Time to take money seriously, gals

Men and women tend to handle money differently, which is to say men are more likely to save, pay bills on time and live on less than they make. We can do better.

Let me tell you a story.

Once upon a time, there was a world-famous photographer. She earned a seven-figure salary from a top magazine in addition to the tens of thousands her photographs and books commanded.

Now, according to a lawsuit filed in New York last month, she is being sued for $24 million she had borrowed and, evidently, cannot repay. She is in jeopardy of losing her homes and even the rights to her own art, decades of work.

This is the true story of Annie Leibovitz, one of the most successful photographers in history.

It's unwise, I know, to generalize too much from any one person's predicament, especially an extreme one like Leibovitz's. But there's still far too much evidence that many ordinary women are handicapped when it comes to money. And it's not a price we can afford to pay.

The female financial gap

A survey (.pdf file) released last month by Financial Finesse, an employee-benefits company, is one example:

• Only a third of women say they pay their credit cards in full each month, whereas two-thirds of men do.

• About 74% of women say they pay their bills on time each month, compared with 90% of men.

• Only half of women say they spend less than they earn each month, compared with 71% of men.

• Only a third of women, compared with half of men, say they have an emergency fund sufficient to pay their bills for a few months.

Now, who knows how accurate this survey is. It's based on 3,500 men and women nationwide who wanted to take a financial education class, provided by Financial Finesse, and filled out the company's online questionnaire. It's self-selecting and self-reported.

Still, I'd wager that respondents were trying to appear somewhat financially adept and cast their answers on the rosier side of reality.

Or let's say they didn't and were trying to be as truthful as possible. Either way, the results for the women are pathetic, especially when you consider that most respondents earned between $60,000 and $75,000 a year.

Income is no guarantee of money smarts, I know (see poor Ms. Leibovitz above). But if the more financially successful women are still lagging behind in basic financial management, that worries me.

No, I'm more than worried. I'm furious.

It starts early

After reading the above study, I went looking for a clearer picture -- from someone, anyone -- of women's financial status circa 2009.

I'll spare you the regression analyses and give you the CliffsNotes version of my research (which is still in progress):

• Women aren't taking themselves seriously as financial people.

• Women's lack of financial skills and acumen is putting them in deep financial danger -- in the short and long term.

And it starts early: Recent surveys of teenagers by Charles Schwab and Capital One find that even in high school, girls are not as financially confident as boys.

That lack of skills and confidence hinders women as they mature: Young men are almost twice as likely as young women to have individual retirement accounts or other investment accounts -- 21% of men versus 13% of women, according to a 2009 Schwab survey of 23- to 28-year-old adults.

It gets worse

The point isn't to slam women for being dumb (or dumber than men, which is dubious). The point is that their lack of day-to-day money skills and planning is likely to add up to profound deficits over time:

• Less than half of today's working women have access to a pension or retirement savings plan through their jobs. That's according to a June report by the Women's Institute for a Secure Retirement, a research and policy group in Washington, D.C.

• Of those who have access to a retirement plan, 72% of female heads of households participate in their plan, compared with 80% of eligible men, according to a survey of 5,000 401k plan participants in 2007 by the Employee Benefits Research Institute.

• And women who contributed to their 401k plans earned an average of only $57,000, compared with an average of $84,000 for men, according to a study by Hewitt Associates, a global human-resources company.

What does this all amount to? Let's just say that millions of women are on a collision course with poverty.

The combination of shortsighted spending and saving habits, plus generally lower salaries and less time in the work force (because of child rearing), means that many women's retirement benefits end up being about one-quarter the size of men's, according to the National Center for Women and Retirement Research. (Read more in "Why women fall behind in retirement.")

Nearly a third of women (29%) who are 65 and older are single and living close to the poverty line, according to the Social Security Administration.

Apparently, women aren't connecting the dots between their money habits now and where they are likely to end up in 10, 20, 30 or 40 years.

What will you do?

Clearly there are societal factors that need to change (equal pay for equal work would be nice).

But in the meantime, my fellow countrywomen, our financial well-being rests in our own hands. What are you going to do about it? A few ideas:

• Join the Women in Red message board. The Women in Red motto -- "Financial sanity through community" -- works. Together, women learn to save, pay off debt (more than $4 million and counting) and tackle daily money problems in order to create enduring financial stability.

• Talk about money. Talk about spending, about saving, about how you want the future to unfold. Don't be afraid to ask questions.

• Take small steps. Rome wasn't built in a day, and my own financial journey has taken thousands of steps over the years. Keep moving.

• Learn. There are hundreds of financial resources -- Web sites, blogs, books -- many of them written in plain English. A new favorite of mine (short and easy to digest): money tips from DailyWorth.

Above all, get to know yourself as a financial person, and take that person seriously -- her fears, dreams and needs. If there's a money block in your way, get yourself a chisel (or a small grenade) and blast it out of your path.

5 downsides to 'cash for clunkers'

Automakers, car dealers and the White House are praising the rebate program. But the benefits may be less than advertised. And there may be hidden consequences.

The first $1 billion allocated to "cash for clunkers" rebates apparently helped boost car sales by more than 250,000 vehicles, bringing some much-needed cheer to depressed auto showrooms. So Congress added $2 billion to the program, which by extrapolation could increase sales by more than 750,000 units overall.

Carmakers are gleeful. And the Obama administration finally has some concrete evidence that extravagant government spending occasionally moves the needle.

But the buying spree, fueled by government rebates of up to $4,500, may not be quite the economic boost it appears to be on the surface. And there will probably be some of those pesky unintended consequences.

Here are a handful of reasons that cash for clunkers is likely to look a lot less successful when seen in the rearview mirror:

1. Some of those car purchases would have happened anyway. Analysis from car-research site Edmunds.com found that at least 100,000 car buyers put off a purchase earlier this year to take advantage of cash for clunkers, once they learned about it. So those sales would have happened even without the government giveaway.

And analysis of the steep discounts offered in 2001, after the 9/11 attacks, has shown that most buyers who took advantage of the sales simply moved up their planned purchase by a few months, creating a "payback" effect when sales dipped several months later. That's probably happening now.

"We have crammed three to four months of normal activity into just a few days," wrote Edmunds CEO Jeremy Anwyl in a Wall Street Journal op-ed.

If so, car sales could dip again this fall, slowing any momentum gained over the summer.

2. The used-car market might go haywire. Since clunkers that get traded in have to be destroyed, the program could take 750,000 vehicles out of the used-car market. That's about 5% of the market, according to kbb.com, or enough of a contraction to cause significant price hikes for used vehicles.

Kbb.com predicts there will even be a used-car bubble, with a shortage now leading used-car dealers to stock up on inventory. But when the clunker rebates end, dealers could end up with too many cars, causing prices to seesaw the other way.

A serpentine sales curve makes it much harder to manage a business and earn profits than a nice steady one.

3. The program could depress sales of other goods. Most consumers have only so much money to spend, especially in a recession. And while the rebates lower the cost of a new car, buyers are still adding a sizable new payment to their monthly budget.

Purdue University retail expert Richard Feinberg estimates that the average clunker-upgrader takes on an extra $400 in monthly car payments, which could divert $1.5 billion from elsewhere in the retail economy.

"After suffering from the worst holiday sales season since 1970," Feinberg says, "retailers will be facing an even more dismal 2009, in part because of the cash for clunkers program."

So the overall effect on the economy could be nothing more than a shift from one kind of retail spending to another.

4. Drivers could end up burning more gas. That's counterintuitive, since drivers must trade in their old car for one that gets significantly better mileage in order to get the rebate. But with a fresh ride in the driveway, buyers are likely to change their driving habits.

