Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Dealing with the esoteric world of estate planning scares most people. And yet, without a basic understanding of the subject matter, professional estate planners are left with no other alternative than to guess what their clients wish to accomplish after they pass away. Our readers are therefore grateful to John Giarmarco, an acclaimed estate planner, for contributing this special article for our readers

ESTATE PLANNING HIGHLIGHTS 2022

John J. Giarmarco, J.D., LL.M

After months of speculation, 2022 began with no new federal estate and gift tax legislation.  As the proposed legislation wended its way through the legislative process in 2021, the major proposed changes to federal estate and gift tax law were dropped.  These aborted changes included a significant reduction in the federal estate and gift tax exemption, different tax treatment of grantor trusts, and elimination of the step-up in basis for appreciated assets at death.  Because Congress could pass legislation that changes this information during the year, you should contact your estate planning attorney for advice prior to taking any transfer tax planning action.  Despite all of the lurking uncertainty, there are some positive developments for taxpayers beginning in 2022. They include:

• Lifetime Exclusion Increases to $12,060,000: As of January 1, 2022, the federal gift and estate tax exclusion amount, as well as the exemption from generation-skipping transfer (GST) tax, (collectively, the “transfer tax exclusion amounts”) have increased by $360,000 from $11,700,000 to $12,060,000 ($24,120,000 for a married couple). Please note, however, that the transfer tax exclusion amounts are scheduled to decrease on January 1, 2026, to $5,000,000 per individual (plus an inflation adjustment between 2018 and 2025).
• Annual Exclusion Increases to $16,000: As of January 1, 2022, the federal gift tax annual exclusion amount (i.e., the amount that an individual can annually transfer to another individual without using any lifetime gift tax exclusion or paying any gift tax) increased by $1,000 from $15,000 to $16,000 ($32,000 for a married couple).

• The highest federal estate tax, gift tax, and generation skipping transfer (GST) tax rate remains at 40%.  The highest federal income tax rate for estates and non-grantor trusts is 37%. This tax rate applies to taxable income over $13,450 earned by an estate or non-grantor trust during its administration period.

• New life expectancy tables used for determining required minimum distributions (RMDs) from IRAs and qualified retirement plans went into effect as of January 1, 2022.  Changes in the life expectancy tables will result in lower required annual distributions from qualified retirement plans and IRAs in 2022.  This benefits taxpayers because the lower distribution will result in less taxable income and helps to continue to preserve and grow the principal of the account under favorable market conditions. These changes impact traditional (non-Roth) IRA owners who have reached their Required Beginning Date for taking RMDs, qualified retirement plan participants who have reached their Required Beginning Date for taking RMDs, and beneficiaries of an inherited IRA or qualified retirement plan. Please contact your plan administrator or financial advisor regarding how to compute your RMDs for calendar year 2022 using the new tables.

• Since the proposals to limit Roth IRA conversions have not been enacted, the loophole known as a “back door” Roth IRA has not yet been eliminated. Using this technique, high earners who are otherwise barred from contributions to a Roth IRA and who do not have a traditional IRA may use after-tax money and establish a traditional IRA, and then immediately convert to a Roth IRA with no or minimal tax consequences.  It’s uncertain if future legislation barring this technique will be retroactive to January 1 or some other date. For those considering this planning, completing it sooner rather than later may be beneficial.
• Under current federal tax laws, the income tax basis of property acquired from a decedent generally is adjusted to the fair market value of that property as of the date of the decedent’s death (often referred to as a “step-up” in basis at death). Although there were proposals in Congress to change this, Congress did not pass those proposals in 2021, so the step-up in basis at death remains in effect for 2022.

• The ability to transfer a decedent’s unused federal estate tax exclusion amount to the decedent’s surviving spouse by filing a federal estate tax return (often referred to as “portability”) remains in effect.

As we ring in 2022, let’s look at some of the most important estate planning documents you should have prepared:

• When you think about considering estate planning in 2022, one of the most important documents to consider is your will or trust. A will is a document that spells out your wishes regarding the distribution of your assets and care of any dependents if needed. A trust is a tax-advantaged way to arrange ownership of your assets and allows a third party to hold these assets on behalf of a beneficiary to protect the beneficiary from his/her inability, disability, creditors and predators including ex-spouses.  Assets held in trust also avoid the costs, delays and public record of probate.

• You can also set up a living will, which is a directive to physicians that explains your end-of-life medical care preferences. If you are unable to communicate, a living will helps doctors and family members make decisions about your care based on what you would prefer (e.g., CPR, mechanical ventilation, tube feeding, organ donation).  In your living will, you may also specify a healthcare power of attorney, which is an agent who can make important healthcare decisions on your behalf.

• Power of attorney (POA) is given to the agent or person you designate to act on your behalf and oversee your will if you are unable to do so. It’s important to designate POA because if you don’t, the court may decide how your will and assets should be managed. You don’t have to give POA to a family member, either. You can choose a trusted friend or financial advisor to act as the agent of your will, especially if they have a strong financial and estate planning background.

• A will or trust explains how you would like your assets distributed among beneficiaries, so it’s also important to update your beneficiaries as you build your estate plan. You should have a contingent beneficiary stated on all insurance and retirement accounts, as well as contingent beneficiaries stated in your will or trust. The new year is a great time to review your beneficiaries as things can change (e.g. marriage or divorce, kids and grandkids, new in-laws, etc.) and having an outdated estate plan can be a recipe for disaster.  If no beneficiary is stated, your estate may end up in the hands of the court, which can be an impersonal way to handle your assets because a judge has no familiarity with your wishes.

• Finally, a letter of intent might cover other details that aren’t included in a will, such as funeral arrangements or a decision for a particular asset. Unlike a will, most letters of intent aren’t legal documents, but they provide supplemental information for your estate and the more information you have for your beneficiaries, the better. A letter of intent can help supplement gaps in a will and answer questions your beneficiaries or probate court might have.

So What Now?  This is an opportune time to review and consult with your estate planning attorney to assess changes in your circumstances.  High net worth individuals who have not made lifetime gifts may want to consider taking advantage of the increased exemptions in case Congress revisits this legislation and certainly in advance of the 2025 change.  If you are charitably inclined, you might want to review options for incorporating charitable giving in your estate plan in ways that may also benefit your family.  Keep in mind estate planning involves more than minimizing taxes, it’s about prudent planning for your family (and charity) to further your personal objectives.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Posted on Valentine’s Day, 2022

On this auspicious day I invite my readers to join me in extending our love and respect—shrandhanjali—to the international icon Lata Mageshkar, the jewel of India.

Lata Mangeshkar, India’s music legend, who held the rare title of Bharat Ratna (Jewel of India), passed away on February 6, 2022. Since then, the international news media has been profuse in its praise of Lata and her incredible achievements in the music world. She truly deserves all of this recognition, and then some.

This media coverage has not, however, included the human dimension of this iconic lady. Fortunately, all is not lost. Surprisingly I, of all people, am privy to information I will share in this blog that will provide this missing feature of the media coverage.

Although Lata and I are both Indian, and she was the same age as I am, we share nothing else in common. She and I have lived on two separate continents. Her accomplishments in the music world made her stand out among 1.2 billion Indians. By contrast, I have been an academician who has achieved what I consider a small measure of success. Above all, until the stories described in this blog, we had neither known nor communicated with each other.

If all of this is true, you say, then how come I am privy to personal information that can add a human dimension to the portrait of Lata? That is a legitimate question that I will now address.  

AN UNBELIEVABLE OFFER

February 1, 1976.

It was a wintery Sunday morning in Rochester, Michigan. I was checking my mail when the phone rang. Wondering who might be calling me on a Sunday morning, I answered the phone. On the other end of the line was none other than the manager of Lata’s upcoming U.S. and Canada concert tour. The manager came directly to the point: “Mittra Saheb, would you accept our offer to act as the Master of Ceremonies (MC) for Lata’s 10 concerts in the U.S. and Canada this summer?”

I was flabbergasted, to put it mildly. I was a university professor and had no experience acting as a concert MC. In addition, I was not permitted by my university to accept any assignment not related to my field of study. Nevertheless, I was fascinated by the prospect of participating in Lata’s concerts and introducing her to North American audiences. I had a lot to sort out before making my final decision.  

Ultimately, my desire to assist a lady I admired so much won out. I was permitted to accept the offer on one condition – that I would not accept any compensation for my role. In the end, everything worked out perfectly, and I accepted the offer with enthusiasm.  

Later that year I acted as the MC for all but one of Lata’s summer concerts. What follows are solely my reflections on the human side of this star based upon my personal conversations and contacts with her. More importantly, these reflections do not include any information, told to me by others like the concert manager and the conductor of her musical orchestra, that I could not corroborate.

HUMAN SIDE OF LATA: PERSONAL REFLECTIONS

I will now share with you seven stories that paint a picture of Lata’s human dimensions, which highlight her strengths and insecurities, her feelings for people, and her rigidities and flexibilities. To reiterate, each of these reflections is based on my personal experiences, and I alone am responsible for the observations that follow.

• My Ph.D. Credentials

One day, when the concert crew was walking from the air terminal to board a plane, Lata (who, by the way, was universally called Lata Didi or Sister Lata) approached me and asked: “Mittra Saheb, do you have a Ph.D.?” That question, which sounded like a job interview question, startled me. Since I had already been retained as the MC for her concerts, and my academic qualifications had nothing to do with that responsibility, her question seemed misplaced. Still, out of courtesy, I politely replied: “Yes, I do.” She followed my response with another strange question: “Do you have to take frequent exams to keep your degree current?” Somewhat miffed,  making clear by the tone of my voice that this was my final response to her vexing questions, I replied: “No I don’t!”

Lata’s next comment cleared the air: “As a musician I believe that I, too, have sort of a Ph.D. However, every time I step on stage I feel as if I am taking a new Ph.D. exam and that the audience is grading me. That means that to renew my Ph.D., I have to be perfect every single time I perform or record my music.”  

What a refreshing admission of insecurity by a music world icon!

• Maintaining a High Standard of Perfection

When leaving Canada for the U.S., we arrived at the airport for a flight that was scheduled to reach Washington, D.C., around noon. We learned, however, that because of mechanical difficulties, our flight would be delayed and not arrive in Washington, D.C., until 4:00 p.m.  For most passengers, that would not have been a major problem, but our situation was vastly different. Lata’s concert was scheduled for 6:00 p.m., and she always needed about six hours of rest and preparation time before her performances. Although it was not my place to do so, I suggested that if she did not want to perform with only a two hour pre-concert preparation period, then I, as MC, would be happy to explain to the audience that the concert would be delayed by two hours and the reason for the delay. After all, I pointed out, the plane delay was not her fault.

When the rest of the crew appeared to support my suggestion, Lata’s response demonstrated a side of her personality that no one had expected. Lata, emphasizing that her audience had every right to expect perfection in all aspects of her performance, including starting the concert on time, she made the following decision: When we arrived in Washington, D.C., instead of following our normal routine and head for our hotel, we would go straight to the concert hall. There the crew would prepare a separate room in which, for two hours, she could rest and prepare for the concert. She added bluntly: “Remember, our concert must start at 6:00 p.m. Period.”

