|
ADAM SMITH'S MONEY GAME Missed the show? Get a phone call half way through? Fail to catch the name of a stock in "Personal Best"? In case you did, we are happy to provide you with a transcript. If you would like a transcript from a previous season, please visit 800-All-News at www.800-all-news.com or call them at (800) All-News. ANNOUNCER: [voice over] This program is made possible by a grant from MetLife, helping people become financially secure for 130 years. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation. ADAM SMITH: [voice over] In the Money Game this week, the Asian contagion. Is this dangerous virus which has made markets and currencies crash heading our way? Could it surprise the stock markets? Could it be stopped in time? Meet Larry Summers, number two in the Treasury Department. His job is to know the answers and find a cure. Shopping on the web _ will you find bargains or bummers? Could a charitable gift annuity be just the thing for you as you turn your investment strategy into a personal best? Find out next.
Face to Face [Back to top] ADAM SMITH: Hello, I'm Adam Smith and welcome to the Money Game. The Asian financial crisis may be the most serious threat to the world economy since the oil crisis of the 1970s. Economists now say we'll start to feel it seriously in the next six months. When Asia first began to unravel, the administration looked around and asked who should be our point man to carry the American message? Who should we send to meet across Asia with the prime ministers, presidents and bankers? The answer was Deputy Treasury Secretary Larry Summers, a 43-year-old former Harvard economist with a curious family background of having a Nobel prizewinning economist on each side of his family. Larry Summers' travels have been described like those of General MacArthur. I went to Washington to meet him, face to face. LAWRENCE H. SUMMERS, Deputy Secretary of the Treasury: These are very large forces that we are dealing with in markets and there are no silver bullets. And these problems and issues are going to be with us for quite some time to come and there are going to be steps forward and there are going to be steps backward. But I think what we can best do is encourage countries to pursue strong policies, provide support, appropriate conditional financing and, very importantly, keep our own house in order and encourage the Japanese economy, the largest economy in Asia, to do the same. ADAM SMITH: [voice over] Encouraging once booming Asian countries, now in financial distress, providing support, worrying about Japan _ these right now are the main ingredients of the Deputy Secretary's job. As he jets in and out of Asian capitals with descriptions and advice for local leaders, he is headline news in the local media wherever he goes. [on camera] The American economy is booming. The American market is near a new high. If Asia is a problem, no one seems to notice at the moment. Why then is Asia so important? LAWRENCE H. SUMMERS: First, Asia is a crucial market for our exports, which high-wage jobs depend on. It's the largest and most rapidly growing market for our exports. Second, there are linkages between markets. I'm sure sometimes capital that leaves Asia will come here and go into our assets. But at other times, as we saw last October when the Hong Kong market fell and the Dow fell by more than 500 points, these markets can be linked and it can change in the way the markets interact within a matter of hours. And so I think there's important impact on people's savings here. And third, there's a crucial security interest. We've got 37,000 troops in Korea. We have a strong military presence in the Pacific. ADAM SMITH: [voice over] But it's not South Korea that causes the most concern in Washington, it's Japan. As it struggles with its banking system and boosting domestic demand, a good deal of the administration's energy is taken up with watching, advising and warning Japan. [on camera] Recently, the United States intervened in the currency market in Japan to bolster the yen. Why did it do that? And why did it do it alone? LAWRENCE H. SUMMERS: Secretary Rubin's statement said we intervened in a context of Japan's plans to address its banking system problems and stimulate its economy, particularly its commitment to move beyond the convoy system of all the banks supporting the rest of the banks that they have relied on for so long. The intervention was arranged between the United States and Japan, but took place within the G-7 context. And traditionally, interventions with respect to the yen have been in the dollar rather than with respect to any other currencies. ADAM SMITH: What exactly should the Japanese do? LAWRENCE H. SUMMERS: Japan faces a real challenge of restoring confidence in markets. Three things are crucial. One, working through the banking system by closing failed institutions and supporting