Surveys by research firm CNW Marketing Research have found that clunker-upgraders drove their old vehicle about 6,200 miles in 2008, barely half the typical annual mileage of 12,000. But most said they'd drive their new car more and take longer trips. CNW's math shows that if clunker-upgraders drive just 90% of the annual average mileage in the first year of ownership, they'll end up burning an extra 61 gallons of gas, even though they get better mileage. Multiply that by 750,000 vehicles, and cash for clunkers would result in an additional 46 million gallons of gas being burned.

As a consolation, the program will unambiguously cut down on greenhouse gas emissions, since today's cleaner engines more than make up for extra miles driven. CNW pegs the greenhouse-gas reduction due to clunker retirement at 92% or more.

5. Sticker prices could rise. For the past 18 months, there's been an oversupply of cars, since virtually all automakers failed to anticipate the sharp plunge in sales. The excess inventory has made it a buyer's market, with historic deals available on many models. But the automakers have curtailed production and whittled down their inventory, gradually bringing it in line with demand. Now, the sudden spike in demand generated by the clunker program has created unexpected shortages of some models.

That's the kind of problem the automakers don't mind, because it allows them to raise prices. As long as the clunker program is still in place, the government rebate will mask the increase for those who qualify.

But buyers who don't qualify for a clunker rebate will be more inclined to notice that prices are up and choice cars are harder to find. And the clunker rebates will end at some point, since the government can't subsidize car purchases forever. Or can it?

Big changes ahead for student loans

Proposed legislation would provide more federal loans to students and largely cut the private sector out of the lucrative market.

Private lenders are losing the battle over student loans. By this time next summer, they probably will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam.

On July 21, the House Committee on Education and Labor began marking up a bill, introduced by Rep. George Miller, D-Calif., that seeks to eliminate government-subsidized private student lending and replace it with direct loans to students through the Department of Education.

"This is the biggest change in federal loans for higher education since 1965, when the original program was created," says Terry Hartle, senior vice president at the American Council on Education.

Sallie Mae, NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services have been awarded loan servicing contracts by the Department of Education. But even with such a contract, the bill means "we would be about half of our size," says Martha Holler, a spokeswoman for Sallie Mae.

Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates it would save about $87 billion over the next 10 years.

"Among other things, the savings will be used to significantly boost Pell Grant scholarships (need-based grants given to low-income students), to keep interest rates low on need-based federal student loans for years to come, to simplify the FAFSA (Free Application for Federal Student Aid) form, to invest in strengthening community colleges," Rachel Racusen, the deputy communications director of the House Education and Labor Committee, said in an e-mail.

Lenders argue students will suffer

Lenders worry that the savings will be used to plug other budget gaps rather than to fund additional higher education financing. Already, Congress' plan dramatically would cut the level of Pell Grant entitlements envisioned in the Obama administration's proposal to address the issue of who should be in the student lending market. Under that plan, less than half the savings would have gone toward that grant measure, with the other money going toward other purposes.

Meanwhile, many lenders argue that with only direct lending, students would get less in the way of services. "We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders," says Christopher Chapman, CEO of Access Group, nonprofit student lender in Wilmington, Del. "We also provide the value-added services," such as financial education.

Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.

An overhaul for schools

For schools, the legislation translates into a major overhaul of their lending programs. Only about a quarter of eligible schools participate in direct government lending.

"To implement the proposal, about 4,500 schools would have to convert lending systems," Sallie Mae's Holler says. "It's not like putting a different disk in their PC; the whole system has to be reworked."

3 ways to get your 401k started

Young investors attracted to the simplicity of set-and-forget funds have gotten a real-life test of risk tolerance. Here are worthy alternatives to the easy, hands-off choice.

For 20-somethings new to 401k plans, target-date funds, which allocate investments and their corresponding risk according to your retirement date, have been an easy, hands-off choice.

But with many target-date funds taking a beating during the market collapse, some younger investors may be reconsidering the set-it-and-forget-it attitude and looking to take a more hands-on approach with their 401k plans.

"Not everybody can jump into a target-date fund and expect it to be what they need it to be," says DaRayl Davis, an investment adviser in Washington, D.C. "A target-date fund will only look at a certain time horizon, but it doesn't look at our risk tolerance in general."

For younger investors looking for more investment options, here are some alternative funds to consider:

Index funds. These low-cost funds seek to produce the same return you would get owning all the stocks in a particular stock index.

Davis says broad stock-market index funds -- which mimic, say, the Standard & Poor's 500 Index ($INX) or the Dow Jones Industrial Average ($INDU) -- are a good option for younger workers investing long term because, over the long haul, the market as a whole is likely to outperform any one individual stock or mutual fund.

And as market indexes recover from the steep slides of last year, index funds will gain value along with them.

You can diversify your risk by dividing contributions among index funds that follow riskier emerging markets and those following more-stable markets.

Balanced funds. These funds, which generally split investments 60-40 between stocks and bonds, may appeal to young investors who want to reduce the risk exposure in their 401k's. The goal of balanced funds is to avoid the sudden highs and lows of the markets and maintain steady growth. You might not be able to cash in on a hot new sector, but you won't be hit as hard if the market plummets.

"There's a danger with being too conservative, and there's a danger to being too aggressive," says Nancy L. Anderson, a financial planner in Sacramento, Calif.

Lifestyle funds. Rather than adjusting your portfolio to your estimated retirement date, lifestyle funds are built to match your risk tolerance by dividing money accordingly among stocks, bonds and money-market funds.

You should be able to choose from funds that are labeled as conservative, moderate or aggressive -- with the conservative funds more focused on bonds and the aggressive funds heavy in stocks. Some companies offer additional options like very aggressive and very conservative.

Some general wisdom: Regardless of your allocations, you should keep a close eye on your 401k and review statements each quarter to learn more about how the market works and what is happening to your money.

But try to rebalance no more than once a year -- and avoid drastic changes in response to a big market drop or rally.

"One of the mistakes people make in their 401k's is to continuously change their investments around," says Larry Rosenthal, a financial planner in the Washington, D.C., area.

It may help to sit down with a financial adviser to develop a long-term investment plan.

Dirty, dangerous jobs -- and in demand

Americans who have been unemployed for months are lining up for work that they would not have considered in the past.

Some of the dirtiest, smelliest, most dangerous jobs are suddenly looking a lot more appealing in this economy. People who have been out of work for months are lining up for jobs at places they once considered unthinkable: slaughterhouses, sewage plants, prisons.

"I have to just shut my mouth because I can't do anything about it," said Nichole McRoberts of Sedalia, Mo., who pictured more for herself at age 30 than working in a poultry plant, cutting diseased or damaged flesh off chicken carcasses.

Recessions and tight job markets always force some people to take less-desirable or lower-paying work than they are used to. But this recession has been the most punishing job destroyer in at least 60 years, slashing a net total of 6.7 million jobs.

All told, 14.5 million people were out of work last month, with a jobless rate of 9.4%. The result is that many people have had to seek jobs they would not have considered in the past.

Take Kristen Thompson. Before the recession, she worked at an upscale Los Angeles-area gym arranging pricey one-on-one personal training sessions. Now she's a guard at a women's prison in rural Wyoming.

After the gym laid her off last year, Thompson spent months looking for work. Even fast food restaurants failed to respond to her application. For each opening, dozens of other people seemed willing to work for less money. When she heard that a prison in Lusk, Wyo., (population 1,447) was hiring, she leapt at the chance.

In her new job, she patrols cellblocks and monitors the mess hall. Back in L.A., she never had to worry about inmates with weapons or drug stashes or prisoners getting into fights. Yet she's hardly complaining. It's a job.

"People have to pay the bills, so what we see is people kind of grasping at straws and taking anything that's available," said Matthew Freedman, assistant professor of labor economics at Cornell University.

The desperation of the long-term jobless has rippled through the labor force. More skilled and educated workers have filled clerical or restaurant jobs. So unskilled workers such as teenagers or high school graduates who once held most of those positions have displaced those even lower on the economic ladder, such as immigrants, Freedman noted.

