Some perspective around the “fiscal cliff”

Dad and I often laugh about some of the “extreme” terms that are coined by the media. One of our favourites is “fiscal cliff”, I mean blimey, how scary does that sound?! For me that term conjures up an image of Barrack Obama hanging one-handed from the edge of a cliff with Republican Treasurer, Tony Parker, prying at his fingers.

Don’t get me wrong, the situation in the US is serious, but as always, we need to keep perspective.

With all the doom and gloom, there’s also been a lot of good news coming out of the States and so I feel a little bit of balance is called for… Below are some good news stories that you could have been excused for missing amongst all the negative noise.

• Whilst there’s been a lot of media coverage on the fact that that the US economy contracted slightly in the December quarter, it would seem this is mostly related to disruptions caused by Hurricane Sandy and a drop in defence spending. So far nothing concrete to indicate they’re heading back into recession. 
• The pace of growth in private final demand actually picked up from 2% in the September quarter to 3% in the December quarter, and basically what this means is that underlying growth is fine, which is a positive sign.
• US corporates are in a financially very strong position with approximately $1.7 trillion dollars in cash sitting offshore. More than 70% of listed US companies reported greater than forecasted earnings expectations last quarter and 65% reported greater than forecasted revenue expectations.
• Business investment is looking stronger, construction spending is on the rise, consumer sentiment is up and jobs growth has been fair.
• The Republican Party (who control the House of Representatives) have agreed to cooperate with Obama’s recent debt ceiling proposal, albeit with conditions, which is a positive step. As I mentioned on my radio program last year, I couldn’t ever imagine the Republican Party would want to be seen as the reason the US went back into recession and for this reason would ultimately always agree to raising the debt ceiling. However, last year that they left their cooperation until the 11th hour and the argey bargey caused some real confidence damage. And if I can just hark back to last week’s blog post, you’ll recall the impact investor confidence has on sharemarket performance in the current climate.
• Obama has proposed a “sequester” on automatic budget cuts and tax increases which would have otherwise come into play this year, and this should hopefully have a positive effect on confidence and economic recovery.
• The International Monetarty Fund (IMF) have conceded that some of their fiscal austerity measures have been harsher than necessary, and will take a more moderate approach going forward.
• The US banking system may not be completely “fixed” but is greatly improved, and definitely well ahead of Europe.
• The US has access now to abundant cheap energy in the form of gas, and by 2017 is set to overtake Saudi Arabia and Russia to become the largest single producer of oil in the world.
• The US housing crisis appeared to bottom late last year, and US households are reducing debt at around US $500bn per annum.

Without question, the US still have a massive task ahead to fully recover from the financial mess they got themselves into - a task made even more difficult by the political instability of a Government with no clear majority.

It’s easy to get caught up in the negativity because frankly that’s what’s thrust upon us every day, but at the end of the day, the question we really want answered is – how does this effect us? And you can only get this answer and perspective with a balanced view of what’s going on. Hopefully I’ve helped provide a little bit of that today.

Should you loan money to friends or family?

A number of years ago one of my clients came to me to ask my advice about loaning a significant amount of money to her daughter. The first question I asked was whether there was any chance that her daughter might not pay her back, to which she replied “oh there is every chance she won’t pay me back.”

I knew her financial position and knew that she couldn’t afford that risk, so told her to explain to her daughter that she wasn’t in a position to help out.

But there are cases where we are in a position to help, and at the end of the day, the only person who can decide if you want to loan a friend or family member money is you, but I do have some tips.

Questions to ask yourself:

1. Will you suffer financially, if the loan isn’t repaid. If the answer is yes, then my recommendation is to walk  away. You don’t want to put yourself into financial hardship because of somebody else’s money problems.

2. Will your relationship be damaged beyond repair if the loan isn’t repaid. If the answer is yes, then again, I recommend walking away. You don’t want to lose your relationship AND your money.

In the very few times I’ve loaned money, I have gone into the arrangement with the attitude that if I never saw the money again, I would live with it. If I can’t feel that way, then I just don’t do it.

3. How formal do you want the arrangement to be? If someone asks to borrow money from you, particularly if it’s what you consider to be a sizeable amount, then you have the right to expect a formalised written agreement. The written agreement should state the amount borrowed, any interest that may apply, payment terms (how much and how often), and the date the loan should be finalised.

I’d recommend having the agreement drawn up by a solicitor, and I personally believe that the person borrowing money should foot the cost of any fees.

4. Will you charge interest? And if so, at what rate?

Often loans between friends or family members are no interest, or low interest, and this is of course up to you. You may wish to apply a market rate of interest, particularly if you believe there’s a reasonable chance that you might not get your money back. Perhaps it’s unlikely that person will be able to get a loan from a bank or other lending institution, and would be more than happy to pay the market rate to obtain the capital

You do need to be aware that legally you have to declare all interest to the ATO, even if it’s a loan between friends or family.

5. If it’s not a formal written agreement, what are your terms? Even if you decide not to formalise the agreement, I do think you need to be clear on the terms. You terms might include a structured amount to be credited to your account each month, or a lump sum to be paid at the end of a certain period.

6. And once you’ve decided the terms, what happens if the terms aren’t met? At what point are you going
to start jumping up and down, or at least giving a little nudge? That’s probably something you should also agree upon from the start. And if the loan is never repaid – what are you going to do? If an agreement is in place, are you going to take legal action?

Probably the best advice I can offer is to be totally up-front right from the start. You may feel a little awkward, but if someone has had the courage to ask you for a loan, then setting the terms should definitely be your prerogative and should be expected. Some ideas for approaching this might include:

“This is a lot of money to me, and while I’m happy to loan it to you, I will need it to be repaid in monthly installments by July. Is that going to work for you?”

“I won’t need the money for the next twelve months, but after that I really do have plans for it. Will you be able to pay me back by September next year? And will you do that as a lump sum, or regular payments.”

“I’m happy to loan you some money, but I have to be honest I’ve seen some relationships turn really sour when money is involved, and I would hate that to happen to us. Would you be agreeable to formalising the arrangement so that we don’t have to worry about any of that?”

“If you happen to miss a payment, do you want me to give you a reminder straight away, or give you a few days in case it’s just slipped your mind?”

At the end of the day it comes down to personal circumstances and your relationship with the person needing a loan. Just make sure you consider the risks involved and what you need from the arrangement.

Talk soon,

C