That evening, Lata stepped on stage at 6:00 p.m., and began her concert by singing the famous verse Aham from the religious scripture, Bhagavad Gita.

This incident evidenced Lata’s ability to make a personal sacrifice when necessary to adapt to unfortunate circumstances.  

• Singing at Ambassador’s Home

While we were in Washington, D.C., the Indian Ambassador to the U.S. invited our crew for lunch. It was a delightful experience, where we enjoyed a lavish serving of Indian snacks like samosas, laddoos and masala chai.

As we were enjoying ourselves, a prominent Indian guest of the Ambassador requested that Lata make her visit memorable by singing a song for this distinguished group. On the face of it, since she was the nightingale of India, that seemed like as reasonable request.

It wasn’t.

Although she did not verbalize it, judging from the looks on her face, I could sense that Lata did not want to sing, because she wanted each of her public performances to include a 30-piece orchestra, a perfect sound system, proper lighting, and a concert hall filled with an appreciative audience. That expectation could not be compromised under any circumstances.  After a few seconds, she responded: “Maf keejie yahan to kuch bhi nahi hai, mai kaise gaun? (Excuse me, but there is nothing here so how can I sing?)

Although Lata did not sing, there’s more to the story.  In an adjacent room, Mukesh, Lata’s singing partner, was having a ball chatting with other invited guests, one of whom requested that Mukesh sing a song for the group. His response couldn’t have been more different from Lata’s. Mukesh replied with confidence, “I never deny the request of my listners.” And with that, he stood up and, to my surprise, without any accompaniment or even a simple microphone, sang his signature song, “Jane Kahan Gaye Woh Din,” which was the song that had led to his becoming a popular playback singer.  

I do not know how Lata responded to Mukesh’s actions when she heard about them. But the entire incident clearly demonstrated something about Lata – she was willing to take whatever stand was necessary to maintain her commitment to perfection.  

• Perfection to a Fault

In the field of Indian music, it is customary for musicians playing percussion (called tabla) to fine tune the tabla during a performance. For that reason, the percussion player carries a little tuning hammer and uses it whenever there is a need to tune the tabla.

I once asked Ramakant Mhapsekar, the crew’s lead tabla player, why he carried on stage four extra perfectly tuned tablas, but no tuning hammer. That seemed odd to me, especially since I had not seen even Zakir Hussain, arguably the best international tabla player, follow that strange practice.

Ramakant’s instant response was so out of the ordinary that it floored me. He blurted out in Hindi: “Didi ko thokna thakna pasand nahi” (Lata Didi does not like my tuning tabla making a noise). So when there is a need for tuning, instead of using a tuning hammer, I can quickly switch tablas without making any noise.

Although this story relates only indirectly to Lata, it emphasizes her commitment to perfection even in the least important aspect of her performances.

• Concern for Indian Women in London

Once, during a long walk from the airport terminal to our plane, Lata revealed a little known side of her persona that intrigued me. She explained to me in some detail that during a flight from Bombay to New York she had an unexpected 12-hour layover in London. She had all the free time she needed to visit glamorous stores and enjoy the ambiance. However, when she saw Indian women performing less than menial jobs in a foreign country, it made her feel sick to her stomach. At one point she even had the courage to prevail upon someone to ask one of the women why she was performing such a dirty task in a foreign country. The woman’s response hit Lata like a ton of bricks. The woman said that she had three children and that she couldn’t find a job in Bombay that would pay enough to enable her to feed her family. She explained that in London, the same job paid her so well she could live there comfortably. After Lata told me this story, she blurted out: “As an Indian woman I feel ashamed and I would change this situation if I had the power to do so. But I know I can’t. Forgive me God, but I can’t bear this pain.”

This experience evidenced to me Lata’s concern for fellow Indians and highlights another unique dimension of her total personality.

• Revolving Stage

One important prerequisite of Lata’s performances was that everything on stage had to meet her specifications before she would perform. Once she had approved a stage set, nothing could be moved, not even the angle of the microphone.  It was also important to her that when she stepped up to the microphone, the distance between her face and the microphone would be exactly as she wanted it. Ironically, audience members would sometimes complain that, as a result of Lata’s preferred microphone angle, only those sitting on one side of the concert venue got to see the front of her face, while those on the other side only had a glimpse of the side of her face. She nevertheless rejected any request that the microphone angle be changed.  

One time, at a concert in Cleveland, we got the bombshell news that the concert venue had – are you sitting down – a revolving stage! The revolving stage was very popular among American performers, but it was devastating news for our crew, who assumed that only two options were available – perform on the revolving stage, or cancel the show.

I wasn’t privy to the intense debate that must have taken place among the crew, but I knew that no way would Lata want to perform on a revolving stage. On the other hand, I was sure that she also would summarily reject the idea of cancelling the show.

Ultimately, Lata prevailed, sort of. Concert hall technical personnel were able to lock the stage so that it would not revolve during her performance. But that would also mean that the crew could only use the front half of the stage, which would result in the available space being overly crowded, and adversely affect the show’s aesthetics.

Once Lata approved the plan and the decision was made to proceed with the show, it was business as usual. Lata’s performance was flawless, and she showed no signs of frustration resulting from the compromise made regarding the revolving stage.

This incident clearly demonstrated that, while Lata was a perfectionist to a fault, she was also mindful of her commitments as a professional.  

• Death of Singing Partner

It was August 27, 1976, a beautiful summer afternoon in Detroit, my home town. Our last performance of the tour was going to be staged at the Ford Auditorium. Just to make sure that everything was okay, around 3:00 p.m. I visited the neighboring Hotel Pontchartrain, where the crew was staying. As usual, Lata was secluded in her room, preparing for the show. Her singing partner, Mukesh, was in his room, busy practicing for his performance. At 4:00 p.m. I left the hotel, whispering THIS WOULD BE THE DAY. It did turn out to be THE DAY, but not in the way I could have imagined in a million years. As I was sitting in front of the stage watching the musicians assemble and the crew set up the sound system, a member of the crew approached me with the devastating news that Mukesh had suffered a massive heart attack and passed away on his way to the hospital.

It must be a joke, I thought, since I had heard that he was practicing in his hotel room only a couple of hours ago. Sadly, it turned out to be true.

Then came the grim task of how to handle the situation. There was no way to inform ticket holders of a concert cancellation before they left home. If the show was not cancelled, there was the issue of how to completely reorganize it, since one of the two main singers would be missing. Finally, no one was sure how Lata could control her emotions during her performance.  

I offered my two-cents worth without anyone asking me. I said that in America the words, THE SHOW MUST GO ON, resonate among all performers. Therefore, consistent with that tradition, I suggested that, after explaining the situation to the audience, a curtailed version of the show should be staged. I also suggested that the fact that this was going to be the tour’s final show was an important consideration.

I don’t know if anyone on the crew took my suggestion seriously, but after an intense debate lasting a half hour, the following decisions were made:

1. At 6:00 p.m. I would go on stage and, as MC, inform the audience that Hridaynath Mangeshkar, Lata’s younger brother, had something important to say.
2. Hridaynath would then come on stage and make the announcement about Mukesh’s death only a couple of hours ago. He would also point out that, out of respect for Mukesh, the show would be cancelled.
3. The local promoter of the show would then come on stage and announce that he would take care of reimbursing concert goers for the price of their tickets.

I do not know what role Lata played in making the final decision, so I leave it up to you to guess. However, her agreeing to the decision to cancel the show – a very expensive proposition indeed – did reveal to me her human side like nothing else could have.

SOME FINAL WORDS

In this blog I have painted a detailed picture of the human dimension of Lata’s personality. I hope that this convinces you that she was both a musical icon and a normal human being with typical strengths and frailties, a need for achieving excellence, the ability to compromise, and above all, a love for her fellow Indians around the world. I offer these reflections as a homage to Lata Mangeshkar, who carried the highest civilian honor India could bestow on her – Jewel of India.

_________________________________________________________________________Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Before getting into the subject of this blog’s complex title, just for fun, let’s have a short quiz. Ready?

Below are three real life stories, each completely different from the other two. However, a central theme flows through all three. Can you identify the theme?

PART I: REAL LIFE STORIES

Story 1

Joseph and Marlene live with their two children in a tiny 750 sq. ft. apartment in the Bronx. Each night when Joseph comes home, he hears the same complaint from his wife: “Honey, this apartment is too small for us. Why can’t we move to a larger apartment?” Joseph routinely responds: “Please understand that on my limited salary we can’t afford the cost of a larger apartment.” The matter ends there, though not always peacefully.

Then, one day, Joseph returned home and joyfully announced: “Honey, guess what? Starting next month we are going to live in a more expensive apartment.” Virtually speechless, Marlene blurted out: “Oh, wow! So when are we moving?”

Joseph responded nonchalantly: “Who said anything about moving? Starting next month our rent is going up, so we will be living in a more expensive apartment.”

Story 2

Betty is mad at her bank where she had enjoyed a 40-year relationship. The manager who served her in the 1970s even offered her a generous 14% interest rate on her savings account. But now, the new bank manager cares only about making obscene profits for the bank. So he only offers Betty a miserly 0.75% interest rate on her savings account, which he claims is a higher interest rate than he offers to other bank customers. Betty is seriously thinking of moving her business to another bank. 

Story 3

Following the end of the First World War in 1919, the German government responded to growing economic uncertainty by printing increased quantities of marks, rather than by borrowing from other countries’ banks. This resulted in the progressive devaluation of the mark and eventually in an exponential collapse of the mark’s value, a condition known as hyperinflation. In January 1923, a loaf of bread cost 250 marks. By November the price had risen to 200 billion marks. Workers carried their cash wages home in wheelbarrows. Factory workers were paid twice a day, since by afternoon, their morning wages would be considerably devalued. Photographs from this period show children playing with building blocks made from banknotes (which represented the government’s promise to pay the bearer a stated amount upon demand) and homeowners satirically papering their walls with worthless marks. Eventually, single banknotes worth 50 trillion marks were being printed, and it cost more to print a banknote than it was worth.

It’s now time for you to identify the central theme of these three stories. But wait! I think I made this quiz too easy for you, and I bet that you know the answer. Shame on me for devising such an easy quiz.

PART II: THE CONFUSING WORLD OF RAPID INFLATION

In order to make the topic of this blog interesting yet informative, I have created three hypothetical characters: The first is Mary, who will ask questions about inflation that this blog’s readers might have. The second is John, who will elaborate on Mary’s questions. Finally, there is Nancy, who will attempt to answer the questions, using academically-oriented, but hopefully understandable, language.

Let us begin.  

Mary: What is this inflation that everyone is so concerned about?

John: My understanding is that inflation is nothing more than increases in the prices of goods and services we routinely buy, such as groceries, gasoline, entertainment, and so on.  So what more is there to say?

