customer security requirements. Offloading security services under a managed umbrella from a large service provider such as Verizon for small and medium businesses is probably a very viable service. Large businesses probably have sufficient internal IT resources to deal with security threats, but this is very different for smaller businesses. Small businesses need to deal with the same threats as much larger corporations but without the financial resources or IT capabilities. The cybersecurity threats could be ignored, with the appropriate amount of risk to business operations.

From LightReading:

Verizon Taps McAfee for SMB Security

Verizon Business is teaming up with McAfee Inc. (NYSE: MFE) to offer mid-sized businesses a managed security service that makes it easier for them to stay up-to-date on potential network threats.

The suite of security services protects against five basic types of security threats faced by companies with between 20 and 1,000 employees: network, endpoint, Web, data, and email. The new services come in two flavors: McAfee Total Protection Service -- Advanced, which is hosted within the McAfee Software-as-a-Service infrastructure and doesn't require investment in hardware; and McAfee Total Protection for Secure Business, which provides software that a business can download on its own servers.

http://www.lightreading.com/document.asp?doc_id=187716&

http://www.mcafee.com/us/partners/global_strategic_alliances/verizon.html

http://www.internetnews.com/security/article.php/3859736

http://www.net-security.org/secworld.php?id=8794

Google and NSA

In an earlier post, I wrote about the problems of cyber-attacks on corporate infrastucture giving as an example the attack on Google. Well, it seems that Google has now teamed up with the National Security Agency (NSA) to investigate the attack. What this means and how far will this agreement will go is up for speculation. But at least in my opinion this is a good start. The NSA is tasked with monitoring communications across the world for the protection of the US. Anything federal agencies can do to enhence the protection of US corporations is positive news.

http://www.washingtonpost.com/wpdyn/content/article/2010/02/03/AR2010020304057_pf.html

All the money in the world

OK, the amount of money in the world is not infinite. Given that the US is about to spend $750 billion on defense, I was curious how much money there is in the world. How much money the US has, how many dollars China has. So here are some statistics for the curious. I don't try to make any conclusions here, that is for another blog, but I wanted at least to get a sense of perspective of the available cash in the world.

A calculation in January 2009 was done by Mike Hewitt of the economics blog DollarDaze.com. Hewitt calculated that in October 2008, there was about (in notes and coins of countries that comprised about 97% of the world's GDP) the equivalent of $3.94 trillion in U.S. dollars in circulation [source: Hewitt].

M0 is the amount of outstanding notes and coins in circulation. According to the Federal Reserve, there was $908.6 billion in the M0 supply stream as of July 2009 in the US [source: Federal Reserve].

Thus, about 25% of money (cash) circulating in the world is American dollars.

The global market capitalization for all stock markets that are members of the World Federation of Exchanges was $32.5 trillion by the end of 2008.[http://www.world-exchanges.org/about-wfe] [2008 WFE Annual Report, p. 84]. By comparison, the New York Stock Exchange capitalization is $28.5 trillion as of May 2008. [http://en.wikipedia.org/wiki/New_York_Stock_Exchange].

Just for thought, cash in the US = $908 billion, market cap of NYSE = $28 trillion.

Getting back to the US and the rest of the money, after all there is more money than $900 billion. The rest of the money is held in bank accounts of various types, and the Federal Reserve tracks these funds in three different values known as the M1, M2 and M3 money supplies:

M1 represents all of the currency in the M0 money supply, plus all of the money held in checking accounts and other checkable accounts, as well as all of the money in travelers' checks. In July 2009, the M1 money supply for U.S. dollars equaled about $1,655.6 billion [source: Federal Reserve].

M2 is the M1 supply, plus all of the money held in money market funds, savings accounts and small CDs. In July 2009, the M2 money supply was about $8,326.8 billion [source: Federal Reserve].

M3 is M2 plus all of the large CDs. As of March 2006, the Fed no longer tracks the M3 money stock as an economic indicator. That month, M3 totaled around $10.3 trillion [source: St. Louis Fed].

[http://money.howstuffworks.com/how-much-money-is-in-the-world.htm]

And lest we forget, the current US debt is $12,346,427,470,024.01, about $12.3 trillion. That is 4 times the total amount of cash in the world, to put it in perspective. Furthermore it is more than M3, total money in the US. [http://www.treasurydirect.gov/NP/BPDLogin?application=np]. Where there is debt there are interest payments. The annual interest payments by the US is about $400 billion annually. [http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm]

So how do we get out of this mess?

US and China

When it comes to trade, according to the US Census Bureau, the US deficit with China in 2009 was about $208 billion (excluding December).http://www.census.gov/foreign-trade/balance/c5700.html.

At the same time China held about $2.4 trillion in foreign reserves, of which it seems that $2.1 trillion is in US dollars. That is more than 2 times the amount of total cash in circulation in the US. [http://en.wikipedia.org/wiki/Foreign_exchange_reserves]. [http://news.xinhuanet.com/english/2009-07/15/content_11710420.htm]

Furthermore, the US debt to China, in form of US Treasuries, is around $800 billion as of Nov. 2009. [http://en.wikipedia.org/wiki/United_States_public_debt], [http://www.ustreas.gov/tic/mfh.txt].

Enough information for now, more to come so that we can make some conclusion about what it means to have a Federal budget of over $1 trillion and where will the money come from.

iPAD, Microsoft and Cybersecurity

OK, so cybersecurity is one of my favorite topics. There are lots of issues associated with cybersecurity both personal and social. Having said that, there are two innovations that I think work in the interest of corporate protection of data, one is the release of the iPAD and the other is Micorsoft's release of WEB-based M/S Office.

The great security feature of the iPAD is its lack of an USB port. I'm sure that it was not the intent of Apple to provide a non-USB device for the purpose of enhancing security but I think that a corporate IT infrastucture that does not have to worry about people storing data on USB devices or inserting USB memory sticks embedded with viruses is a good thing. Unfortunately, there are adapters but maybe there are ways to disable such devices for corporate applications.

Anecdotally, I have recently read about stories where an USB memory stick being left in a parking lot of a coporation with the appropriate logo of that corporation. A curious employee takes the USB device, inserts it into their PC and opens it, releasing a virus that has penetrated the best of Firewall, Router, Intrusion detection methods. With no USB ports, a product like the iPAD provides protection against such methods.

And now to Microsoft, with applications such as Microsoft Office being able to be accessed on the Web, files need no longer be accessed by downloading them to a PC. For a user the experience should be no different than what it is currently expect that the data will never exist locally albeit on their web browser, and hopefully if configured properly the remote data would no be allowed to be downloaded by the browser.

No local access, no USB port; this protects against many security flaws that have allowed users to take data on an USB memory stick outside corporate offices and lose them or worse yet sell the data. Web-based applications allow for the protection of data from being moved outside of corporate facilities.