viable institutions and selling off bad assets. Second, continuing to stimulate its economy through strong and sustained fiscal policies to promote growth. Three, work to continue the process of deregulation and openness in its economy. These are not issues of politics between us and them or any other country and them. These are issues that have to do with restoring market confidence, which is so important for Japan and for the global economy. ADAM SMITH: The prescription seems clear. Why don't the Japanese carry it out? LAWRENCE H. SUMMERS: I think it's a combination of things that are crucial. I think that the consensus needs to form in their country. The diet has to take the necessary actions. I think the bureaucrats in a number of key ministries have to internalize and recognize the seriousness of the problems. I think there's certainly a role for strong political leadership. And I know that President Clinton and Prime Minister Hashimoto have discussed this issues on a number of occasions. And I'm sure that when the prime minister comes to Washington in July, these issues will be very much on the agenda. ADAM SMITH: After the U.S. bolstered the yen, you said we have a window of opportunity now. Well, what happens if the Japanese don't utilize this window of opportunity? LAWRENCE H. SUMMERS: I think if the Japanese were to not regain the confidence of markets, I think you could well see very adverse developments in foreign exchange markets and asset markets in Japan. And I think in this context, that would certainly stress the situation more in other Asian economies and would exacerbate trade imbalances, globally, and potentially have serious consequences for emerging markets around the world. ADAM SMITH: Why aren't investors in America more concerned about the situation? LAWRENCE H. SUMMERS: Well, I think the American market looks to many, many things, and clearly the difficulties in Asia are a stress on profits for some companies. But, of course, as a consequence of the capital coming out of Asia, some of that capital is coming into our markets and that operates in the opposite direction. ADAM SMITH: The way you describe it, the American economy has actually benefited from Asian capital fleeing its home country and coming into the American markets. Could the converse be true that if things start to improve in Asia, the money could flow out and go back to Asia. LAWRENCE H. SUMMERS: The links are very complicated. Of course there is that possibility. There is also the possibility that stress in one market will be transmitted quickly to stress in other markets. And so, I think surely the safest path for the health of our economy is for us to be working to support stable and sound Asian economies. ADAM SMITH: [voice over] So far, China has managed to escape the Asian mess. Back while all other Asian currencies have fallen dramatically against the dollar over the last 12 months, China's currency, the renminbi, has actually gone up. [on camera] Why wasn't China sucked up into the Asian contagion? LAWRENCE H. SUMMERS: There's obviously an element of insulation because they didn't have as well developed capital markets. But I think the large accumulation of reserves, the fact that they were in a trade surplus situation, I think those kinds of things have also benefited China. And to be sure, China faces very real challenges in economic reform where it could possibly face a significant slowdown in growth. ADAM SMITH: Everybody says that if China devalued its currency it would create another round of devaluation all through Asia and create all kinds of problems. When the President was there and the Secretary of the Treasury, the Chinese insisted they would not devalue. How long do you think that pledge is good for? LAWRENCE H. SUMMERS: China made its position clear and it has also made clear in its statements that in reaching that judgment, it is looking to its very large supply of reserves. It's looking to a very clear political determination at very high levels in their country. It's looking to what is substantial technical capacity to carry out a monitored policy. And it's looking to a question of motive. And they've made clear that their credibility is very much related to the level and position of the exchange rate. And those don't seem like ephemeral factors or factors that would go away soon. ADAM SMITH: I had a guest on my show who made a billion dollars selling short an Asian currency that was weak. And there's a backlash against speculators and the free flow of capital into these markets. Do you think that backlash will have a permanent place? LAWRENCE H. SUMMERS: I think there is a backlash in some quarters. In some quarters, its cause is being generated by those who want to place blame elsewhere for what are more fundamental problems. But, you know, blame the speculators for a financial crisis is a tradition in