The intensified competition has hurt all workers, even those who are still employed, because it shrinks wages. Employers don't have to pay more to lure workers.

That helps explain why personal income fell 0.1% in June, excluding the one-time benefits of the government's stimulus program. Wages have fallen each month since October -- a total of 5% over the past eight months.

Indeed, many people who have had to downshift to unsavory jobs have found they're now earning less, too.

With two kids to support and just a high school diploma, McRoberts has few options in the job market.

"I feel like I'm not accomplishing much," said McRoberts, who lives with her boyfriend and children. "I'm paying my bills and my rent, but that's it."

A year ago, McRoberts had a good job building tool boxes at Waterloo Industries. The work was fast-paced and fun. And the nearly $14 an hour was plenty for her and her boyfriend to pay the bills.

But as production slowed, Waterloo cut her hours. By February, she was out of a job.

Around Sedalia, some other employers had begun cutting staff, too. The result was a crowded job market and few openings.

As her options dwindled, McRoberts decided to apply at a Tyson Foods (TSN, news, msgs) poultry plant. She found work on the "re-processing line," where damaged birds are sent by Agriculture Department inspectors who spot bruises or sores on carcasses.

The plant is wet and noisy. McRoberts worries about injuries when nearby workers use knives to cut birds in a hurry. She fears being sliced during a moment of distraction.

McRoberts spends evenings searching the Internet for other openings, but they are scarce.

"Until things start booming again, I can't go anywhere else," she said. "Otherwise I would."

Work at poultry plants has often been done by recent immigrants, who now face more competition for such jobs.

"It's easy for someone like your middle manager to take on a job at a poultry plant, because they have the skills to do many things. But for the immigrant, that might have been the only option," said Catherine Singley of the National Council of La Raza, an immigrant advocacy group in Washington.

Tyson spokesman Gary Mickelson said the company has seen a rise in applicants at most of its processing plants and "an increase in the qualifications and experience of those applying."

"Some applicants have recently lost jobs or are underemployed and are attracted to the full-time pay and benefits we offer," Mickelson said.

When officials in Stamford, Conn., posted a single position at the local sewage plant, more than 300 people raised their hands -- about twice the number who would seek such jobs before the recession.

About 100 of them made the cut and were allowed to take a test and interview. The work: drying up wastewater sludge and operating chlorine tanks.

After months of unemployment, that job sounded appealing to 26-year-old Gary Cappiello of nearby Norwalk. Cappiello had worked in the maintenance department of a Target (TGT, news, msgs) store before being laid off in the spring of last year.

"I'm just applying for anything now, even if the job is low-paying or not a comfortable position," he said. "It's just getting to a desperate point. The bills need to be paid."

Recently, he found out he didn't make the cut at the sewage plant.

More fortunate is Ronnie Purtty, 50, who said he's grateful for his new job gathering trash in narrow St. Louis alleyways.

Purtty used to work in the air-conditioned cab of a truck, hauling steel to local factories. He was laid off last fall.

He spent four months looking for work before landing a job in March as a trash collector for the city's "bulk item" crew.

Wearing thick leather gloves, Purtty hauls sodden carpet, moldy mattresses and nail-studded lumber into a truck. As he sorts through mounds of garbage, he watches out for rats, spiders and raccoons.

He isn't complaining. It beats his long months of unemployment.

"I was blessed to get in here," he said.

The stock market's coffee craze

While Starbucks has staged a nice recovery, the real action has been in shares of smaller outfits such as Green Mountain, Caribou and Diedrich. Credit the K-Cup.

Despite a recession, these are hot times in the stock market for the coffee business. Shares of Green Mountain Coffee (GMCR, news, msgs), which reported impressive earnings July 29, are up about 160% in 2009. One small coffee wholesaler, Diedrich Coffee (DDRX, news, msgs), is up about 6,500% this year.

stocks

Even beleaguered coffee chains are bouncing back from steep declines in previous years. Starbucks (SBUX, news, msgs) shares have risen 85% in 2009, while second-place rival Caribou (CBOU, news, msgs) has seen shares more than quadruple in value (up 360%).

It's not that coffee drinkers haven't cut back somewhat on their daily caffeine fix -- at least outside the home. Last quarter, Starbucks' same-store sales were 5% lower than the year before.

Changing the business

But the coffee business has been surprisingly resilient in the face of the steep economic slowdown. At the same time, powerful trends -- new technology, changing tastes and new industry players -- have made many coffee stocks powerful investments.

Green Mountain Coffee got investors' attention with the success of its Keurig coffee brewers. Costing about $100 each, these brewers make single cups of coffee at home in about 30 seconds. "Every 10 or 15 years, something comes around that changes the way people drink coffee," says Scott Van Winkle, an analyst at Canaccord Adams. Easy to use and easy to clean up, "this is the new thing in coffee brewing," he says, noting sales of the brewers were up 187% last quarter.

On July 29, Green Mountain beat Wall Street expectations with earnings of 36 cents per share. Green Mountain doesn't just make money off the Keurig units, but also the small packs of coffee, called K-Cups, that the brewers use. Green Mountain makes its own K-Cups, but it also licenses that privilege to companies like Diedrich Coffee. In June, Diedrich announced it was boosting its output of K-Cups by 40%.

'An affordable luxury'

Though not profitable on an annual basis since 2005, Diedrich, with a market value of just $127 million, posted a small profit last quarter. The result: Diedrich's share price has risen from 23 cents last November to 23.15 cents on July 30.

The growing popularity of at-home single-cup brewing fits with trends coffee experts have seen since the economy began slowing down. "Coffee in general is doing well. It's proven to be pretty recession-resistant," says Ric Rhinehart, executive director of the Specialty Coffee Association of America, which counts as members more than 2,000 businesses up and down the U.S. coffee supply chain.

"As people cut back, coffee is an affordable luxury," says Michelle Rhodes-Brown of Profit Investment Management, which owns Green Mountain shares.

Drinking more at home

But, while Americans are still drinking plenty of coffee, they're getting coffee from different places. Purchases of coffee for the home are up, while sales at coffee shops and other retail locations have softened, Rhinehart says.

Though the recession has hurt some coffee sales, it hasn't ended Americans' move toward higher-quality coffee, says Bruce Milletto, president of Bellissimo Coffee InfoGroup, which provides consulting and training to the industry. "Our taste buds have memories," Milletto says. "Once you drink a really excellent cappuccino, it's very hard to go back even to a chain store that may be using automatic machines."

Despite the recession, "consumers are becoming more particular," he says. "We want good coffee, and we're willing to pay for it."

McDonald's may be helping

One sign that specialty coffee is still on the rise is that it's been embraced by mass-market chains like McDonald's (MCD, news, msgs) and Dunkin' Donuts. Both have upgraded their coffee offerings in an attempt to steal business from Starbucks.

But instead of seriously hurting Starbucks' business, the marketing push from McDonald's this year may have actually sparked more interest in coffee in general. That's what Starbucks Chief Executive Howard Schultz said in July, telling analysts: "It appears that the various marketing campaigns and all the media coverage of our coffee has created unprecedented awareness for the coffee category overall."

Peet's Coffee & Tea (PEET, news, msgs) is a company that prides itself on the very highest-quality coffee, sold both through supermarkets and its own coffee shops. On July 28, Peet's announced quarterly earnings per share 24% higher than a year ago. Despite the tough economy, revenue rose 5% from a year ago.

Can it last?

Grocery store sales were also up 10% and Peet's market share was up 10% -- showing customers were willing to pay more for quality coffee at home. "Peet's may very well be one of the few premium-priced brands in the grocery store achieving strong sales and share growth despite the economic and competitive environment," Peet's President and CEO Patrick O'Dea told analysts. Peet's shares are up 15% this year.