Nancy:  Inflation is typically expressed as the annual change in prices for a basket of goods and services. There are two main indices that measure inflation: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). Although both indices measure inflation, their approaches to doing so vary slightly. The CPI uses data from surveys of urban households. The PCE uses data from the GDP report and from suppliers, along with data from all U.S. households and nonprofits. The CPI includes out-of-pocket expenditures on goods and services; but the PCE also includes other expenditures not paid for directly, such as employer paid medical care, Medicare and Medicaid. Finally, the CPI is more likely to be affected by items with wide price swings, such as computers and gasoline, whereas the PCE smooths out these price swings, which makes it less volatile than the CPI.  The PCE is generally considered the official inflation measure.

Mary: Well, then, who is responsible for fixing the problem of inflation or rising PCE?

John: Our central bank, the Federal Reserve, or the Fed, is primarily responsible. We hear that it has this magic wand that controls interest rates. All it has to do is to raise its interest rate and inflation magically disappears.

Nancy: Surprising though it may seem, the nation is not totally opposed to some inflation. In fact, the Fed has historically set a target of 2% annual increases in the PCE. That is because a 2% inflation rate gives companies room to adjust to a slow but steadily growing economy – one where labor and commodities might cost more without companies being forced out of business.

When the PCE exceeds 2% on a consistent basis, the Fed increases the interest rate it charges on loans to member banks. This requires businesses to pay higher interest rates on their borrowings, which results in them increasing the price of the goods and services they sell. That, in turn, reduces the consumer demand for their goods and services, which eventually causes the inflation rate to return to a desired level. 

Mary: If that’s how it works, then is the Fed currently ignoring its basic responsibility and allowing inflation to be totally out of control?

John: We hear that the Fed is not sitting idly by, but for some reason the inflation problem persists.  

Nancy: That is because the current inflation situation is unique due to the fact that it is the result of three unusual causes, each of which complicates the Fed’s task.

First, there is the pandemic, which virtually shut down the economy. The federal government launched massive stimulus packages to keep the economy from going under, and the Fed assisted the government in its efforts by buying a huge amount of bonds in order to inject billions of dollars of easy money into the economy.

Second, the Fed has maintained its interest rate at near zero so that banks could borrow money at virtually no cost and provide significant loans to the private sector to help the economy recover from the ravages of the pandemic.

Third, normally an increased demand for goods and services results in increased supply. However, the supply chain issues caused by the pandemic have made it difficult to increase supply, and neither the Fed nor the government can do anything about it.

The Fed has been quite active pursuing policies that focus more on economic recovery than on inflation control. So it is unfair to blame the Fed for failing to control inflation. 

Normally, when the above causes are not a factor, the Fed has a powerful, albeit invisible, ally – called the invisible hand – which is the free enterprise system. Under this system, if a company raises prices for its products to increase its profits, other companies quickly enter the market and introduce competitive products. Soon, due to this competition, prices of the subject product decline to an acceptable level. This invisible hand goes a long way toward helping the Fed maintain price stability over the long term. 

Mary: Well, well, the cat is finally out of the bag. If what you say is true, then why isn’t this invisible hand helping the Fed solve the current inflation problem?

John: Very well put. We are all anxious to hear the answer to that question.

Nancy: The answer is simple – it’s the pandemic. During 2021, few new businesses were established. Even the products produced by existing companies were difficult to deliver due to the supply chain fiasco. As a result, the supply of products could not be increased to meet the higher demand.  That inevitably resulted in the rate of inflation increasing to a level we haven’t seen in almost four decades.

There are also other pandemic related factors at play.  The spike in inflation America experienced in 2021, which has continued into 2022, has been driven partly by special forces and partly by demand.

On the special forces front, the pandemic has caused factories to shut down or curtail production, and has blocked shipping routes, adversely affecting the supply of cars, furniture, other household goods and, of course, groceries. Travel costs, including hotel rates, have skyrocketed, and demand for items like electronic gadgets and computers have gone through the roof. And, of course, rapidly increasing gasoline prices have contributed significantly to the spiraling inflation. Policymakers are unable to solve this unique problem with the tools they have at their disposal. 

But there is another powerful factor at play. During the early days of the pandemic, when the economy was virtually shut down and the government’s stimulus packages put additional money into the pockets of consumers, they increased their savings, which created a huge pent-up demand for goods. As a result, when the economy began to open up, consumers unleashed their accumulated purchasing power, virtually disregarding the inflation that had increased the cost of the products they were purchasing. There is plenty of evidence to corroborate this fact. Because of robust consumer demand, during the last quarter of 2021, the GDP grew over 6%, a rate not seen for decades. Consumers are continuing on a spending spree, even as costs for consumer products continue to skyrocket. At the same time, consumers are also paying higher rent and more to purchase new homes. This shopping spree is resulting in brisk and unstoppable price increases.

Mary: I get all that, but aren’t you being too parochial in your thinking? What about the wage increases that labor has negotiated during this pandemic-infected period?

John: Yes, we have heard that an unskilled worker recently negotiated an employment deal with a restaurant owner that provided for a $10,000 signing bonus, college tuition, a four-day work week, and three weeks of paid vacation. But even that unbelievable deal fell apart when the worker obscenely demanded eventual part ownership in the business. Won’t the rising wages in this hot labor market overcompensate for the inflationary increases in the cost of goods and services?

Nancy: It is not as simple as that. First of all, the majority of people in the labor force are not in a position to negotiate such grandiose deals. Second, many workers are still unemployed and may never find a suitable job. Third, the current 6% inflation rate is merely an average. For many families, increases in housing, gasoline, grocery, child care and health care costs have exceed that rate.

Mary: Is this inflation going to be a short-term problem?

John: Let me put that question another way. Are we wrong in expecting this inflation to last through 2022 and possibly beyond that?

Nancy: There is growing concern that the current inflation will not be short term. If inflation lasts too much longer, it will become a long-term issue. Already, rents have increased sharply, and home prices have risen to the point that many would-be buyers have given up the idea of home ownership. Also, consumers are beginning to revise their budgets in anticipation of inflation continuing for the long term.

The bad news about this trend is that, over time, high inflation can become a self-serving reality. When that happens, labor can successfully negotiate higher wages to cover the rising cost of living. Records show that when that has happened in the past, companies facing higher labor costs have routinely passed those higher costs on to consumers. That’s all it takes to start a cycle of increasing wages and consumer prices.

It is a bit premature to conclude that the current inflationary scenario will continue long term, but the possibility should nevertheless be taken very seriously. Currently there are distinct signs that both the Fed and the government are trying their best to make inflation a short-term problem. We can only wish them Godspeed.

Mary: Despite the current high rate of inflation, people are still not panicking. One reason for that is the phenomenal increase in stock prices. If inflation continues to increase at the current rate, would the stock market continue to surge?

John: I read that in 2021 the stock market, measured by the S&P 500, increased by 27%. I don’t recall such a robust market in the recent past. So I am curious to know if investors will be amply rewarded if inflation continues to push the stock market to new highs.

Nancy: While stocks have historically done well during periods of moderate inflation, a continued high rate of inflation is not good for the stock market. The reason is that, in such an environment, corporations must continue to generate higher returns just to break even; but most corporations are not in a position to unilaterally raise the prices of their goods and services. As a result, after a while, profits begin to shrink, inevitably leading to a steady decline in their stock prices. I should also mention that determining appropriate stock market valuation is a highly technical subject that is beyond the scope of this discussion. However, consider the following statistics as you analyze whether the stock market is overvalued.

At the end of 2021, the U.S. stock market was valued at $53.4 trillion, 2.3 times the size of our $23.2 trillion economy. By contrast, at the peak of the “dot-com bubble” in March 2000, the U.S. stock market was valued at 1.4 times the size of the U.S. economy!

Mary: One last question: Are you saying that since you don’t know what the future holds, you can’t be of any help at all?

John: Let me rephrase the question. Given the uncertainty we face, please tell us what we should do about our stock market investments, family budget and other personal financial issues.

Nancy: That’s a tall order. I will try, but only after repeating that I am not making any predictions about how inflation will behave in the future. Likewise, anything I suggest should not be considered a recommendation to be acted upon. For that you should consult your financial adviser. That being said, here are some general suggestions for your consideration:

Immediate Action: Please do not make any rash decisions based solely upon the current inflation problem.

Stock Market Investment: After several extraordinary years of high returns in the stock market, 2022 has already been more volatile. In January of 2022, the S&P 500 Index fell more than 10%. Since then, the S&P 500 Index has recovered more than 50% of what it has lost, but the trend of higher volatility will likely continue. Consider maintaining the current stock/bond/cash ratio in your investment portfolio, unless, of course, your investment adviser recommends that you do otherwise.

Family Budget: Adjust your budget so that you can manage more efficiently the rising prices of essential goods and services like gasoline, groceries, housing, etc.

Long-term Planning: Refrain from making any long-term plans until the smoke clears – hopefully someday soon.

Final Advice: Please stay tuned and remain connected. Best of luck to you.

BOTTOM LINE

Our discussion has underscored an important point – continuation of the current high rate of inflation is not an option under any circumstances. The Fed and the government must use everything in their tool kit to solve the problem. When the policymakers implement anti-inflationary measures, which should be soon, the nation will undoubtedly suffer from short-term dislocations and imbalances. We must accept that outcome if we wish to have a healthy and economically prosperous nation for the long term.

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

This is a special gift from me, especially designed for you. I hope you like it.

PART ONE

IDENTIFYING YOUR RETIREMENT PLAN OBJECTIVES

I begin by using an acronym, RETIRED, to list the elements that are generally important for people who are retired or contemplating retirement:

R     Recommit to Good Health Management

E      Emphasize Close Family Relationships

T      Take Care of Long-term Finances

I       Invent Fun Work Environment

R      Reconsider Extended Charitable Activities

E      Enjoy New Leisure Activities

D     Desired Activity for Me

Next, in order to make you an active participant in the creation of the best retirement plan for you, I invite you to complete a survey designed to identify the essential elements of your retirement plan. In doing so, follow these three simple steps: 

1. Carefully examine each of the first six retirement elements presented above (ignoring element D until step 2), deleting the ones that do not interest you. For instance, if you have no interest in inventing a fun work environment or enjoying new leisure activities, then delete that element.
2. Add to the above list of elements as element D an activity that you deeply care about. For instance, if your lifetime desire is to spend six months sailing around the world, or to spend a year in the Buddhist Monastery in Nepal, India, then add that element.
3. Rearrange the elements to reflect their importance to you (my personal preference is reflected in the above list), and never mind what anyone else prefers.

Congratulations. You have just taken the first step toward creating a retirement plan for yourself.   

PART TWO

ESSENTIALS OF YOUR RETIREMENT PLAN

You now have the task of identifying the essential elements of your retirement plan. You can do that by completing the following survey, which is designed to clearly identify your retirement personality. So, relax and, by all means, have fun.

1A.——-I prefer to receive a guaranteed monthly income for life.

