John Wasik

By John F. Wasik
The opinions expressed are his own.

Imagine being elected to government even though you’re openly hostile to it.

Such is the perverse arrangement the Tea Party has with the electorate, which is foisting a “Blue Deal” on Americans. As opposed to a “New” deal or even “Square” deal, the Blue Deal and its prolonged pain will hurt most middle-class Americans through higher costs in retirement, health care and public health.

Tea Party affiliates’ nonchalant posturing on the potential debt default influenced the Standard and Poor’s decision to downgrade U.S. debt and the ensuing turmoil.

Now that the Congressional super-committee has been named to begin

cutting more government spending — and hopefully raising revenues — it’s time to craft a balanced agenda that will preserve social programs while cutting government waste.

The Tea Party’s brash intrusion into U.S. politics was a needed wake-up call, although the movement will be more destructive than productive if it doesn’t create a tide that lifts all boats. Here are the major stumbling blocks that need to be addressed head-on by the committee:

• Being the World’s Cop. If Congress is truly interested in the kind of debt reduction the ratings agencies and markets will take seriously, it has to end its role as gendarme to the world’s hotspots. Rep. Barney Frank (D-Mass.) said as much on Tuesday in a National Public Radio interview in which he was cut off before he had a chance to fully explain why. Frank said overspending on needless military expenses is one reason U.S. debt was downgraded by Standard & Poor’s. Nobel Prize winning economist Joseph Stiglitz estimated in 2008 that the Iraq and Afghan wars will cost the U.S. at least $3 trillion — double the cost of the Korean War and outpacing the 12-year Viet Nam war. Pull out of these countries and reduce spending on forces in Europe and Asia and Congress will not have to touch social programs.
• Deregulation Will Cost Money and Lives. The epic dismantling of government regulation by conservative GOP members is going to result in more deaths and higher costs for everyone. Ralph Nader, who knows more than anyone how consumer regulation works, noted that at least 150 million workers will be adversely impacted by cuts in workplace safety and health regulation. There’s more:  ”There are 307 million eaters in America,” Nader states. “More than 7,000 of them die from contaminated food and more than 300,000 are hospitalized each year. The Tea Partiers pushed cuts through the House to the already underfunded FDA food safety programs.” Add to that the assault on investor protection, unions, bank regulation and environmental protection, and it’s difficult not to conclude that the Tea Party’s unrelenting hostility toward government watchdogs will largely hurt the populace.
• Tax Expenditures Cost the Treasury Billions. Tax breaks such as mortgage interest and health insurance deductions take away up to $1 trillion from the Treasury every year and do nothing to promote affordable housing or health care. Conservative economist Martin Feldstein at the Bureau of Economic Research proposes capping all personal write-offs at 2 percent of annual gross adjusted income. He estimates that would raise annual tax revenue by $278 billion annually. Isn’t this a tax increase? While those making $500,000 a year would likely pay $40,000 more in taxes, taxpayers in the $25,000 to $50,000 range would pay only $1,000. The theme here is restoring progressivity to the tax code instead of raising rates. The wealthiest taxpayers don’t get to lard up on breaks that most of the middle class won’t benefit from. In any discussion about taxes, the Tea Party needs to recognize that fairness in the tax code can partially eliminate the cuts in education and health care. Needless corporate breaks that don’t create any jobs and rob the Treasury should also be on the chopping block.
• Rebuild the American Dream. A new social contract is needed. A mindless slashing of every government program isn’t the answer. Social Security and Medicare are enormously successful social programs that have kept millions out of poverty. When you cut benefits, the math is simple: It will increase costs for the retired. If anything, these programs should be expanded to cover more people. Government should be in the business of saving money on hospital stays, medicine and retirement fund management. Social programs should be part of a separate discussion that doesn’t demonize them and implements meaningful cost controls reached by a consensus of Americans. Another dialogue should begin on how to create jobs and involve the private sector, which is sitting on more than $3.6 trillion in cash. Activities that are harmful to society — such as pollution, junk food, smoking, gambling, alcohol and trading speculation — should be heavily taxed. Use the revenue to create 21^st Century jobs that pay a living wage and fund public education and clean energy.

Compromise and social progress need to have a seat at the table. The alternative: Chaos, economic despair, social unrest and a lower standard of living. We need only look to the streets of England or the Arab world to see how gross social inequity eventually translates into anarchy.