Perhaps investors shouldn't have been surprised that coffee would hold its own during the downturn. Coffee is relatively inexpensive, particularly when prepared at home, Van Winkle notes. Also, he adds, "we are talking about an addictive product."

The question for investors now is whether the coffee craze can continue. Many coffee stocks have gotten rather expensive. Green Mountain shares trade at more than 60 times 2009 earnings. Companies like Caribou and Starbucks are in the midst of turnarounds that are still in early stages. At the beginning of 2009, Caribou reported its first quarterly profit since 2005.

Some coffee stocks may have further to run, though only if current growth trends continue and even accelerate. With coffee shares at these heights, investors need to be especially alert to signs the country's love of coffee has run its course.

A pessimist's prediction: Hyperinflation

Does the Fed's massive money printing mean inflation is about to soar? I'm not jumping on that bandwagon, but gold is still an attractive bet right now.

Does the Fed's massive money printing mean inflation is about to soar? I'm not jumping on that bandwagon, but gold is still an attractive bet right now.

Marc's most recent Gloom, Boom & Doom Report contains an excellent discussion of inflation vs. deflation, and he makes the connection between the policies we're pursuing -- massive stimulus to create inflation, due to the fear of deflation -- and the funding crisis that I have warned about that will arrive as the U.S. has trouble financing its increasing debt. (Read "Why creating jobs is so hard.")

I decided to quote liberally from Marc's report. But I encourage folks to read it in its entirety. (Here's the Gloom, Boom & Doom Web site; a subscription is required.)

For newer readers who continue to ask me to elaborate on this subject, hopefully Marc's commentary will bring them up to speed:

Deflation can be avoided through debt and money printing. This isn't to say that I support such policies, or that I find deflation to be "bad" and inflation to be "good." (Price stability is the most desirable condition.) But the point is that if a government is really determined to inflate its problems away, it can be done. Those people who believe in deflation have, however, some strong arguments. Their principal contention is that the economy is so weak (output gap) that the private sector's contraction cannot be offset by government spending and money printing.

In fact, the massive money printing and the rest of the stimulus are why gross domestic product has held up as well as it has. More from Marc:

The deflationist argues that, because we have a weak economy, we shall have deflation; an argument with which I would tend to agree in the very short term.

I believe that in fact we have passed the point of maximum downside pressure. But more from Marc:

A true deflationist will also argue that because of deflation, economic conditions will worsen and, therefore, long-term U.S. government bond yields will decline. . . . But what happens to fiscal deficits and monetary policies under a scenario of a further decline in economic activity and a further collapse in asset prices? The answer is very simple. Deficits will increase further and more money will be printed. And the longer weakness in the economy prevails under the deflationary scenario, the more fiscal deficits will pile up and the more easy monetary policies will be pursued.

So, whereas near-term deflation is a distinct possibility, in the longer term inflation is more likely because of several factors. When the economy recovers (and the recovery is likely to be fragile), the Fed will be very reluctant to increase short-term rates. Another reason for the Fed's reluctance in this respect will be the size of the government debt, given that higher interest rates would increase the interest burden. Therefore, I can't imagine any scenario under which the Fed wouldn't keep interest rates at an artificially low level, as it also did post-2001. That such a monetary policy, combined with the growing fiscal deficits discussed above, is more likely to lead to inflation rather than deflation should be clear.

And here, in Marc's words, is what the funding crisis could look like:

For the reasons I explained above, inflation will pick up. With or without Fed tightening, interest rates will shoot up because of a loss of confidence by foreign U.S. dollar debt holders and the dollar tanks. Government debt payments and health care expenditure will soar. Instead of contracting, fiscal deficits will increase and force the Fed to continue monetizing the debt at a time when it should be tightening. . . .

A vicious cycle of higher and higher inflation rates and a weaker and weaker dollar will follow amid economic weakness, because personal incomes will be squeezed by inflation. Eventually, hyperinflation will follow. So, in the debate about inflation and deflation, both camps could be right but at different times.

Marc is far more certain than I am that hyperinflation lies ahead. For me, it's way too early to have to make that determination, and it's not at all clear to me that that is our ultimate destination.

However, I am more certain than he is that the maximum deflationary pressures have passed. The policies of the Fed and other central banks are why I continue to advocate that folks own the currency with no central bank to screw it up: gold.

GEe, who knew?

Lastly, in the slap-on-the-wrist department, General Electric (GE, news, msgs) announced Aug. 4 that it had agreed to pay a $50 million fine to settle an accounting fraud complaint brought by the Securities and Exchange Commission. That followed news of the day before that Bank of America (BAC, news, msgs) had agreed to pay $33 million to settle a similar charge, regarding false statements that it made on the Merrill Lynch deal.

Were these attempts to just sweep problems under the rug? Many of us have thought that GE has been monkeying with its numbers for a long time in an attempt to win at the game of beat the number.

The modest fines imposed by the SEC make it look as though GE and Bank of America had done nothing more than tell little white lies -- which hardly instills confidence that the agency is serious about its role as enforcer of financial integrity.

Regretfully, this is what I've come to expect from the government. (If I were surprised, I'd be outraged.) What those in command do is rescue the "establishment" rather than punish them for wrongdoing. How else can you interpret giving GE the functional equivalent of a parking ticket in light of the fact that, according to Bloomberg:

"The company broke accounting rules four times in 2002 and 2003 to increase earnings or avoid reporting negative financial results, the Securities and Exchange Commission said in a lawsuit in federal court in Connecticut today. 'GE bent the accounting rules beyond the breaking point,' SEC Enforcement Director Robert Khuzami said in a statement. 'Overly aggressive accounting can distort a company's true financial condition and mislead investors.'"

If this is what the paper tiger SEC decided to charge GE with, who knows what creativity really took place? I'm sure financial scoundrels everywhere are laughing all the way to the bank.

The secrets of the Amazon best-seller list

The up-to-the-hour sales barometer is a tool for entrepreneurial authors doing all they can to push their books up the charts.

It's almost a philosophical riddle: Do sales drive the best-seller list, or do best-sellers get all the sales because buyers see them on the list?

As much as we'd like to believe that the crowd picks the best books, a strong presence in retail locations -- front-of-store positioning and tempting discounts -- still counts a great deal in determining how well a title sells.

Nonetheless, authors are in it for the glory, and the visibility and bragging rights of being a "best-seller" retains the glamour of years past.

In the old days, the New York Times best-seller list meant everything. But it doesn't come out until weeks after the sales take place, and it updates only on Sundays. Today's author needs a better, faster sounding board. And she's found it in Amazon.com's (AMZN, news, msgs) unblinking sales rank, the 24-hour barometer of book sales.

Indeed, it's a rare author who, as soon as the book is published, doesn't obsessively check the list these days, which is updated every hour.

Yet for all that, few people understand how the Amazon list works or its relative importance in the publishing industry. Amazon's method of ranking books remains something of a black box, with the fancy word algorithm used to describe it.

Let's look at an extreme version of what a writer can be today. The best writers take an active, entrepreneurial role in their book sales. Publishing is filled with success stories that began as self-publishing miracles.

Many of those are novels, but let me introduce you to a friend of mine, Andy Kessler, who did it in nonfiction.

Andy's a bit of an annoying guy. He's got that gene that just won't let him take anything at face value. So when he's presented with a challenge like publishing a book, he just keeps picking it apart until he feels he can do it better.

That worked to his advantage in the 1990s when he moved to the Bay Area and opened a hedge fund that invested in early-stage technology companies: real engineering-geek stuff like chip sets and drivers. Andy did well as an investor. He did so well during the tech boom from 1998 to 2000 that he found himself with plenty of free time for writing afterward.

In 2002, when Wall Street was getting pilloried in the press, he realized he had worked with some of the most notorious names from the dot-com bubble, like Mary Meeker, Frank Quattrone, Henry Blodgetand Jack Grubman (remember him?).