I realize that this choice requires me to purchase an annuity from a life insurance company, or an FDIC-backed CD marketed by a bank. I am willing to forgo potentially higher long-term investment returns for the sake of predictable guaranteed income.

OR

1B.——-I prefer to shoot for higher long-term returns by investing my retirement assets in riskier assets.

I am willing to see my asset values go up and down in the short term in hopes of achieving higher long-term appreciation.

*******************

     2A. ­­­­­­­­——­­­I prefer to spend a fixed amount on monthly expenses.

While I realize that this would require adjusting my monthly expenditures from time to time, knowing I had fixed monthly expenses would give me peace of mind.

OR

2B.——-I wish to freely spend in retirement.

I have saved so that I have financial freedom. If I need money, I can liquidate assets whenever I like.

********************

3A. ——-I am not worried about taxes and possible estate taxes for my heirs.

The money is mine and whatever inheritance my heirs receive will be an unexpected blessing for them.

OR

3B.——-I wish to minimize my taxes and possible estate taxes for my heirs          

            I am willing to hire professionals to help me with this endeavor.

 ********************

4A. ——-I prefer to set aside a pre-determined amount of retirement assets in case of an emergency.

This would help me feel more comfortable and secure.

OR

4B. ——-I feel no need to set aside such a reserve of retirement assets.

If I need money, I will be able to liquidate assets. I want 100% of my assets invested, rather than sitting in a savings account earning next to nothing.

********************

5A. ——-I wish to have my retirement assets managed by a Certified Financial Planner (CFP)  professional.

I would gladly pay a CFP a fee equal to a small percentage of my assets, so that I don’t have to worry or stress about investments all on my own. As I grow older, this becomes increasingly more important.

OR

 5B. ——-I prefer to manage my own retirement assets, but would consider consulting a CFP if necessary.

I prefer not to pay a CFP for this service. If I am no longer able to manage my own investments, I will consider hiring a CFP at that time.

PART THREE

YOUR CURRENT NET WORTH

Regardless of whether you engage a CFP to manage your retirement assets or choose to do so on your own, you need to have an updated net worth statement. In times of emergency or incapacitation, this net worth statement will also provide a basis for others to help you.  Attached is a chart to assist you in preparing your net worth statement.

PART FOUR

A RETIREMENT PLAN JUST FOR YOU

While limited in scope, I hope you now have a starting point to begin creating an ideal retirement plan. You do have the luxury of creating and managing that plan entirely yourself. If so, I wish you all the best. If, however, you wish to engage a CFP (someone I highly recommend), please share with your investment advisor the above information and your Statement of Net Worth, so the adviser can get a clear picture of your needs and desires. 

BOTTOM LINE

The following quote beautifully sums up the value of creating your personal retirement plan: William Sharpe, winner of the 1990 Nobel Memorial Prize in Economic Sciences for his work on financial economics theory, had the following profound observation regarding an ideal retirement plan: “It’s really nasty. It’s the nastiest, hardest problem I’ve ever looked at. . . . I can’t say I’ve found some magic solution, because I haven’t.”

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

I understand that a fair number of my readers are intimidated by blogs dealing with economic and financial topics. It is my firm commitment to present these topics – especially the complex ones – in simple terms so that they are both understandable and enjoyable. 

As a result, I have vowed to improve my blogs so that they are understandable and enjoyable to all of my readers. With that goal in mind, in this blog I will explain in simple language the terms frequently used in economic and financial discussions.     

Balance of Trade  

Balance of trade is the difference between the value of a country’s exports and the value of the country’s imports for a given period. 

Bonds   

A corporate bond is a debt security that is issued by a corporation.  The corporation issues the bond to raise cash. Investors purchase the bond to receive the bond interest paid by the corporation. The quality of the bond depends upon the firm’s future revenue and profitability prospects. In some cases, the corporation’s physical assets may be pledged as collateral.

A government bond is a debt security issued by a government to support government spending and financial obligations. Short-term government bonds, known as Treasury bills, have maturities of up to one year. Long term government bonds typically mature in 10, 15 or 30 years. Government bonds can pay periodic interest, called coupon payments, and are considered virtually risk-less investments because they are backed by the full faith and credit of the government issuing them.

Business Cycles

Business cycles are cyclical upswings and downswings in gross domestic product (GDP), employment, income and sales.  Recessionary cycles begin at the peak of a business cycle and end at the bottom of the cycle. By contrast, a boom cycle begins at the bottom of a business cycle and ends at its peak.

Consumer Price Index

The Consumer Price Index (CPI) is a measure of the prices paid over time by typical consumers for a fixed market basket of goods and services. The CPI is published monthly, quarterly, semi-annually and annually.

Crowding Out and Crowding In

The crowding out effect refers to a situation where rising public sector spending negatively affects and drives down private sector spending. Basically, in a situation like this, the government siphons off resources used by the private sector. This can happen when a government provides financial support for such things as social welfare, infrastructure, defense and general spending in order to help revive an ailing economy. Crowding in, however, refers to the opposite effect when government borrowing actually increases demand for private goods and services.  

Discount Rate

The discount rate is the interest rate that the Federal Reserve charges to commercial banks and other financial institutions on their short-term borrowings. This rate also plays another important role. It is also widely used for determining the present value of future cash flows associated with stocks, bonds and other assets.

Exchange Traded Fund (ETF)

An ETF is one of the newest alternatives for investing in stocks. It is like a mutual fund that trades on exchanges. (See Mutual Fund below.) A key feature of most ETFs is that they are index-tracking, meaning that they try to match the returns and price movements of an index, such as the S&P 500, by assembling a portfolio that matches the index constituents as closely as possible.  This is an appealing feature to investors who wish to invest in a diversified portfolio of stocks that tracks a stock market index.

ETFs have become very popular among investors because of their being exchange traded, their diverse holdings, and the fact that they are priced daily and that their shares can be purchased in small increments.

Gross Domestic Product (GDP)

The GDP is the total market value of all the finished goods and services produced by a country during a specific time period. (See Business Cycle above.) As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health, and is typically calculated on a quarterly basis.

Inflation/Recession/Depression

Inflation is a measure of the rate that prices of goods and services rise. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. Inflation can also occur when there is a surge in demand for products and services by consumers who are willing to pay more for them. There are other causes for inflation, but they require a more in-depth analysis than is practical in this blog. Recession is a normal part of the business cycle that generally occurs when GDP declines for at least two consecutive quarters.

Depression, on the other hand, is an extreme form of recession that occurs when there is an extreme decline in economic activity that lasts for years, rather than just several quarters.

Law of Supply and Demand

The law of supply and demand relates to the interaction between the sellers of a resource and the buyers of that resource.  Generally, as prices increase, sellers are willing to supply more of the resource to increase their profits. At the same time, demand for the resource falls because buyers are unwilling to pay the higher prices. The opposite reaction occurs when prices decline.

Money Supply  

The Federal Reserve measures the U.S. money supply (known as money aggregates) by dividing it into three categories: M1, M2 and M3. M1 includes money in circulation plus checkable deposits in banks and similar financial institutions. M2 includes M1, plus savings deposits of less than $100,000 and money market mutual funds. M3 includes M2 plus savings deposits larger than $100,000.

Mutual Fund

A mutual fund is an investment vehicle that pools money from many investors and invests the money in securities such as one or more of the following: stocks, bonds and short-term debt. The combined holdings of a mutual fund are known as its portfolio. Investors buy mutual fund shares that represent part ownership in the fund and the right to receive their share of the income it generates.  Mutual funds are a popular choice among investors because they generally offer the following features: professional management, diversification, affordability and liquidity.

National Debt

The U.S. government’s debt, called national debt, is how much the federal government owes its creditors, both in the U.S. and abroad. Statistics show that, almost without interruption, the U.S. national debt has continued to rise, sometimes at a breathtaking rate.

A related term – budget deficit – occurs when the government spends more during a year than its income for that year. The national debt is an accumulation of years of budget deficits, rarely reduced by budget surpluses.

Philips Curve

The Phillips curve claims that inflation and unemployment have a stable and inverse relationship. In other words, with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. The opposite occurs when economic activity slows down.

Quantitative Easing

Quantitative Easing (QE) is a type of non-traditional monetary policyin which a central bank buys massive amounts of securities to stimulate the economy. When QE works well, the increase in the money supply resulting from those security purchases encourages commercial lending, lowers interest rates, and results in producing higher economic growth.

Saving/Investment

Saving is setting aside money now for emergencies or for a future purchase.

Investing is buying assets such as stocks, bonds, mutual funds or real estate assets with the expectation that the value of these investments will rise in the future. Investments usually are selected to achieve long-term goals.

Stocks vs. Bonds

	Stocks	Bonds
Characteristics	Unit of ownership in business	Unit of money lent to a business
Nature of return	Ownership interest in business plus dividends	Principal repayment and fixed interest
Common name	Equity	Debt

The above table underscores the following: 1. Stocks represent an ownership interest in a business, whereas bonds are a unit of money lent to a business or government. 2. When you buy a stock, you become an owner of an interest in the underlying business that entitles you to receive your share of distributions, or dividends, paid to stockholders. 3. When you buy a bond, you do not get an ownership interest in the business. As a lender, you receive fixed interest payments over the bond’s life. In addition, upon the bond’s maturity, you are entitled to repayment of the face value, or principal, of the bond.

Unemployment

Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is considered to be a key measure of the health of the economy. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force. An unemployment rate of around 3.5% is considered to be ideal. Any rate lower than that is assumed to stifle movement between jobs, an essential feature of a vibrant society.

Yield

Yield is the earnings generated and realized on an investment over a particular period of time, usually quarterly or annually.  It is expressed as a percentage based upon the invested amount, current value, or the face value of the investment. Earnings used to compute a yield include the interest earned or dividends received from the investment. Depending upon whether the investment has a fixed or fluctuating value, yield may be classified as known or anticipated.

Bottom Line

I hope you now have an understanding of the above economic and financial terms that the media uses. You may find it helpful to keep a copy of this blog handy just in case you need to refer to it. Thank you for being such a committed reader. Please let me know if I can make my blogs more enjoyable.

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Note: Views contained in this invited blog are those of Travis Smith and do not necessarily reflect the views of our Board of Advisors. Sid Mittra 

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Travis J. Smith, CFP^®

I am very honored that Sid Mittra has asked me to be a guest writer on his blog. While I began investing at the age of thirteen, my professional journey started in 2006. On a breezy spring day in Grand Rapids, I graduated magna cum laude from Grand Valley State University with a degree in finance, and I was ready to conquer the world. Little did I know that my most valuable education was still ahead of me.

The summer of 2008 was ending, and I was a young advisor learning the industry and studying for my upcoming CERTIFIED FINANCIAL PLANNER^TM exam. Suddenly, and with little warning, the US economy and the US stock market began their extreme free fall. Years of excess leverage in financial markets was being unwound at a dizzying pace, and large financial corporations started going bankrupt. Each day, I woke up and immediately checked the markets. And each day, the stock market would be indicating another very bad day for investors. This continued unabated for months. Frankly, it felt like the US stock market was heading to zero, and I began wondering if I had picked the proper career. By spring of 2009, the S&P 500 Index had fallen -55%, and the economic news was bad and getting worse. Long-time market investors came on television to say that they had sold everything and went to cash. Everyday, we fielded calls from anxious clients wondering if they should do the same.