political thought that goes back to the ancient Greeks and it tends to be associated with a reluctance to pursue the kinds of policies that are necessary to work through problems. ADAM SMITH: [voice over] Back in Washington, Summers and his boss, Robert Rubin, have come under considerable fire for defending the role the IMF has played in Asia and for calling for more U.S. funds to be made available to the beleaguered agency. The correct response to the Asian crisis, Summers says, is for the U.S., as financial leader of the world, to chart a course somewhere between regulating global capital growth and simply letting international markets take their course. [on camera] Well, Mr. Secretary, what you're saying is free markets alone, untraveled markets, don't do the job. LAWRENCE H. SUMMERS: That's the kind of idea that was pursued by many people, by Herbert Hoover and Calvin Coolidge, in the late 1920s and early 1930s, that you could simply ignore these problems. You could just let the market work them out; that there was no role for international financial support. And what that led to was a set of cascading devaluations, greater conflict between countries and, ultimately, the Depression. And that's a mistake we're determined not to let happen again. ADAM SMITH: On these issues sometimes the administration is going one way and certain elements in the Congress go another. From those elements do you hear echoes of the 1930s and isolationism? LAWRENCE H. SUMMERS: There has always been an isolationist impulse in American politics and I think it has always been a dangerous one. And I hope it's something we can move through. ADAM SMITH: What do you think a reasonable timetable in Asia for recovery would be? LAWRENCE H. SUMMERS: I think each country will be on its own schedule and it will really depend on how their policies evolve. And it will depend on the global economic environment, which depends very critically on Japan. But I would hope that we'll see over coming months and into next year some increases in confidence. But as I say, these problems will be with us for quite a long time to come. ADAM SMITH: It always comes back to Japan, doesn't it? LAWRENCE H. SUMMERS: Japan is absolutely critical. It is on some measures as much as 70 percent of the Asian economy. Its banks are key sources of funds. Its market is a key market_ is a key export market. And its situation is a major determiner of psychology throughout the region. ADAM SMITH: You've quoted the phrase, ``War is too important to be left to the generals,'' and added ``And the economy is too important to be left to economists.'' What did you mean by that? LAWRENCE H. SUMMERS: I think it's important for all of us to recognize that this crisis in Asia has important political dimensions; important political dimensions in a sense that economic insecurity can create secured military conflicts; important political dimensions in that the political acceptability of government is really crucial for the ability to carry out the necessary economic reforms. And I think we need to think about this crisis in a very broad way and not think of it as purely in terms of our commercial interests or purely in terms of protecting our economic interests because the broadest political and security and foreign policy stakes are on the line. [Graphic: Asia Crisis in Perspective Asian stock market capitalization values have plunged since the crisis began in July 1997. Tokyo down $650 billion. Hong Kong down $122 billion. Source: MSCI Index]
In Focus [Back to top] ADAM SMITH: More than 60 million Americans have access to the Internet and the World Wide Web. Stocks of Internet companies like Yahoo!, Excite, Lycos and AOL have been given market values in the billions. But what are the most useful things you can do online to help you make or save money? And what are some problems to avoid that might cost you a bundle? I went to visit Andrew Kantor, editorial director at Uproar to put this important story In Focus. The Internet is growing by leaps and bounds; millions of hits a month. What are all these people doing? ANDREW KANTOR, UPROAR: They are looking for things. They are looking for a new pair of shoes at a good price. They are looking for their old college roommate. ADAM SMITH: [voice over] The search for entertainment online is driving growth in Kantor's company, Uproar. It's a leading game producer. Looking ahead, Kantor sees another kind of explosion. ANDREW KANTOR: I think that shopping online at the consumer level is going to be the driving force of the Internet over the next five, six years. ADAM SMITH: Well, how can I best use this service? ANDREW KANTOR: If you were going to buy something that costs more than $20 or $30, before you go to your local store, whether it's a hardware store, an electronics store or even a grocery store, go online and see who is selling it online at what price. Can you