So Andy sat down and wrote up his experiences in a book called "Wall Street Meat." He published it himself because traditional publishers were too slow and kept him too far from the action.

Kessler's experience outlines just about everything we know about the Amazon list.

1. Authors' obsession.

Like dozens of other writers, the Amazon sales rank became his daily, even hourly thermometer of success.

"The Amazon rankings are a blessing for authors, because you can really figure out how your marketing is working," Kessler says. "Just do Fox News? No change. Maybe that wasn't a good use of my time. A positive Wall Street Journal review? Wow, look at it spike. I went up 150 today. Woohoo!

"Radio interviews feel like echo chambers, 'Hello Cleveland," he recalls. "I wonder if anyone is even listening to WZIP -- they sure haven't budged the rankings."

2. Smart authors try to goose the list.

"After countless hours watching the timing and delivery of PR for my books -- radio, NPR, cable TV, broadcast TV, newspapers, magazines, blogs, newsletters -- I have picked up on the rhythm of Amazon rankings," Kessler says. "I've done the best after a week or two of decent PR followed by an e-mail newsletter (from a third party with a big, big following) with a link to click. The former sets up a base, and the latter spikes the sales within a few short hours or over the course of the day."

"My best?" Andy asks rhetorically. "I once hit No. 4 and stayed there almost all day. It was a Sunday. An e-mail newsletter had dropped on Friday night with a direct link, and I could almost hear mouses clicking all weekend.

"By Monday morning, I was back in the 20s and 30s; by Wednesday I was back to around 100. It was exhilarating."

3. The list seems to be a series of weighted averages.

I'm not sure the exact number," Kessler says of the weightings, "but my guess is 40% hour, 30% day, 20% week, and 10% month. So if you have a huge spike in sales, you don't completely dislodge books that have been in the top 10 or top 100 for months and months. Though you might pass them for a very fun hour."

An Amazon spokeswoman essentially confirms his hunch when she says, "We base rankings on all-time sales, as well as recent sales that are weighted more heavily than older sales, so that our lists are timely and aren't always dominated by all-time best-sellers like "Harry Potter."

4. There are ways to game the system, but it's not necessarily worth it.

The desire to manipulate one's Amazon ranking has given birth to a cottage industry of fixers and fudgers who will help you increase your sales through multi-tiered marketing schemes or rentable e-mail lists.

The simplest way to game the Amazon list is to gather credit card numbers directly at speaking engagements or through an e-mail offer, then turn around and plug the names and addresses into Amazon by hand.

It's raw data entry, but the applied effort can shoot a title to the top. Amazon is a "long tail" retailer. At the very top -- rankings Nos. 1 to 10 -- a book could be selling 3,000 to 10,000 copies a week through the Internet retailer. So all it takes is, say, 500 to 1,000 copies manhandled through the system on a single day to get your book into the top ranks.

What the gamers get from all of this is never clear. Manipulated sales rarely generate genuine sales momentum.

Smart manipulators don't try to return books they've ordered back to Amazon, like former Washington Post reporter David Vise, the author of a book about a turncoat FBI agent.

Amazon is smart enough to recognize bulk orders, so suspicions that Vise was goosing his rankings back in 2002 were probably off the mark. That, or the transaction costs were their own punishment for such a failed attempt.

Besides, there's no point in manipulating Amazon's sales. Getting on the New York Times best-seller list used to trigger all sorts of author benefits, from additional discounts at superstores (a practice that was discontinued a decade ago) to author bonuses based on best-seller statistics (another practice that rarely happens anymore.)

What effect does the Kindle have on all of this? Too soon to tell. Outside Amazon, USA Today has recently begun to include Kindle sales in its best-seller list. With two weeks of data, the Kindle effect remains inconclusive.

It does appear that Kindle favors books that are already best-sellers, which may be because Kindle owners are what the fast-food business would call "heavy users," or it may be a function of the $9.99 price point for best-sellers on the Kindle.

Amazon says that its own top-100 list will represent Kindle editions as it does other editions -- like when an audio book appears near the print version in the top 100 -- of a book. That means separately. And if a Kindle edition moves as many units as any of the other top titles, it will earn its own place in the top 100. But that hasn't really happened yet.

The stock market's coffee craze

While Starbucks has staged a nice recovery, the real action has been in shares of smaller outfits such as Green Mountain, Caribou and Diedrich. Credit the K-Cup.

Despite a recession, these are hot times in the stock market for the coffee business. Shares of Green Mountain Coffee (GMCR, news, msgs), which reported impressive earnings July 29, are up about 160% in 2009. One small coffee wholesaler, Diedrich Coffee (DDRX, news, msgs), is up about 6,500% this year.

Even beleaguered coffee chains are bouncing back from steep declines in previous years. Starbucks (SBUX, news, msgs) shares have risen 85% in 2009, while second-place rival Caribou (CBOU, news, msgs) has seen shares more than quadruple in value (up 360%).

It's not that coffee drinkers haven't cut back somewhat on their daily caffeine fix -- at least outside the home. Last quarter, Starbucks' same-store sales were 5% lower than the year before.

Changing the business

But the coffee business has been surprisingly resilient in the face of the steep economic slowdown. At the same time, powerful trends -- new technology, changing tastes and new industry players -- have made many coffee stocks powerful investments.

Green Mountain Coffee got investors' attention with the success of its Keurig coffee brewers. Costing about $100 each, these brewers make single cups of coffee at home in about 30 seconds. "Every 10 or 15 years, something comes around that changes the way people drink coffee," says Scott Van Winkle, an analyst at Canaccord Adams. Easy to use and easy to clean up, "this is the new thing in coffee brewing," he says, noting sales of the brewers were up 187% last quarter.

On July 29, Green Mountain beat Wall Street expectations with earnings of 36 cents per share. Green Mountain doesn't just make money off the Keurig units, but also the small packs of coffee, called K-Cups, that the brewers use. Green Mountain makes its own K-Cups, but it also licenses that privilege to companies like Diedrich Coffee. In June, Diedrich announced it was boosting its output of K-Cups by 40%.

'An affordable luxury'

Though not profitable on an annual basis since 2005, Diedrich, with a market value of just $127 million, posted a small profit last quarter. The result: Diedrich's share price has risen from 23 cents last November to 23.15 cents on July 30.

The growing popularity of at-home single-cup brewing fits with trends coffee experts have seen since the economy began slowing down. "Coffee in general is doing well. It's proven to be pretty recession-resistant," says Ric Rhinehart, executive director of the Specialty Coffee Association of America, which counts as members more than 2,000 businesses up and down the U.S. coffee supply chain.

"As people cut back, coffee is an affordable luxury," says Michelle Rhodes-Brown of Profit Investment Management, which owns Green Mountain shares.

Drinking more at home

But, while Americans are still drinking plenty of coffee, they're getting coffee from different places. Purchases of coffee for the home are up, while sales at coffee shops and other retail locations have softened, Rhinehart says.

Though the recession has hurt some coffee sales, it hasn't ended Americans' move toward higher-quality coffee, says Bruce Milletto, president of Bellissimo Coffee InfoGroup, which provides consulting and training to the industry. "Our taste buds have memories," Milletto says. "Once you drink a really excellent cappuccino, it's very hard to go back even to a chain store that may be using automatic machines."

Despite the recession, "consumers are becoming more particular," he says. "We want good coffee, and we're willing to pay for it."

McDonald's may be helping

One sign that specialty coffee is still on the rise is that it's been embraced by mass-market chains like McDonald's (MCD, news, msgs) and Dunkin' Donuts. Both have upgraded their coffee offerings in an attempt to steal business from Starbucks.

But instead of seriously hurting Starbucks' business, the marketing push from McDonald's this year may have actually sparked more interest in coffee in general. That's what Starbucks Chief Executive Howard Schultz said in July, telling analysts: "It appears that the various marketing campaigns and all the media coverage of our coffee has created unprecedented awareness for the coffee category overall."