Then, for no apparent reason, the US stock market put together a string of very strong days in March 2009. As this robust rally continued, the panicked phone calls from clients started to wane. In fact, we actually started receiving a few calls from clients that now wished to purchase! While the economic headlines continued to deteriorate, the S&P 500 Index finished +26% higher in 2009. The strong gains continued and, by 2012, the S&P 500 Index had fully recovered everything it had lost from the fall. 

Fast forward to today, and the news is almost the opposite. Instead of witnessing a once in a lifetime economic collapse, the last 10 years have given me a front-row seat into one of the best 10-year periods investors have ever seen.

Why am I telling you this? As a millennial CERTIFIED FINANCIAL PLANNER^TM who has helped clients young and old navigate their way through two of the biggest bull and bear markets in the last hundred years, I believe I offer a unique perspective for investors. 

In the spirit of Sid’s distinctive writing style that we have all grown accustomed to by now, I wanted to present my own acronym. The acronym is CROPS because I believe investing is a lot like farming. In order to receive a plentiful harvest, a farmer must start taking the right provisions today. Please journey with me as I share some of my most valuable investing lessons.

C-R-O-P-S

C is for compounding – Did you know that the life of Warren Buffett would look a lot more ordinary if he had saved and invested like many Americans? If Warren began investing at age 30 and then cashed out his portfolio at age 60 for a life of ease on the beach, his net worth would be approximately $5-10 million today¹. Even though Warren averaged superior investment returns over this time frame, a 30-year investment period is simply not very long for any individual.

Fortunately for Warren, this is not his actual story. Warren began investing at 10 years old and continues to be fully invested today – at age 91. And he’s still working and earning the same $100,000 salary he’s made for the last 40 years! This 81-year period of compounding is why Warren is not worth $5-10 million today – but instead, over $100 billion! And even more astonishing is that more than 90% of Warren’s wealth has been amassed after his 65^th birthday.²

The point of Warren’s story is to illustrate how important time is for investors. The process of investing always starts slow and ends big. The more years you are able to work and invest, the larger your end number will be. This is directly due to the mathematical beauty of compounding. 

Think about it: In a $100 portfolio, a yearly return of 10% is enough to buy lunch. With a $1,000 portfolio, a 10% return is enough for a night on the town. A 10% return inside a $100,000 portfolio is enough to pay for your car lease for a few years. And, with a $1 million portfolio, 10% can be a full-time salary (This is a hypothetical example for illustration purposes only.)

But instead of taking your gains out, compounding reinvests these profits to buy even more investments. And, as you purchase more investments, it becomes easier to make even more. The moral of the story: the earlier you invest, the longer you work, and the longer you stay invested are easily the most significant determinants toward your future net worth. 

“The nature of compound interest is it behaves like a snowball of sticky snow. And the trick is to have a very long hill, which means either starting very young or living to be very old.” Warren Buffett

R is for rebalancing – Let’s say you come into the new year with an investment portfolio all your friends wish they had been invested in. Each of your investments have significantly out-performed over the last year, and you are sitting on extraordinary gains. What could possibly be wrong with this picture? Unfortunately, investments do not care about past history. Just because an investment has done well in the past does not necessarily make it any more likely to do well in the future. 

From an allocation standpoint, there are nine major investment classes in US stocks and nine more in international developed market stocks: from small-cap value to large-cap growth and everything in between. When you add in other major investment asset classes (US High Yield Fixed Income, Real Estate Investment Trusts, Emerging Markets Stocks, Municipal Bonds, International Fixed Income, Commodities, US Treasuries, etc.), investors have close to 30 major investment classes to choose from.

To make matters even more difficult, the relative performance of each asset class is ever changing. In 2020, the best asset class was Chinese stocks, and the worst asset class was commodities. In 2021, the best major asset class was commodities while the worst was Chinese stocks.³ Talk about a head-spinner!

What is an investor to do? The optimal portfolio is a diversified portfolio composed of many different asset classes. This ought to include assets that are negatively correlated (or at least lowly-correlated) to one another. This smooths out your returns and reduces portfolio volatility. The portfolio allocation should contain risk levels that match your risk tolerances, and be actively rebalanced at least once a year. Usually, this means trimming your winners and adding to your losers, so that you don’t let investment performance determine your long-term asset allocation. Please consult a financial professional for help as each person’s situation is unique.

“The beauty of periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard.” Benjamin Graham

O is for optimism – When it comes to successful long-term investing, the single greatest trait one can possess, in my opinion, is optimism. Humans are hardwired to be better at protecting against losses than achieving gains. According to many scientific studies, the pain of losing is psychologically about twice as powerful as the pleasure of gaining. ⁴  

The consequences of this for investors are many. Namely, it is very easy for investors to sell investments if they hear something concerning on television or see an investment decline in value in the short-run. This often results in poor market timing. 

Every year DALBAR conducts a market study using investor inflows and outflows to see how average investor performance compares to that of the stock market. For the 20-year period from 1/1/2000 to 12/31/2020, DALBAR found that the average investor’s average annual return was +5.96%. This compares to the +8.29% average annual return of the Global Equity IFA Index Portfolio 100 over the same time period. In other words, investors’ poor market timing caused an average underperformance of 2.33% per year over this 20-year period. While a couple percent per year may not sound like that big of a deal, if both portfolios started with a $200,000 initial investment, the difference between the two portfolios would be $347,032 by year 20!⁵ (This example is for illustration purposes only. Actual investor results will vary.)

What is an investor to do? It may seem counterintuitive, but, outside of annual rebalancing, the best thing an investor can do is usually nothing at all. The stock market continues to be the single greatest wealth creator in the world. The more you deviate by getting in and out, the lower your long-term probability of success.

“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.” Benjamin Graham

P is for market predictions – Did you know that, since the data has been tracked, Wall Street strategists have never predicted a negative year over the last 15 years? ⁶ In other words, predictions can be fun, but an investor should never base investing decisions on a single forecast.   

What are the best things to do instead? Gather some third-party research. Study technical analysis. Review what the actual management of the investment are saying. Consult an investment professional. Analyze the past performance of the investment over a full market cycle to get a better feel for possible future volatility. 

“Forecasts usually tell us more about the forecaster than of the future.” Warren Buffett

S is for investment selection – We previously discussed the many different asset classes and the need for rebalancing, but we have not covered the specific investments, themselves. The main types of investments available in the market today include: individual stocks, individual bonds, CD’s, mutual funds, ETF’s, money market funds, annuities, life insurance, commodities, and structured products. Each of these product types has its benefits and drawbacks. Before purchasing an investment, make sure you are purchasing the right asset for you and your current investing needs.

Lastly, investors ought to know that there is a growing segment of investments that pride themselves on being ESG, or socially-responsible. It is easier than ever to build a financially sound portfolio today that aligns with your personal principals. Examples of the types of themes that are available for investment include: environmentally-friendly operations, investments in renewable energy, diverse and welcoming management, strict limits on executive compensation, profits going to charitable causes, fair treatment of animals, the exclusion of alcohol/tobacco/firearms, and investments that align with religious beliefs. It’s an exciting time for socially-conscious investors!

“Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical.” John Templeton

Thank you for staying with me all the way until the end! I hope you found this information helpful in your investment journey. As the great investor Benjamin Graham once said,

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” 

Travis J. Smith, CFP^®

Registered Principal

http://www.raymondjames.com/Oxford

Travis.Smith@raymondjames.com

Footnotes:

1. ‘Here’s the most overlooked fact about how Warren Buffett amassed his fortune, says money expert,’ Morgan Housel, Sept 8, 2020, CNBC.com
2. Bloomberg Billionaires Index, Bloomberg.com
3. Blackrock Return Map, Blockrock.com
4. Loss Aversion, Behavioraleconomics.com
5. Average Equity Investor as determined by Dalbar | Study sources, Dalbar 2020 QAIB Study, Morningstar, Inc. 
6. Fast Money podcast, 12/31/21, Carter Worth

Any opinions are those of Travis Smith and not necessarily those of Raymond James Financial Services.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation of any kind. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. All data, including performance data, is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Diversification, re-balancing, and asset allocation do not ensure a profit or protect against a loss.

Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Certified Financial Planner Board of Standards owns the certification marks CFP, Certified Financial Planner TM and, CFP in the US. which it awards to individuals who successfully complete CFP Boards’s ongoing certification requirements.

This information is not intended and should not be used for any official tax, lending, legal, or other non-financial planning purposes and should not be relied upon by third parties.  

Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

© 2022 Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

PART ONE

In American culture, the expression 100% occupies a venerable position. When we achieve 100% in any endeavor, we reach the pinnacle of success. To understand what it really means, I took two important steps. First, I numbered each letter of the alphabet, starting with 1 for A, 2 for B, and ending with 26 for the letter Z. Second, I started looking for a single word whose assigned numbers added up to 100. I eventually realized that the word ATTITUDE satisfied my criterion.

Attitude, one of life’s most important characteristics, comes in all shades and colors. Attitude can be good or bad, right or wrong, and even the basis for ultimate success or abject failure. 

PART TWO

I will now share with you three personal stories in which attitude played a defining role in influencing the outcome. I’m sharing these stories at the risk of this blog becoming “too personal,” so that I can personally vouch for their authenticity. 

STORY NUMBER ONE: Fulbright Scholarship Application

The year was 1951. At age 21 I had just become a research assistant at the Reserve Bank, India’s central bank, in Mumbai.  It was there that I learned of the Fulbright Foreign Student Program that grants scholarships that enable graduate students, young professionals and artists from abroad to study and conduct research in the U.S.  This program is intended to foster mutual understanding between the people of the U.S. and other countries, including India, through international educational and training programs. Scholarship applicants are seldom rejected if they are recommended by a foreign institution.

The year after I joined the Reserve Bank, A. Raman, my senior colleague, received a Fulbright scholarship and enrolled in Harvard University to further his studies. Raman was also given the option to extend his stay at Harvard if he wished to pursue a Ph.D. degree. I, in all my naiveté, decided I would be the next Reserve Bank research assistant to receive a Fulbright scholarship.  I pursued this dream and, after a lengthy and rigorous application process, I did get recommended by the Reserve Bank to receive a Fulbright scholarship. Upon receiving the news, I looked to the west and screamed: “Hello, Harvard; here I come.”