get a better product? Can you get a better price? Can you get a better deal in terms of add-ons? ADAM SMITH: Give me an example. ANDREW KANTOR: I wanted to buy a digital camera. They're getting to be all the rage now. I have a couple of options. I can go to CompUSA, about a half-an-hour's drive. I can go to Staples, about a 20 minute drive. I go online. I read the different kinds of cameras, what the plusses and minuses are. I choose the best one for me. I don't need a salesman to show me. Then I look at the stores that sell it and I find one store that sells it at a good 15 percent less than the others. It's a name I know. It's called Insight. I click on Insight's little ``I'' button and three days later I have the camera at a substantial savings. ADAM SMITH: I understand you can buy airline tickets, even cars, this way. ANDREW KANTOR: There are lots and lots of travel agencies online. The Internet Travel Network is my favorite. Microsoft has Expedia. Travel networks are very big and they are competing with travel agents so that now I know some travel agents, live ones, are charging extra for booking because they've got so much competition. Car buying sites like Auto-By-Tel, Auto-By-Internet, Carpoint let you shop for the best car and then shop for dealers in your area and then shop for an auto loan from a bunch of different companies to get the lowest loan rate. And they will approve you and send you a package in the mail and send you a check to bring to your auto dealer. You can do all this online. ADAM SMITH: [voice over] As I listened to this glowing view of the electronic future, I wondered is there a downside for the consumer? ANDREW KANTOR: If you deal with a disreputable company, yes. If you go shopping in a store that's run by disreputable people, then, yes, you can lose money the same way if you shop at a store in your neighborhood run by a less than honorable person maybe who will sell you gray market merchandise. Online, it's possible that you'll give your credit card number to someone who is going to take it and run off with it. But in most cases, you're going to recognize the companies. They're going to have awards from magazines; that you're going to hear about them by word of mouth _ Amazon.com for books or CD Now for music are the two biggest ones. You know them. They're not going to take your money and run. ADAM SMITH: [voice over] Surprisingly, Kantor thinks online shopping will not kill off Mom and Pop retailers. ANDREW KANTOR: The little store has always prided itself on personalized service _ ``Come in. Good to see you. Hey, how did that work out _ whatever you bought last week.'' Those kinds of stores are still going to offer that and people are going to like that. But if you want something at a discount, why go to Wal-Mart? Why deal with the crowds? Why not buy that same thing online from a store in another state? Have it shipped to you. It's a couple of dollars for shipping, but it saves you so much time and aggravation.
Personal Best [Back to top] ADAM SMITH: We've had several letters from you asking about how to make tax deductible donations. Timothy Hannan from Mahopac, New York, writes ``I keep hearing about charitable gift annuities but I'm not quite sure what they are. How do they differ from other annuities? And how can I use one to help me with my financial planning?'' Timothy, a personally-signed copy of my book, The Money Game, is in the mail. Joining me now to answer Timothy's question is Lynn Brenner of Bloomberg Personal magazine and author of the recently published book, Smart Questions to Ask Your Financial Advisers. Lynn is here to help turn your financial planning into a personal best. Lynn, how do you answer Timothy's question? LYNN BRENNER, Bloomberg Personal: Well, as you know, a regular annuity is an investment where you give your money to an insurance company and the insurance company pays you a fixed amount of income every year for as long as you live. With a charitable gift annuity, you give your money to a charity and the charity pays you that income stream. ADAM SMITH: So you give your money and they give you your money back? Or they give you the income on your money back? LYNN BRENNER: They give you the income on your money. And they can give it to you during your lifetime or, if you wish, during your lifetime and your spouse's. But when you are dead, the charity gets what is left of that money. That is your gift to the charity and you get a tax deduction for the present value of that future money that is going to the charity. And it's calculated according to a formula that depends on how long the IRS thinks you're going to live. ADAM SMITH: It's on their table? LYNN BRENNER: It's on their actuarial table, yes. ADAM SMITH: So the shorter time you have to live, the larger the deduction? LYNN BRENNER: Well, yes, depending on how much income the charity is paying you. That's part