Peet's Coffee & Tea (PEET, news, msgs) is a company that prides itself on the very highest-quality coffee, sold both through supermarkets and its own coffee shops. On July 28, Peet's announced quarterly earnings per share 24% higher than a year ago. Despite the tough economy, revenue rose 5% from a year ago.

Can it last?

Grocery store sales were also up 10% and Peet's market share was up 10% -- showing customers were willing to pay more for quality coffee at home. "Peet's may very well be one of the few premium-priced brands in the grocery store achieving strong sales and share growth despite the economic and competitive environment," Peet's President and CEO Patrick O'Dea told analysts. Peet's shares are up 15% this year.

Perhaps investors shouldn't have been surprised that coffee would hold its own during the downturn. Coffee is relatively inexpensive, particularly when prepared at home, Van Winkle notes. Also, he adds, "we are talking about an addictive product."

The question for investors now is whether the coffee craze can continue. Many coffee stocks have gotten rather expensive. Green Mountain shares trade at more than 60 times 2009 earnings. Companies like Caribou and Starbucks are in the midst of turnarounds that are still in early stages. At the beginning of 2009, Caribou reported its first quarterly profit since 2005.

Some coffee stocks may have further to run, though only if current growth trends continue and even accelerate. With coffee shares at these heights, investors need to be especially alert to signs the country's love of coffee has run its course.

A pessimist's prediction: Hyperinflation

Does the Fed's massive money printing mean inflation is about to soar? I'm not jumping on that bandwagon, but gold is still an attractive bet right now.

Last week's 26-year high in the price of sugar must have stuck in the craw of the deflationist camp, those who fear a bout of falling prices. And that's as good a segue as any to the inflation-vs.-deflation debate.

I've spilled plenty of ink on this important topic (for example, read "What's next: Inflation or deflation?"), and this week I'd like to turn to a friend of mine, Marc Faber, for his assessment.

Marc's most recent Gloom, Boom & Doom Report contains an excellent discussion of inflation vs. deflation, and he makes the connection between the policies we're pursuing -- massive stimulus to create inflation, due to the fear of deflation -- and the funding crisis that I have warned about that will arrive as the U.S. has trouble financing its increasing debt. (Read "Why creating jobs is so hard.")

I decided to quote liberally from Marc's report. But I encourage folks to read it in its entirety. (Here's the Gloom, Boom & Doom Web site; a subscription is required.)

For newer readers who continue to ask me to elaborate on this subject, hopefully Marc's commentary will bring them up to speed:

Deflation can be avoided through debt and money printing. This isn't to say that I support such policies, or that I find deflation to be "bad" and inflation to be "good." (Price stability is the most desirable condition.) But the point is that if a government is really determined to inflate its problems away, it can be done. Those people who believe in deflation have, however, some strong arguments. Their principal contention is that the economy is so weak (output gap) that the private sector's contraction cannot be offset by government spending and money printing.

In fact, the massive money printing and the rest of the stimulus are why gross domestic product has held up as well as it has. More from Marc:

The deflationist argues that, because we have a weak economy, we shall have deflation; an argument with which I would tend to agree in the very short term.

I believe that in fact we have passed the point of maximum downside pressure. But more from Marc:

A true deflationist will also argue that because of deflation, economic conditions will worsen and, therefore, long-term U.S. government bond yields will decline. . . . But what happens to fiscal deficits and monetary policies under a scenario of a further decline in economic activity and a further collapse in asset prices? The answer is very simple. Deficits will increase further and more money will be printed. And the longer weakness in the economy prevails under the deflationary scenario, the more fiscal deficits will pile up and the more easy monetary policies will be pursued.

So, whereas near-term deflation is a distinct possibility, in the longer term inflation is more likely because of several factors. When the economy recovers (and the recovery is likely to be fragile), the Fed will be very reluctant to increase short-term rates. Another reason for the Fed's reluctance in this respect will be the size of the government debt, given that higher interest rates would increase the interest burden. Therefore, I can't imagine any scenario under which the Fed wouldn't keep interest rates at an artificially low level, as it also did post-2001. That such a monetary policy, combined with the growing fiscal deficits discussed above, is more likely to lead to inflation rather than deflation should be clear.

Faber on the funding crisis

And here, in Marc's words, is what the funding crisis could look like:

For the reasons I explained above, inflation will pick up. With or without Fed tightening, interest rates will shoot up because of a loss of confidence by foreign U.S. dollar debt holders and the dollar tanks. Government debt payments and health care expenditure will soar. Instead of contracting, fiscal deficits will increase and force the Fed to continue monetizing the debt at a time when it should be tightening. . . .

A vicious cycle of higher and higher inflation rates and a weaker and weaker dollar will follow amid economic weakness, because personal incomes will be squeezed by inflation. Eventually, hyperinflation will follow. So, in the debate about inflation and deflation, both camps could be right but at different times.

Marc is far more certain than I am that hyperinflation lies ahead. For me, it's way too early to have to make that determination, and it's not at all clear to me that that is our ultimate destination.

However, I am more certain than he is that the maximum deflationary pressures have passed. The policies of the Fed and other central banks are why I continue to advocate that folks own the currency with no central bank to screw it up: gold.

GEe, who knew?

Lastly, in the slap-on-the-wrist department, General Electric (GE, news, msgs) announced Aug. 4 that it had agreed to pay a $50 million fine to settle an accounting fraud complaint brought by the Securities and Exchange Commission. That followed news of the day before that Bank of America (BAC, news, msgs) had agreed to pay $33 million to settle a similar charge, regarding false statements that it made on the Merrill Lynch deal.

Were these attempts to just sweep problems under the rug? Many of us have thought that GE has been monkeying with its numbers for a long time in an attempt to win at the game of beat the number.

The modest fines imposed by the SEC make it look as though GE and Bank of America had done nothing more than tell little white lies -- which hardly instills confidence that the agency is serious about its role as enforcer of financial integrity.

Regretfully, this is what I've come to expect from the government. (If I were surprised, I'd be outraged.) What those in command do is rescue the "establishment" rather than punish them for wrongdoing. How else can you interpret giving GE the functional equivalent of a parking ticket in light of the fact that, according to Bloomberg:

"The company broke accounting rules four times in 2002 and 2003 to increase earnings or avoid reporting negative financial results, the Securities and Exchange Commission said in a lawsuit in federal court in Connecticut today. 'GE bent the accounting rules beyond the breaking point,' SEC Enforcement Director Robert Khuzami said in a statement. 'Overly aggressive accounting can distort a company's true financial condition and mislead investors.'"

If this is what the paper tiger SEC decided to charge GE with, who knows what creativity really took place? I'm sure financial scoundrels everywhere are laughing all the way to the bank.

Why credit counseling often fails

Could a debt-management plan get your finances back on track? It works for some. But if you're struggling, it shouldn't be the only option you consider.

When people are overwhelmed by debt but don't want to file for bankruptcy, I typically recommend they make two appointments:

• One with a legitimate credit counselor, preferably affiliated with the National Foundation for Credit Counseling.

• Another with a bankruptcy attorney.

I make the second suggestion for a number of reasons.

One is that credit counselors and their debt-management plans, which are designed to pay off credit card debt over five years or so, are geared to steer people away from bankruptcy. Consulting with a bankruptcy attorney can help ensure that those struggling with debt know all their options.

The other, even more important reason: I know that even if you desperately want credit counseling to work, it often -- usually, in fact -- won't.

Here are the statistics, straight from the NFCC. Of the 3.2 million people who contacted NFCC agencies for help last year:

• About one-third were too far gone for debt management plans to help, with too little income, too much debt or the wrong kinds of debt (medical bills instead of credit cards, for example). These folks were advised to seek other remedies -- typically bankruptcy protection.

• Another third were referred to social-services agencies because of other, underlying issues, such as a gambling problem, alcoholism or other addiction.