Following this recommendation, I was required to complete a lengthy Fulbright application and submit it to the United States Information Agency (USIA) office in Mumbai no later than April 16. Completing the application quickly turned into a nightmare. In India, college application forms were only two pages long and requested only factual information. By contrast, the Fulbright application had over two dozen pages, accompanied by long, explanatory notes and comments. It asked many strange questions like, “What, in your judgment, is the true value of higher education?” and “How would you be able to help your country upon your return?” A question that I found particularly formidable was, “Explain in your own words why we should award you a scholarship.” The stress of completing the application became unbearable, but I never gave up, realizing that I had to submit the application to the USIA by the April 16 deadline. The day after I submitted my application, I was summoned to an interview with Ms. Parseghian (Ms. P), the USIA office director. Not knowing what to expect, I showed up at her office the next day.

This is how the interview went:

Ms. P: Mr. Mittra, do you know the deadline for submission of this application?

Me: I sure do. It was April 16. I personally hand-delivered my application to your secretary on April 16.

Ms. P: Yes, we did receive your application on April 16. Unfortunately, you missed the deadline, which was April 10.

My heart stopped beating and my mind became numb. My dreams of a scholarship to pursue a Harvard Ph.D. had just gone up in smoke. Before I could recover, Ms. P showed me the page in the application that clearly stated that the application deadline was, in fact, April 10.

I remember sitting there, motionless. Ms. P then continued, “Mr. Mittra, from the look on your face I gather that you want me to ignore this slip-up on your part and treat your application as having been received on time. I can’t blame you, because had your application been received on time, you would have received a Fulbright scholarship. However, since you did miss the application deadline, I have little choice but to disqualify your application.” Then, after taking a deep breath she added: “It might be impossible for you to fully recover from this terrible blow. But I sincerely hope that this devastating experience will strengthen your resolve, and some day you will find another way to go to the U.S. to pursue advanced studies.”

Reflecting on this experience, it appears that Ms. P’s predictions were inexorably foreordained. I would never receive a degree from Harvard or, for that matter, from any other top-ranked U.S. university.

My cavalier attitude toward a submission deadline changed my life forever.  

As you will see in the next story, I had better luck securing a visa to live in the U.S.

STORY NUMBER TWO: U.S. Visa Application Process

Upon my arrival in the U.S. in September 1957 on a student visa, I knew that I wanted to make this country my home. That was, of course, wishful thinking, because, after graduating from college in the U.S. I, like all foreign students graduating from a U.S. college, would be given an 18-month visa extension to gain work experience. After that, foreign student graduates like me were compelled to return to their country of origin. NO EXCEPTIONS, THANK YOU.

As I was completing my 18-months of work experience, the Immigration Office reminded me of the impending expiration of my visa. My request for a waiver of the 18-month rule fell on deaf ears. In fact, I was advised that, unless I returned to my country of origin when my visa expired, I would be barred from entering the U.S. for life. Case closed.

I can say without equivocation that my attitude toward never giving up my desire to make the U.S. my permanent home played a decisive role in what eventually transpired. 

Phase One

After intensive research, and experiencing a stroke of good luck, I learned about and met Dr. Edward Holland of MIT, who was spearheading a project being financed by the U.S. Agency for International Development to create a model for Venezuelan economic development. I worked really hard to convince Dr. Holland that I had just the expertise he needed for his project. Once I sold him on the idea, I argued that, since his project was financed by a U.S. agency, I should be given a special visa to spend two years in Venezuela without violating U.S. immigration laws. My argument was successful, although with a strange twist. Since the U.S. did not have a special visa category that fit my situation, I was ultimately granted a two-year – are you sitting down – PAROLE visa. A permanent blemish on my immigration record, I’d say. 

Phase Two

As my two-year stay in Venezuela was coming to an end, with no hope for the future, I asked Dr. Jorge Ahumada, director of our Venezuelan host organization for help. He suggested that I approach Mr. Prasad, Director of the Asian Institute for Economic Development and Planning in Bangkok, a sister institution of the United Nations. That suggestion was a pleasant surprise, because Mr. Prasad was none other than my Mumbai economic advisor who had recommended me to receive a Fulbright scholarship. Suddenly, everything was falling into place. After Mr. Prasad worked his magic, I received the following letter:

Unbelievable as it may seem, it was this U.N. appointment and the issuance of a U.N. passport that permitted me to return to the U.S. and begin the process of obtaining my permanent resident status.

Phase Three

After entering the U.S. on a U.N. passport, I landed a teaching position at the University of Detroit, which sponsored my application for a permanent visa. Subsequently, I was granted an all-important permanent resident visa, which moved the infamous parole visa to the archives. Finally I was in my new home, free and clear.

My steadfast attitude toward my ultimate goal resulted in this miracle.

STORY NUMBER THREE: A Calm and Patient Attitude Pays Off

I was sitting in my financial counseling office on a cool fall afternoon in 1982 when a young girl came in, unannounced. My receptionist tried to stop her, but she insisted on seeing me without delay. Assuming that something serious was going on, I acquiesced.

The girl was 24-year-old Betty (not her real name), and she needed my advice on a strange personal matter. An 80-year-old multi-millionaire named Norm (not his real name) had approached her with a serious proposition.  If Betty agreed to marry him and remain his wife until he died, then his entire investment portfolio, net of taxes and charitable bequests, would be bequeathed to Betty. After Betty finished her story, I murmured to myself, “Get me out of here.”  I then advised Betty: “That’s entirely your decision. I can’t get involved in this.”

After reflecting on my response for a moment, Betty replied that she would agree to Norm’s proposition only if he agreed to turn over the management of his entire investment portfolio to me. She then asked if I was ready to take on that responsibility.

My answer was direct, if impolite. I said, “I am not licensed to manage any portfolio subject to such stringent conditions. So my answer is clear. Thank you, but no thank you.”

I think you can guess that this was not the end of the story.

After almost eight years I received a note from Betty advising that her husband Norm had passed away and providing the date, time and place of his funeral service. For some strange reason I felt obliged to attend.

When I arrived at Norm’s funeral service, Betty asked me to meet with her in a private room so that she could share something important. I obliged and, at our meeting, Betty reported that she had treated her marriage vow sacredly and stayed married to Norm all these years. But after Norm passed away, Betty was surprised to discover a note from him in which he directed Betty to do the following: a) sell all of his investments, which were jointly owned with Betty, and deposit the proceeds in their joint checking account; b) pay all estate and income taxes that were due; and c) withdraw the remaining money, stash it in a box and place it securely in his casket.

I was flabbergasted to hear Betty describe this incident in such a calm fashion. But I presumed that since the money in their joint account now legally belonged to her, she had no responsibility to carry out Norm’s wishes and that the case was closed.

I was wrong.

After taking a deep breath, Betty spoke again, this time with an incredibly commanding attitude toward solving the convoluted mess: “Dr. Mittra, out of respect for my late husband I will follow his wishes, with one slight exception. Instead of stashing all the cash in a box, for practical purposes, I will write a check for the money remaining in the checking account, put the check in an envelope and place it securely in his casket before burial. When the check is not cashed in six months, the bank will be legally obligated to void the check and all the money in the checking account will be mine.”

As unrealistic as Betty’s story sounds, I’m sharing it with you because I honestly believe that the thought process behind her handling of an emotionally charged issue was very creative. 

I have never experienced another incident where someone’s calm and calculated attitude turned a potentially disastrous outcome into such a winning strategy.

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

PART ONE

TAXABLE INCOME FOR 2022

The IRS recently announced 2022 inflation adjustments to several tax provisions, some of which are summarized below.

1. Standard Deduction:

Taxpayer	2022 Deduction	Increase
Married, filing jointly	$25,900	$800
Single	12,950	400
Head of Household	19,400	600

2. Tax Brackets:

The threshold for each tax bracket is higher for 2022 so, if possible, it might be beneficial to shift income to 2022. See the attached chart for a comparison of the new tax brackets with this year’s tax brackets.

3. Other

(a) The Earned Income Tax Credit will increase from $6,728 to $6,935; the gift tax exclusion will increase from $15,000 to $16,000; and the estate tax exclusion will increase from $11,700,00 to $12,060,000.

(b) Pending legislation would lower the top income bracket threshold and increase the top-bracket tax rate.

PART TWO

YEAR-END TAX PLANNING

Below are selected tax and financial planning actions you should consider taking before the end of 2021.

1. Claim Any Tax Losses. With the U.S. stock market having another strong year, it is easy to overlook the possibility that you may have tax losses in your investment portfolio. If so, you might consider realizing these tax losses before year-end.

2. Roth IRA Conversion. Converting your IRA to a Roth IRA requires you to pay taxes now on the amount converted, but allows you to make future withdrawals from the Roth IRA tax-free.  In addition, there is no Required Minimum Distribution (RMD) from a Roth IRA.

3. Social Security Benefits. If you are age 72 or older and have postponed receiving Social Security benefits, start receiving your benefits now, because the amount of your benefit will no longer increase if you postpone receiving your benefits beyond age 72.

4. Review Financial Plan. Year-end is an ideal time to review your financial plan, with special emphasis on your investment portfolio. Actions to consider include: (a) rebalancing your portfolio; (b) reviewing your savings plan and anticipated cash flow for next year; and (c) updating your financial plan to reflect changed financial conditions affecting you and your family.

5. Medicare Insurance. Each year, from October 15 through December 7, Medicare beneficiaries can change their plan to make sure that it best suits their current needs.  If you are a Medicare beneficiary, you should review your plan annually during this window of opportunity. (Note: By the time this blog is posted, it will be after December 7, 2021; but I hope that if you are not happy with your current plan, you will remember to consider changing it during the next window of opportunity.)

6. 401(k) Investments. If you are currently contributing to an employer 401(k) plan and have not maxed out your contribution for this year, you should consider doing so before year end, particularly if you have not taken advantage of your employer’s matching contribution amount.

7. Wealth Transfer Strategy. If you are considering creating a grantor-retained annuity trust (GRAT) to transfer assets to a beneficiary, subject to your right to receive annuity payments from the trust, you might consider doing so now because President Biden’s proposed Build Back Better Act may limit the use of GRATs.

8. Consider Cybersecurity Actions. Given the frequency with which personal information falls prey to professional hackers, it is imperative that you make it a top priority yet this year to take appropriate steps to protect financial and personal information stored on your computer and elsewhere.

9. RMD Strategy. If you have a traditional IRA (not a Roth IRA) you are required to start making withdrawals from the IRA upon reaching age 72.  The amount you have to withdraw depends upon your age, life expectancy and your IRA account balance.  Almost always, these withdrawals result in positive cash flow, and the amount withdrawn is taxable at your ordinary income tax rate.  As a result, cash flow and tax planning are important. 

One option to minimize the tax impact of RMDs is to donate all or a portion of the RMD (up to $100,000) directly to a 501(c)(3) charitable organization or an educational institution.  If you have not made a RMD for 2021, RMD planning should be high on your “to do” list before the end of the year.

10. Review Insurance Policies. Insurance policies perform a variety of functions, ranging from providing death benefits to the insured’s beneficiaries to providing a source for money through borrowing or surrendering the policy. Year-end is a good time to review all of your insurance policies, making any changes necessary to reflect your current insurance needs.