of the formula too. ADAM SMITH: Lynn, if I make a gift like this, what kind of a return can I expect on what I've given? LYNN BRENNER: It depends on a lot of variables, one of which is which charity you give it to because different charities will offer you different rates of return. But if you set up your own trust, typically you would get between 5 and 8 percent a year of the amount that's in the trust. And the big advantage of getting a percentage instead of a fixed dollar amount is that you protect yourself from inflation because as the amount in the trust grows, the dollar amount you get out with 5 percent a year grows too. ADAM SMITH: So your 5 or 8 percent is worth more? LYNN BRENNER: That's right. ADAM SMITH: Who should do this? LYNN BRENNER: Well, first of all, no one should do this who can't really afford to make the gift because, of course, once you have given away this money, even though you will have the income stream, the principle is gone. You will not have it anymore and neither will your children or grandchildren. So you have to be able to afford it. You might also consider doing it if you have highly appreciated stock, for example. It's worth a lot more now than when you bought it. If you sold it, you'd have to pay a big capital gains tax, but you'd really like to reinvest the money for income instead of growth. If you gave that money to a charity, they could reinvest it for income and pay you the income. ADAM SMITH: That's the ideal circumstance. You escape the capital gains tax. You get a tax deduction and you get an income for the rest of your life and you get to feel good about whatever charity you're supporting. LYNN BRENNER: That's true. But it's important to remember that even though this is a donation to a charity, it's also an investment. So I would say comparison shop because there are, in fact, several ways to do this. You should talk to your tax accountant. And you might want to talk also to a lawyer who specializes in estate planning because there is more than one way to do it and the difference in income to you might be considerable. ADAM SMITH: But this is a trust. This is a charitable remainder trust. You are setting up a trust. LYNN BRENNER: If you do it the most expensive way, you will set up your own trust and then you can select one or more than one charity to be the beneficiary of your trust and you will control how the money will be invested and what the pay out to you will be. If you want to do it less expensively, you could go directly to one charity and purchase an annuity from them. Or today you could go to Fidelity Investments, which has a pooled income fund, a mutual fund which has a status of a charity and you pick. ADAM SMITH: You can direct which charity to send it to? LYNN BRENNER: That's right. You can choose. [Graphic: Lynn Brenner Says - Advantages of Charitable Gift Annuities - A tax deduction of your gift's future value. - No capital gains tax on your gift. - A stream of income guaranteed for life. - Reduction of your taxable estate. Disadvantages of Charitable Gift Annuities - You can't take back the gift. - The income may not cover your needs. - Your children's inheritance is reduced.] ADAM SMITH: What question would you like answered to help you do your personal best at the money game? Get in touch at our e-mail address, letters@adamsmith.net. Or write to us the old-fashioned way at Adam Smith's Money Game, 885 Third Avenue, Suite 2800, New York, New York 10022. We look forward to hearing from you. And if we answer your letter on the air, I'll be sending you a personally signed copy of my book, The Money Game. Here's one stray thought about Asia. We've always been told that the world is now a global economy _ everything affects everything else. And because it's now global, that's a good reason for the stock market to go up. Recently, with Japan in recession and Asia in the tank, we're told that Asia doesn't matter, it's just a blip, so it's all right for the market to go up. Which of these statements is right? Each, probably, but not entirely. The two statements are, after all, mutually exclusive. So the truth will zig zag in the middle between them. I'm Adam Smith. See you next week as the Money Game continues. ANNOUNCER: For more of the Money Game, visit us in cyberspace at www.adamsmith.net. ANNOUNCER: This program is made possible by a grant from MetLife with over $330 billion in assets under management. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation.
CREDITS Editor-in-Chief ADAM SMITH
Thanks to: International Home Foods
Special thanks to: Bloomberg: A provider of news and information services worldwide. 3-D Models Provided in Part by 3-D CAFE For a VHS cassette send $19.95 or $5.00 for a printed transcript to: Adam Smith's Money Game Copyright _ 1998 Adam Smith Educational Productions Ltd.
|
|
OTHER ITEMS About Adam Smith Global Television Transcripts
|