• The final third enrolled in debt-management programs (DMPs), but the dropout rate averages at least 45%.

NFCC spokeswoman Gail Cunningham said 55% of those in DMPs either complete their payments or contact their agency at some point to say they're able to resume payments on their own. Cunningham said she couldn't give me a breakdown of that 55%, so we don't know precisely how many people actually follow through in paying off their bills.

But with the statistics at hand, we know that -- at best -- fewer than 20% of people who contact NFCC for help are any kind of a success story.

When budget and reality collide

I don't bring this up to discourage anyone from contacting a legitimate credit counselor. Some people do complete their plans, and many others get much-needed advice on budgeting, credit improvement and other topics.

Credit counselors also are a key source of housing counseling; HUD-approved housing counselors help ready people to buy their first homes and advise them on navigating the mortgage refinancing and modification maze when their payments aren't affordable.

But I want people to know that if they're counting on credit counseling as a way to avoid bankruptcy, the deck might be stacked against them. They need to consider all their options before signing up for a debt-management plan or any other debt solution.

Roni, who lives near Seattle, wishes she had.

She signed up with a credit counselor and started shoveling money toward her credit card bills. Then collectors started calling about other debts she owed, and Roni realized she couldn't keep up.

"At the time, the (credit) counselor made the comment that she wondered how long it would be before I filed for (bankruptcy) protection because my debt payment was such a large percentage of my income," Roni said. "I was young and didn't know all of my options and would have saved myself a lot of time and stress if I had filed Chapter 13 sooner."

Chapter 13 bankruptcy protected Roni from creditors' calls while putting her on a five-year repayment plan, after which her remaining debt would be erased.

On a budget and on the edge

Of course, I have to note that Chapter 13 bankruptcy doesn't have a whopping success rate either. Fewer than 40% of Chapter 13 filers examined in a 2007 study actually completed repayment plans. Some were converted into Chapter 7 filings, which allowed the debtors to erase most of their unsecured debt, while others were simply dismissed, leaving borrowers once again vulnerable to collectors.

Many Chapter 13 filings fail because the debtors are trying to stop a home foreclosure but don't have enough income to pay off their back mortgage payments even after a plan is in place, said Richard Marshack, a bankruptcy attorney in Irvine, Calif.

Others simply can't live within the budget guidelines required in their repayment plans.

"Debtors must abide by a budget that is set by the Bankruptcy Code," Marshack said. "Most debtors simply cannot live under such a strict budget."

The budget issue is even more acute with credit counselors' debt-management plans, said Steve Rhode, who once ran a credit counseling agency and who now runs GetOutofDebt.org, a Web site that offers free debt advice.

Rhode believes credit card companies that participate in DMPs are more interested in maximizing their returns than in ensuring debtors have sustainable budgets.

"It's calculated all backward," Rhode said. "A DMP is not calculated based on what is reasonable, affordable or sustainable for consumers. It's based on what the creditor wants."

This often leaves borrowers on budgets so tight, Rhode said, that any slight setback -- an unexpected bill, a drop in hours at work -- throws them off track.

"People will agree to anything when a DMP is put in front of them, because they think it's going to help," he said, "but it's going to fail the next time they hit a bump."

The NFCC recently persuaded major credit card issuers to accept somewhat lower payments and budgets that include a savings component, so debtors can try to insulate themselves from such bumps. But Rhode isn't impressed. The savings component is good, he said, "but where the hell has that been all these years?"

Know your options

If you're struggling with debt, here's my advice:

• Do it yourself, if you can. If you can trim your expenses and pay more than your minimum balances, you're typically better off tackling your debt yourself. List your credit card debts by interest rate and throw as much money as you can at your highest-rate balance while paying the minimums on the rest. Once that debt is paid, aim the same payment at your next-highest-rate debt and continue on until you're debt-free. If your credit is good, you might also consider using peer-to-peer lending services such as Lending Club or Prosper to "refinance" your debt at lower rates.

• Heed the warning signs. Many people -- most, in fact -- seek debt help too late. They ignore the red flags warning of potential financial disaster. Some of these include struggling to make your minimum payments, borrowing from one card to pay another and tapping your retirement accounts to pay your debts. If any of these happens, you're in over your head and should consider getting help.

• Consider every debt solution. Credit counseling is just one of them, and you can learn more about it by reading "The consumer's guide to credit counseling." You may not need to go through a counseling agency; credit card companies are also more willing to work out repayment plans directly with borrowers, as described in "Get a credit card reprieve." You should also know your bankruptcy options. If Chapter 7 bankruptcy isn't an option for you, perhaps debt settlement is. Read "When debt settlement makes sense" for more.

How debit cards fleece consumers

A 1,000% fee just for buying a fast-food burger? In our shift to a cashless society, the banking industry has evolved from our financial servant to our master.

Born-again Democrats recently made a big to-do in reining in credit card industry abuses. To really safeguard our interests, the new U.S. Consumer Financial Protection Agency now needs to halt the banking industry's coup in progress and the means of its power grab: the debit card.

Being able to whip out a debit card for virtually any transaction is so convenient. Yet in promoting our evolution to a cashless society, banks have commandeered and privatized the nation's payment system, and they profit mightily on all types of purchases, down to buying a candy bar.

The industry's initial aim was to reduce cash-handling, check-clearing and accounting costs via electronic transactions, including direct deposit of paychecks and automatic withdrawals for bills and expenses.

Its ultimate windfall: While reaping those savings, it now generates billions in fee-based income -- and we've all sacrificed financial privacy in ways we've not yet even begun to fathom.

Used to be debit card purchases wouldn't go through without sufficient funds in a cardholder's account. Then opportunistic banks realized that, with direct deposit, they could recoup the overdrawn funds the instant their clients' next payroll checks rolled in.

The upshot: Banks may impose a $35 fee for "overdrawing" on a $3.50 fast-food purchase -- and have vigorously fought efforts to provide electronic warning of the debit card overdraft at the point of sale. The equivalent interest rate for your $3.50 lapse: 1,000%.

Here's more to consider:

The double standard on account theft. Credit card holders aren't on the hook for fraudulent use of their card numbers and can challenge charges on goods and services not delivered as promised. Debit card holders aren't guaranteed those same protections.

The reason: It's the lenders' money on the line with a credit card transaction -- and just our hard-earned savings with debit card fraud. They'll absorb the cost of investigating and prosecuting theft of their money, but they don't want to pick up the cost of policing the theft of ours -- by identical means through their very same hands.

Credit card borrowers are never out more than $50 regardless of when they discover potential fraud. Debit card holders' liability is limited to $50 only if they report perceived fraud within two days; the liability jumps to a maximum $500 from that point to 60 days and is unlimited thereafter.

Vanishing gift-card balances. When consumers buy gift cards, they essentially give retailers an interest-free loan until the recipient uses the card, rather generous when you think about it. Yet on many cards, in small print, is the caveat that the card's value is wiped out if not used by a certain date.

What the hell? Cash value should never vanish, whether in hand or in stored electronic chits. Whoever let our payment system get boarded by Somali pirates?

(This is already illegal in some states. See your state's rules.)

How we got snookered

The Federal Reserve under Alan Greenspan championed the banks' aims, since it cost the Fed a nickel to process checks through its transfer system versus a penny for electronic transactions. To Greenspan, the cost savings for the Fed justified the unprecedented turnover of the payment system to the banks.

The IRS, meanwhile, loved the personal record the shift to a cashless society produces because it reduces the undocumented flow of cash through the "underground economy." We've improved the likelihood the government will collect on taxes owed, but at what societal cost?

The debit card's predecessor, of course, was the ATM card, whose initial selfish aim was to eliminate the need for bank tellers and associated labor costs. We gained access to cash after banking hours in the 1980s and -- thanks to direct deposit -- never had to wait in long lines during Friday lunch hour to cash payroll checks. How great was that!