PART THREE

CURRENT INFLATION IS TRANSITORY NO MORE

In a blog I posted only a few weeks ago. I cautioned against strong monetary or fiscal actions to control the transitory inflation. My only saving grace is that I made that suggestion before the appearance of THE omicron COVID variant. Its worldwide spread, coupled with all the unknowns surrounding this new variant, make it likely that the uncertain nature and duration of the current inflation will be a challenge for all concerned.

In a few weeks I plan to publish a comprehensive blog on the complexity of the current inflationary environment, of which a dangerous side effect is a wage-price spiral. But for now, I will merely summarize five elements of inflation that are widely discussed among the policymakers, including the Treasury Secretary and the Fed Chairman.

1. The Worst Inflation in 31 Years: The Consumer Price Index increased 6.2% in October from a year earlier, its highest increase since 1990.

2. Buying Spree among Consumers Continues Unabated. Retail sales increased by a whopping 1.7% in October.

3. Blame Game for Current Inflation Continues with Vengeance. Blame for the current inflation is being assigned to the President, the Fed Chairman, the labor shortage, the supply chain fiasco and corporate greed.

4. The Future is Cloudier than a Snowstorm in Alaska. No one has any idea what is the best way to solve the inflation problem. Experts are hopelessly divided. Some link the spike in prices to the economic recovery. Others blame sellers for unfairly raising their prices. And of course, there is the unknown impact of the ongoing COVID pandemic and the omnipresent political stalemate.

5. Total Confusion Abounds. Americans are flush with cash and have high paying jobs. And yet, the majority of Americans think that the economy is awful.

A caveat is in order. In view of the massive confusion that surrounds today’s inflation, you might consider making appropriate adjustments in your life style and/or spending habits to prepare yourself for whatever the future has in store. I wish you Godspeed.

BOTTOM LINE

Because of space constraints I’m unable to discuss many side issues, such as (i) calculation of next year’s RMD based upon your IRA’s December 31, 2021, account balance; (ii) estimation of amounts that should be withheld from next year’s RMD to cover federal and state taxes; (iii) review of your charitable giving budget for next year; (iv) determination of whether to itemize deductions or take the standard deduction; and (v) estimation of any potential long-term and short-term capital gains and losses resulting from possible future asset sales. Still, I believe that you will have found this blog of some value. 

I wish you luck as you complete the year-end task at hand. But P-L-E-A-S-E do not forget to have fun during the holidays.

TAX BRACKETS

Married Filing Jointly

2022 Tax Bracket	Tax Rate	2021 Tax Bracket
0 to $20,550	10%	0 to $19,900
Over $20,550	12%	Over $19,900
Over $83,550	22%	Over $81,050
Over $178,150	24%	Over $172,750
Over $340,100	32%	Over $329,850
Over $431,900	35%	Over $415,850
Over $647,850	37%	Over $628,300

Single

2022 Tax Bracket	Tax Rate	2021 Tax Bracket
0 to $10,275	10%	0 to $9,950
Over $10,275	12%	Over $9,950
Over $41,775	22%	Over $40,520
Over $89,075	24%	Over $86,375
Over $170,050	32%	Over $164,925
Over $215,950	35%	Over $209,425
Over $539,900	37%	Over $523,600

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

During my years as a financial counselor, I regularly reminded my affluent clients that death is inevitable; approaching it unprepared is not. That’s why I consider my own failure to be prepared for the death of my wife to be unconscionable.

I present this blog in the hope that my readers will become fully prepared if, someday, they have to deal with the death of a spouse.  

KEY END-OF-LIFE ACTIONS

In this blog, I will address the following key actions that should be addressed following the death of a spouse (with the actions highlighted in red being of utmost importance).  

• Immediate Actions
  • Death Certificate
  • Notification to Family and Friends
  • Memorial Service
  • Notification to Accountant and Attorney
  • Paying Off Bills

• Critical Actions
  • Review Health Care Coverage
  • Bank and Credit Card Accounts
  • Reregister Financial Assets
  • Legal Arrangements

• Personal Actions
  • Legacy for Deceased Spouse
  • Personal Representative
  • Preference for Life Sustaining Treatment
  • Care for Aging Parents

 Below is a brief discussion of each of the above key actions. 

A. IMMEDIATE ACTIONS

1. Death certificate. The first order of business to be addressed following the death of a spouse is to obtain multiple copies (perhaps as many as 30) of the deceased’s official death certificate. It’s amazing how many institutions require that a death certificate be provided before the institution can take any desired action.

2. Notification to Family and Friends. The death of a spouse is a highly emotional time for the survivor, so it can be easy to inadvertently fail to notify people who should not be overlooked. Preparing a list of these people prior to it being needed can come in handy when the need for the list arises.

3. Memorial Service. The memorial or funeral service is for both the bereaved family and the deceased’s friends.  It is important, however, to respect the wishes of the deceased when planning the service. For instance, some may want their service to be a unique celebration of their lives, while others may want nothing more than a simple burial or interment of their ashes. Detailed end-of-life planning is helpful to assure that the wishes of a deceased spouse are considered when the bereaved survivors plan the service.

4. Notification to Accountant and Attorney. This task is often neglected, and it can be handled simply by providing them with a death certificate. 

5. Paying Bills. Bills are often set aside for future attention, particularly following the death of a spouse. Do not make this mistake. To avoid paying interest, late penalties and hassles, make sure these bills are paid before their due dates, even if there is any question about their validity.

B. CRITICAL ACTIONS

1.  Review Health Care Coverage. If a deceased spouse’s health care policy covers both the deceased and the surviving spouse (and possibly any children) it must be replaced by a new or modified policy. This can be easier said than done, since the health care needs or desires of the deceased spouse’s survivors can be different than those of the deceased spouse.  For instance, the surviving spouse may wish to have different coverages and copays. It is imperative to promptly address this issue. 

2. Bank and Credit Card Accounts. A death certificate needs to be provided to these institutions, and joint and other relevant accounts need to be transferred into the name of the surviving spouse.

3. Reregister Financial Assets. Ownership of joint investment accounts needs to be transferred into the name of the surviving spouse. Similarly, 401(k) and other retirement accounts of the deceased spouse need to be dealt with and transferred to the surviving spouse if appropriate, while in all cases complying with applicable tax laws and rules.

4. Legal Arrangements. Finally, all legal documents that come into play upon a person’s death need to be reviewed and complied with. These include the deceased’s will, any trust documents, and the document appointing the deceased’s personal representative.  

C. PERSONAL ACTIONS

1. Legacy for Deceased Spouse. In my case, nowhere on my “Personal Needs” list did the issue of my wife’s legacy appear.  However, following her death, it occurred to me as something I wanted to address, and I undertook authoring a Memory Book.  At the risk of making this blog too personal, I have included below a link to my wife’s Memory Book, which can be used as a guide for any readers who are interested in exploring the option of preparing a Memory Book for their spouse.

https://drive.google.com/file/d/0B1YQOoVaxkUreVYzZnUyLVFnNDg/view?usp=sharing&resourcekey=0-PWrywD7SWo7YujPIGWjJwQ

I hasten to add, however, that preparing the legacy of a deceased spouse is a very personal matter, and the decision to undertake the task is entirely up to the surviving spouse.

2. Personal Representative. Designation of a personal representative is an important decision.  Acting on behalf of the appointing person, the appointed representative is, in times of need, authorized to make important decisions. Family of the appointing person should be advised who the personal representative is and what powers the representative has.

3. Preference for Life Sustaining Treatment. A personal representative’s appointment should clearly indicate the appointing person’s desires when it comes to undergoing life sustaining treatment. It is my understanding that medical professionals are required to prolong life, even by artificial means, unless the patient has formally indicated a desire not to receive life-sustaining treatment. Note: even after a decision is made in this regard, it can be changed by any person legally authorized to do so.

4. Caring for Aging Parents. If a couple is caring for aging parents, it is important to have a contingency plan in the event of the death of one of the couple. Often times, in such a situation, the surviving spouse gets busy with more pressing tasks and the needs of the aging parents are not dealt with, an outcome that should be avoided.

  BOTTOM LINE

In this blog, I have described important actions that should be taken after – and in some cases in advance of – the death of a spouse. However, there are other actions that are also important, such as designating which family members should receive specific personal belongings, selecting a funeral home, drafting an obituary, deciding on whether to be buried or cremated, notifying Social Security and the issuers of the deceased’s insurance policies and pension checks, designating preferred memorials in lieu of flowers, and so on.

If you found this blog useful, the time to begin thinking about the actions identified in this blog is NOW. Thank you. 

______________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

PART ONE

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

 Absence of Clear Definition of Inflation

On the other end of my cell phone was my old friend, Andrew. Here’s how the conversation went:

Andrew: You claim to be able to simplify complex issues so people like me can appreciate them. So why don’t I find anything published by you about inflation?

Me: How do you rationally analyze the topic of inflation where no two people accept the same definition of inflation?

Andrew: What do you mean by that? I don’t get it.

Me: Take a look at the following potpourri of randomly selected comments by a wide variety of people ranging from the U.S. President and the Fed Chairman to the single mother of two on Medicaid. This should answer your question. 

Comments about current inflation plaguing the U.S. Economy

1. Joyce (Housewife): I can’t believe how much more food costs today than it did a year ago. Just the price of milk alone has jumped 44%, not to mention the ridiculously high prices of beef, tomatoes, and fruit.	2. Hannah (Nurse): I made good money during the pandemic due to lots of paid overtime and increased wages. While burnt out from batting COVID-19, at least inflation is not a worry of mine.
3. Sonny (Truck Driver): Sure, gas prices are really high, but my employer pays it – not me. I just received a 40% increase in my salary due to a lack of supply of qualified drivers. Still it seems I need more money to cope with high prices.	4. Cynthia (Single Mother with two little children): President Biden promised child care but then dropped it from his latest plans. Nobody seems to care about people like me. I am working three jobs, but I still can’t make ends meet. And now this inflation has forced us to cut back on everything. This is the worst country for us to live in.
5. Don (Finance Professor): I am not that worried because what we are seeing is the demand that built up during the pandemic temporarily exceeding the supply of goods and services. Soon things will be back to normal, and inflation will be reduced. All we need to do now is just to be patient.	6. Bob (Recent College Graduate): I had to borrow tons of money just to attend college. Now that I have graduated, I feel the pressure of being burdened by massive student loan debt. Biden indicated that my loans would be forgiven. Then he changed his mind. The one piece of good news is that I have multiple possible employers fighting over hiring me. Workers with the right skills are really in demand right now.
7. Kathy (Executive, Fortune 500 Company): My stock price keeps rising and 2021 will be a record year for me! But I’m still worried that I will have to pay higher taxes in the future. Someone will be forced to pay back all our nation’s debt, and it sounds like legislators want that person to be people like me.	8. Mark (Retired Teacher): I worked my tail off all my life and saved every penny I could. With all my money in the bank, inflation is eating away at my life’s savings. My expenses keep going up every week but my retirement income remains the same. Inflation is so unfair to old people, many of whom are poor.
9. Joe Biden (President): This inflation is caused by a shortage of supply. As soon as that problem is solved, inflation will ease up.	10. Jerome Powell (Fed Chairman): The inflation we are experiencing today is a temporary phenomenon. We are confident that the inflation rate will decline back to its long-term rate of around 2% very soon.

