Hartford Business Journal

www.HartfordBusiness.com December 14, 2015 • Hartford Business Journal 21 BIZ BOOKS How an economy grows and why it crashes "H ow an Economy Grows and Why It Crashes" by Peter Schiff and Adam Schiff, John Wiley & Sons, $34.95. Imagine three guys on a tropical island eking out existence by catching fish bare- handed. Then one invents the fishing net. The inventor loans the extra fish he catches to the other two while they make their own nets; the loan is repaid in fish two for one. Three lives are changed because fishing goes commercial. Attracted by this growing industry, other residents come to the island. While many fish, oth- ers provide services to the fisherman and their families. Prosperity booms as con- sumer spending grows; in the background, the roles of bank- ing and government expand. With hut options limited, the cost of huts spirals. High mortgage payments see more islanders living from paycheck to paycheck and using credit to excess. Inflation begins because the government keeps printing "Fish Reserve Notes," increases taxes and goes into debt to fund its projects and the agencies needed for oversight. Sound familiar? Using the simple, yet complex, island economy as a metaphor, the Schiffs stress the human aspects over the dizzying array of charts and graphs most economists use to explain economics. With wry humor and illustrations, they teach Econ 101. Learning high- lights include: People get rich only by providing something of value to others. If the net inventor had not loaned fish to the other guys so they could eat while mak- ing their nets, they would still be catch- ing fish bare-handed. All three profited from the loan. Advances in productivity allows for expansion into other areas — and more lei- sure time. The three soon built a mega fish catcher that catches more fish than they can consume. They created an export business. One began building surfboards so he could be the big kahuna of the waves; it evolved into a surfing school. Another began creat- ing designer leaf-ware for island residents and tourists; the third worked on canoes and carts for transporting fish and people. Save, save, save! Savings shield people and economies from the unexpected. By under-consuming, people build wealth needed to maintain their living standards in the event of job loss or retirement. From the economy's standpoint, savings (i.e. rein- vested profits) create business growth and economies of scale that make goods avail- able to more people at lower prices. The role of a bank. Loans on the island are predicated on risk. The borrowers with sav- ings and good credit ratings get the lowest rates. The rates on the loan portfolio deter- mine the rates paid on savings accounts and longer-term deposits. As banked savings swell, loan rates drop — money in the vault won't generate profit. The bank monitors credit quality because relaxing credit stan- dards will ultimately increase defaults. On the island, interest rates rise and fall based upon supply of money and the demand for loans. The banks know that artificially low rates actually encourage borrowing/ consumption and discourage savings. The tipping point comes when a large sector of the economy collapses (i.e. fishing industry, hut building) and businesses/con- sumers can't repay their loans. Banks floun- der. Government intervention, in the form of make-work projects drive up the deficit. Loans are made to troubled industries deemed too big to fail with the knowledge that the taxpay- ers won't come out whole — which leads to either higher taxes or higher deficits. Key takeaway on inflation. When a gov- ernment's deficit increases, the value of its currency goes down. The three results: 1. Wages and prices go up because it takes more money to buy what you used to buy. 2. As prices increase, the incentive to save goes down — why save when the things you want will cost more tomorrow. 3. Those on fixed incomes find that their retirement nest egg won't last as long as they'd planned. The Schiffs simplify economics by explaining cause, effect and things that interfere with market forces. n Jim Pawlak is a nationally syndicated book reviewer. Jim Pawlak EXPERTS CORNER Retirement planning tips for CT small business owners By Mark Crandall E very day small business owners in Con- necticut juggle front-of-house opera- tions — serving customers and manag- ing staff — with back-office duties, including payroll, licensing, taxes and labor laws. With so many immediate priorities, planning for retire- ment can take a back- seat, especially when it may be a decade or more away. In fact, a recent survey by TD Bank found that near- ly half (47 percent) of small business own- ers don't have a retire- ment plan in place. With more than a third of small business owners in the U.S. at or near Social Security's full benefit age of 66, the future may be clos- er than many small business owners think. Lacking a 401(k) or a pension to rely on for retirement income leaves many small busi- ness owners ill-equipped for retirement. To properly prepare, Connecticut's more than 331,386 small business owners should consider the following: • Set a goal: Setting a goal and envi- sioning your plan for retirement is crucial. Whether you choose to sell the business or a partnership, pass ownership to another indi- vidual, or close the business, this decision will inform your retirement planning. • Build a retirement plan: Age contributes to how aggressive your savings plan needs to be, so it's vital to begin planning and saving now. If you want to sell your business at retire- ment, be realistic about its market value. While it's impossible to predict how the econ- omy and other factors will impact a business' future worth, obtaining a valuation range bet- ter prepares you for all outcomes. If you want to cash out of your business at retirement, you should still save cash now. Instead of putting all the profits back into the business, consider giving yourself a raise to max out contributions to a 401(k) or IRA. The Small Business Administration (SBA) reported in 2013 that the median income for self-employed individuals in Connecticut was $59,067. Putting even a fraction of that towards your goal will help put you on the right track towards retirement. Paying yourself on a quarterly basis can also make saving easier. • Think about growing your business: Our survey found 57 percent of small busi- nesses are sole proprietorships, meaning the owner has essentially replaced his or her income at a corporation with self-earned income. Unfortunately, sole proprietorships don't sell. Even if they did, the sale wouldn't be a big enough profit to comfortably live off of during retirement. Increasing employees and revenue boosts the business' overall value, making it more attractive to potential future buyers. Investing in your business now makes big differences later. • Be smart with finances: Small busi- ness owners have many resources available, including seminars and videos from the SBA, workshops by local banks and seminars by your chamber of commerce. Often free, these resources can provide insight on topics like expansion, seeking credit and applying suc- cessfully for small business loans. Keep retirement goals in mind when making any major financial decisions for the business. Again, financial professionals can advise on which risks are financially sound by review- ing a plan and factoring in how debt level can impact retirement goals. For small business owners, preparing for retirement is work beyond setting aside a per- centage of your paycheck into a retirement savings plan. A solid strategy will include both succession and retirement plans that allow you to comfortably hang up your hat. n Mark Crandall is TD Bank's regional pres- ident for Connecticut, Massachusetts and Rhode Island. Mark Crandall ▶ ▶ Advances in productivity allows for expansion into other areas — and more leisure time. ▶ ▶ With more than a third of small business owners in the U.S. at or near Social Security's full benefit age of 66, the future may be closer than many small business owners think.

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