Thus began our drunkenness on electronic transactions and the demise of our financial self-discipline as we too liberally dispense with our limited savings simply because they're so readily accessible. That's just as the banks intended when they shifted from making money off how they invested our deposits, and began vigorously promoting our spending for the fees it generated.

Debit card practices now need some immediate curbs to turn the banking industry back into our financial servant rather than our master:

• Notice of deficient funds. Realizing its debit card overdraft fees are blatantly usurious, the banking industry has been open lately to possibly letting account holders "opt out" of the ability to overdraw accounts. Consumer advocates want the policy to instead be "opt in," meaning account holders have to agree to accept overdraft levies. The simple compromise: Notify cardholders at the moment of transaction that they'll be overdrawn and let them decide whether they want to pay the fee or cancel the transaction.

• Same theft protections as credit cards. Whether it's their money on the line or our own, banks must afford debit card transactions the same theft protection they do for credit cards.

• An outright ban on a dangerous ''next-gen" card. When retailers ask "credit or debit," it's merely a question of how consumers want the transaction processed; the funds still come out of their bank accounts. What must be banned outright: allowing banks to offer a single, combined debit and credit card that defaults to the latter if there are insufficient funds in one's bank account. That would be the industry's Holy Grail, and we can't let them hand us that arsenic-laden cup.

America's entire payment system needs immediate scrutiny and reform to map out where it's headed. If not, we might as well cede the future of the world to the burgeoning Chinese middle class, which isn't likely to blow banked, hard-earned yuan in an instant just because it has the ability to do so.

That effort will fall to the Consumer Financial Protection Agency, which will take over regulation of consumer-lending products and practices now overseen by various federal banking regulators, if Congress passes current legislation.

The rub: The primary focus of those banking regulators -- which are funded and lobbied hard by the banks -- is ensuring banks' safety and soundness, and we've seen what a great job they did there. It's now time for federal authorities to look out more for the safety and soundness of our modest little accounts.

7 health insurance myths debunked

Think that insurers are what make coverage so expensive? Think Canadians have it better or that your company's plan is the cheapest for you? Think again.

Hearsay and bad information often fuel people's misunderstandings of health insurance. When was the last time someone snuggled up with a cup of coffee and her insurance policy?

According to the Life and Health Insurance Foundation for Education and the Henry J. Kaiser Family Foundation, the following myths are alive and well in the minds of most folks.

1. It's cheapest to buy health insurance through an employer's group plan.

If your employer offers a group health plan, you're likely experiencing annual increases in premiums, reductions in what's paid for by your employer, increases in your out-of-pocket expenses and the possibility that you're paying for lots of benefits you don't want or need.

An individual health plan (the kind you buy on your own), especially for someone who's healthy and young, can offer significant savings. Unlike individual plans, group health plans must abide by state health insurance mandates, which can require coverage for everything from autism to hearing aids and from contraceptives to in vitro fertilization.

Although an individual health plan can deny your application based on your health status, Matt Tassey, a spokesman for LIFE, notes that if you're eligible the plan can be customized to meet your specific health care needs.

"If you're a man, you have no need to see an obstetrician. But if they have an employer-sponsored health plan, they are still paying for (the obstetrics coverage)," he says.

2. Health insurance is expensive because health insurance companies are driven by profit.

Brenda Weigel, a spokeswoman for the National Association of Health Underwriters, says this is a common misconception. "The fact that health insurance is expensive is because health care is expensive. Or there's the common misconception that Medicare administrative costs are lower than private plans, when in fact there is quite a bit of cost-shifting," says Weigel.

When patients use a government insurance program (such as Medicare), providers of health care shift more costs to people who have insurance. The result is higher premiums for people who purchase their insurance on the individual market and workers who receive insurance through their employers.

Tassey notes that rising prescription drug costs also fuel increases.

3. If you're young and healthy you don't need to pay for health insurance.

Then what happens when you break your leg in a snowboarding accident or blow out your knee while playing soccer? If you find that your tonsils need to be removed, the cost of a tonsillectomy can start at $5,000, with an additional $1,500 per day for an overnight hospital stay.

"There is this idea that if they need to be hospitalized they can just go to the emergency room because they have to take you," says Tassey. "We like to call them 'young immortals.' A problem arises when they have to be stabilized or, worse, have to stay in the hospital for an extended period of time. What happens if they have to be transferred somewhere else for care or have to see a specialist? The cost could reach $100,000 once you add everything up, and starting out their lives in serious medical debt can have a long-term repercussions on their financial future."

Tassey says young people rarely think about health insurance until it's time to have a baby.

4. The highest numbers of uninsured people are under age 25.

The fastest-growing group of uninsured Americans is age 50 to 64. The difference between the younger and older people is accessibility to health insurance. While younger people who are not covered by an employer's health plan may find it easy to acquire affordable individual coverage on their own because of age and health status, older people do not have the same advantage.

According to recent estimates from the Kaiser Commission on Medicaid and the Uninsured, middle-aged and older adults under age 65 (and not yet eligible for Medicare) are fast becoming the largest group of Americans without health insurance.

In fact, 19 million Americans from age 50 to 64 were uninsured or underinsured in 2008. Members of this group are more likely to arrive at a doctor's office with a number of chronic medical conditions, making it difficult or impossible for them to buy individual health insurance. As baby boomers reach age 65, the sheer number of people in need of coverage has the potential of overwhelming the Medicare system.

"This is a serious problem as the baby boomers age and the cost of health care skyrockets. If you drive an old car, you have to do repairs to keep that car moving. Just imagine having 75 million old cars coming into the Medicare system -- that is exactly what we are looking at in the next several years," says Tassey.

5. COBRA is very expensive, and a short-term health plan would be cheaper.

The federal COBRA law allows you to continue buying your former employer's group health plan if you are laid off. The catch is that the employer no longer has to contribute to the premiums. One alternative is buying a short-term health plan on your own.

If you are relatively healthy, a short-term plan could bridge the gap between other insurance plans, but if you have a pre-existing condition, or need maternity care or prescription drug coverage, you may not be able to find a short-term plan.

Also, short-term plans generally require you pay high deductibles before coverage begins. This deductible can vary from $250 (for very healthy policyholders) to well into the thousands. When you consider the cost of meeting the deductible before the plan pays for medical care, COBRA may be the better choice, especially if you have a pre-existing condition. In addition, a typical short-term policy lasts a maximum of six months, and the insurer is not obligated to renew your policy.

Under the American Recovery and Reinvestment Act that went into effect in February, you can receive a 65% subsidy of your COBRA premiums for up to nine months. In return, the federal government reimburses the employer with a payroll tax credit.

6. Large employers always offer health insurance to workers.

The Kaiser Family Foundation points out that one in five workers in firms with 500 or more employees is uninsured because many companies do not offer health insurance.

When workers are offered health insurance, they take it. According to the Employee Benefits Research Institute, less than 5% of those workers who are eligible for health benefits is uninsured.

7. Canada has a better health care system than the U.S.

The debate rages on. Canada's universal care system is fine, but there's a limit on what you can get. For example, if you happen to be a Canadian age 70 or older and need bypass surgery, the government won't pay for it.

"Universal health care isn't better; it's just different," Tassey says. "One of the largest hospitals in the U.S. is the Henry Ford Hospital in Detroit. Many Canadians come over to Detroit for care -- not because it's better; it's because they can get it (in the U.S.). There is no rationing (in America) of any sort, so they can just write a check."

Americans may complain about the high cost of health care in the U.S., but Tassey points out that people are rarely denied care for any reason.

"People in the U.S. demand care and demand it immediately. They also think we can cure anything," notes Tassey. "Unfortunately, it costs a lot of money to treat the number of fatal diseases that need a cure. We already have a semi-Canadian system for those who are 65 and older -- it's called Medicare, and it's going bankrupt."