I hope that the above comments provide a compelling justification for my hesitation to undertake a systematic analysis of inflation.  

Equating Average Inflation with Individual Price Increases

Beverly is hopping mad at the government for misleading the general public about inflation. She is fully aware that recent price increases have ranged anywhere from 59% for fuel oil to 7% for postage and delivery services. And yet, the government boldly announces that inflation (as measured by the Consumer Price Index) in October rose by only 6.2%. And the scheduled increase for social security recipients is only 5.9% (not counting the rise in Medicare costs).

In order to prove her point, Beverly has created the following table that shows the price increases of various good and services.    

Annual Price Changes, October 2021

Fuel oil +59%	Gasoline +50%	Car & truck rentals +39%	Piped utility gas +28%
Used cars & trucks +26%	Hotels & motels +26%	Beef & veal +20%	Bacon & sausage +15%
Home furnishings +13%	Beds +12%	Eggs +12%	Televisions +10%
Cars & trucks +10%	Men’s suits, etc. +9%	Women’s dresses +9%	Computers +8%
Children’s footwear +8%	Postage & delivery +7%	Foreign travel +7%	Fruit +6.5%

Based on her collected data, Beverly swears that she will never again believe in government pronouncements. Not surprisingly, she is not alone. The reason for this confusion? Many people do not realize that the prices of individual items may bear little resemblance to the prices of all items included in determining annual price change percentages.  If that is the case, what other means, short of resorting to Finance 101 lessons, do I have to address the basic problem of inflation?

Mixed Picture of Inflation

It is important to recognize, however, that notwithstanding current inflationary pressures, there is lots of good news when it comes to the economy which, along with the stock market, is strong. The unemployment rate is fast approaching an historic low. Hourly wage rates are rising. The stimulus package succeeded in severely curtailing the misery that the pandemic unleashed on the country. Finally, thanks to the development and rapid government approval of multiple vaccines to prevent COVID-19 infections, new case rates have fallen to less than half of their September 2020 peak (excluding the most recent resurgence of COVID cases). 

But all is not well. The supply chain is paralyzed, which is contributing to significant price hikes on a large number of products and services. In the short term, and especially during the Thanksgiving and Christmas holiday season, people are panicking due to the sudden increase in basic food and gas prices.  

Perhaps the most ironic news is that, although Americans feel good about the stimulus package, the robust job market, and the passage of the infrastructure bill, an October 2021 Gallup poll found that 68% of respondents believe that economic conditions are getting worse.

There are ways to explain this confusing irony that require getting into politics, which is beyond the scope of this blog. So, it is best that I leave it up to you to find a plausible explanation for this dilemma.

In Part One I have explained the difficulties involved in finding a viable solution to the problem of inflation. In Part Two I will suggest a framework for addressing the inflation problem we face today.

 PART TWO

I begin Part Two by describing the features of past and modern inflation theories. I will then suggest a theory to address the inflationary problem currently plaguing the U.S economy.

Past Inflation Theory. In 1966, in my Econ 201 course, I presented the then prevailing theory of inflation as follows: Inflation occurs when demand for a good or service exceeds its supply, and its price increases. Increasing the supply or reducing the demand for the good or service should cause the inflation to disappear. Starting in 1914, the task of controlling inflation was assigned solely to the Federal Reserve, and the government did not interfere in the Fed’s monetary policy decisions. This theory was simple and easy to apply.  

Alas, I truly miss the good old days. But the world keeps changing and we must change with it.

Recent History of Inflation: A Digression.  Inflation began an upward spiral in the mid-1960s and reached more than 14% in 1980, an era defined as the Great Inflation (named after the Great Depression of the 1930s). Inflation eventually declined to average only 3.5% in the latter half of the 1980s, and stayed relatively low until the current pandemic caused an increase in the second half of 2021. The Great Inflation resulted from Federal Reserve and government policies that allowed for an excessive growth in the supply of money. In fact, the whole situation got so convoluted that professionals ultimately adopted the following acronyms to define the nature of inflation that paralyzed the economy: Demand-pull Inflation, Cost-push Inflation, Supply-side Inflation, Open Inflation, Repressed Inflation, and finally, Hyperinflation. These terms were used to define the cause of inflation due to increased public spending, hoarding, tax reductions, price increases in international markets and, above all, lack of a cohesive inflation theory. While it is beyond the scope of this blog to explain in detail the nature of each of these terms, I listed them here merely to acknowledge the basis for the modern inflation theory that evolved in the 1980s.

Modern Inflation Theory

This is a complex subject, and in trying to simplify it, I run the risk of omitting and distorting some elements of the theory. That being said, here is the gist of what constitutes Modern Inflation Theory.

Demand-Pull Inflation. This inflation is caused when there is an excess of demand relative to the available supply of goods and services at existing prices. Since this inflation is due to excess demand, it is considered controllable by monetary and fiscal policies that reduce demand.

Cost-Push Inflation. This inflation occurs when prices increase as a result of increases in the cost of production. Production costs usually rise due to an increase in the cost of raw materials and wage increases.  This inflation is not easily controlled by fiscal and monetary measures which, in turn, can increase unemployment and slow economic growth.  

Mixed Demand Inflation. Many economists believe that the actual cause of inflation is neither entirely demand-pull nor cost-push. Instead, a combination of both is a condition called mixed inflation.

This version of inflation results from elements of both demand-pull and cost-push inflation. The major difference between these two inflation theories centers on the responsiveness of both wages and prices to changes in demand. Those who believe that there is wage and price flexibility in the economy argue in favor of demand-pull inflation because such flexibility renders it impossible for any cost-induced inflationary trend to sustain itself. On the other hand, those who believe that wages and prices are not flexible, emphasize the cost-push theory of inflation. Neither approach taken by itself should be considered a completely satisfactory explanation of the cause and nature of inflation. Both approaches are supplementary, rather than competitive (or alternative), explanations for the cause of inflation.

Pandemic Generated Inflation. I advise caution regarding this cause of inflation because I only identified it as I was preparing this blog, and it hasn’t been validated. The COVID-19 pandemic created a unique situation where the government blocked both supply and demand in order to contain the pandemic. Additionally, legislation passed trillion-dollar bills that further increased market demand and labor prices. At the same time, the Federal Reserve kept interest rates close to zero – spurring even more demand and providing savers with little or no interest to keep up with inflation.  This action created an unrealistic situation, making it impossible to determine how both the supply and the demand for goods and services would interact after the restrictions and limitations imposed by the federal and state governments were eased and ultimately lifted. For instance, if the supply of goods and services continued to be blocked due to these actions, but demand was not restricted, a temporary surge in inflation would be inevitable. In such a situation, any attempt to adopt restrictive long-term policies to reduce demand would certainly be highly unproductive, if not downright detrimental.   

Past is the Best Guide for the Future. It is customary for policymakers to seek guidance from the past when implementing new policy measures. That’s why I was delighted that, in July 2021, the Council of Economic Advisers published a thoughtful article entitled Historical Parallels to Today’s Inflationary Episode. This article convincingly argues that the current inflation resembles the post-World War II inflation and not the stagflation we experienced in the 1970s. Intrigued by this newfound knowledge, I prepared the following table that compares these two inflationary cycles.

Inflationary Features	Post-World War II Inflation	1970s Inflation
Highest inflation rate recorded	20%	20%
Prevailing inflation theories	Inflation is the result of excess money supply	Demand-Pull Inflation, Cost-Push inflation, Supply-Side inflation, Open Inflation, Repressed Inflation, Hyperinflation
Wage-price spiral	Definitely not	Definitely yes
Nature of Inflation	Transitory, though not recognized as such at the time	Semi-permanent
Did inflation control lead to a recession?	Yes, in 1948-49 because of misguided inflation control policies	Yes, but as a result of Fed Chair Paul Volcker’s necessary restrictive policies
Did pandemic-like condition exist?	No	Not really; but an oil embargo did create a unique problem
Which policy measure is more applicable in today’s hyperinflation environment?	This experience is more applicable because inflation was transitory	This experience is not applicable because it was completely different from today’s prevailing environment

This table reveals two important facts. First, it is human nature to quickly adopt major contractionary measures when confronted with the type of significant price increases we are facing today. Second, as the Post-World War II experience taught us, if public support can be mustered, patience may be the best option for today’s policymakers when it comes to fighting the current inflation. Also, to these facts a third one might be added to complete the picture. There is one major difference between the post-WWII inflation and today’s inflation. As compared to today’s rock bottom status, interest rates during the post-World War II period were much   higher.  That meant that savers in the late 1940’s and 1950’s were earning higher interest which offset some of the price increases. Clearly, savers today do not enjoy that luxury.

Now that we have reviewed the current situation, it is time for me to suggest preferred policy actions. It is true that the economy is overheated, and increased prices for items like and food, gas, new and used vehicles, and real estate are causing panic among consumers. However, it is also important to recognize that the GDP and employment are still below where they need to be to reach full employment. In addition, it is reasonable to expect that supply chain problems and ever-increasing consumer demand for goods and services would eventually ease up as the economy reverts back to normal. If this expectation is valid—and there are many skeptics who disagree—then it is best to learn from the policy mistake made after World War II and not make attempts to control the current inflation with severely restrictive contractionary policies.

That being said, as a realist I also recognize that what I just recommended is easier said than done. It is not surprising that our polarized nation makes it virtually impossible for the policymakers to adopt a mild-action posture as a preferred policy to control the current inflation. And so, having no other alternative I leave it up to the policymakers to take the best possible action in this highly polarized nation. 

 A Unique Perspective

Since Biden’s Infrastructure Bill just became law, and the critics are predicting that the country is fast approaching bankruptcy, it is interesting to recall a similar incident that took place in 1956 when President Dwight Eisenhower signed the Federal Aid Highway Act. It is true that at that time the nation was facing modest inflation and even occasional deflation so the situations are not directly comparable. Despite that fact, however, there were loud voices among the policymakers expressing deep concerns that the resulting expenditures would generate uncontrollable inflation and ruin the economy. Fortunately, to the surprise of many, only the opposite happened. From its inception, instead of creating massive inflation, the interstate highway system became an integral part of the American way of life by providing construction jobs and improving transportation options for many Americans. This is truly a valuable lesson for us to remember today even when the prevailing conditions are vastly different from those prevailing in the 1950s and 1960s.  

BOTTOM LINE

In this blog, I have presented in simple terms the complex issues surrounding the severe inflationary problem we are facing today. I found my task daunting, and occasionally overpowering. Still, I managed to accomplish my basic objective and hope that I succeeded in my overall mission. Did I succeed in my mission? I’d welcome your honest response.

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Travis Smith provided technical support for this article. However, the author takes full responsibility for the contents of this blog.

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