Is the recent market upheaval the growling of a new, prolonged bear market or a tempest in a teapot?

It’s too soon to tell and most of us will guess wrong anyway. As Washington and global traders sort out the impact of the U.S. “Tea Party debt downgrade,” you should employ the best hedging strategies possible.

Of course, if you already have a comprehensive financial plan with an investment policy statement in place — and it’s working for you — you’re probably fine. While the ongoing market angst is troubling, you’re still on course.

The only thing that’s guaranteed is that Euro Zone debt woes, the threat of a double-dip recession and ongoing U.S. budget battles will create more short-term volatility than a tropical storm.

Here are some ways of avoiding the market turmoil:

Build a can’t-stomach-stocks portfolio
There’s no shame in protecting your principal, particularly if you’re in or near retirement. The last decade was bad enough, and you shouldn’t have to suffer any more losses. If you can’t afford to lose anything, you shouldn’t be in stocks anyway. One way of dynamically measuring risks and avoiding market downturns is through tactical asset allocation.

The site MyPlanIQ provides some ways of customizing your portfolio to the kind of risk you can stomach. One simple, ultra-safe model they suggest combines just two income funds: The PIMCO Total Return fund and the Vanguard Short-Term Bond fund . About 67 percent of the plan is allocated to the PIMCO fund and 33 percent to Vanguard. While this portfolio doesn’t completely offset interest-rate risk, it’s a good place to be if stocks are tanking and there’s negligible inflation.

Go to safer international havens
Are there such safe harbors anymore in a global economy? Good places to start would be stable, AAA-rated countries like Austria, Australia, Canada, Denmark, Finland, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway and Singapore. While none of these countries is immune from global financial woes, they are a long way from death watch.

Those countries blessed with natural resources give you a double play on the growth in worldwide commodity demand and currency diversification. Exchange-traded funds such as the iShares MSCI Australia Index fund and iShares MSCI Canada Index are worth considering. Want an easy way of buffering inflation? You can buy iBonds directly from the U.S. Treasury, which have returns indexed to a cost-of-living index.

Focus on American essentials
The prospect of a double-dip recession means going defensive in individual stocks. What do consumers do when they have to cut back and save money? Utilities (which pay decent dividends as well) and healthcare stocks typically hold up. Energy is another area that might provide some insulation. Worthy choices include the Utilities Select Sector SPDR ETF, the Vanguard Health Care ETF and Energy Select SPDR ETF.

Let frugality rule
Speaking of trimming the household budget, another retrenchment means people will want to save money any way they can. Priceline, the online travel discounter; Dollar General, the deep-discount retailer; and Netflix, the online movie/TV service, offer some ways to reduce expenses.

Still in the fog over how to deal with the market tumult? Think long term and don’t dart in and out of stocks or funds. Your overall strategy shouldn’t be a whack-a-mole game where you’re trying to avoid the latest market worry such as French banks or U.S. bonds.

Work with a certified financial planner to craft a tax-efficient plan that focuses on risk reduction and adequate retirement income. If your plan matches your comfort zone, you shouldn’t need to worry when national or global economic pots boil over.

Is it time to take cover from exchange-traded funds (ETFs) now that Standard and Poor’s has cut the U.S. debt rating?

With the recent U.S. and Euro debt crises introducing new uncertainty, volatility will be the name of the game. As the frenzy of new fund offerings abates, many funds may close because they will be unable to attract sufficient assets. But a handful of safeguards can protect you.

“The number of ETFs that are shut down or liquidated, while previously a rare occurrence, is on the rise,” said Tom Lydon, publisher of the popular ETF Web site www.etftrends.com in an email. “Closings are up 500 percent in each of the last three years over 2007 levels (which equates to one each week).”

When funds close, Lydon noted, “investors are notified and have 30 days to sell on their own or receive the market proceeds at the time of the closure.”

Keep in mind that ETF assets are not insured by any government agency and you’re subject to market and often credit risk. And while many ETFs have eliminated brokerage fees to buy and sell them, they still may not closely track the index they are named after — a frustrating glitch for many investors. The popularity and perils of ETFs recently triggered a warning from a group of state securities regulators.

The North American Securities Administrators Association warned that “some traditional ETFs may be appropriate for long-term holders, but others, including exotic-leveraged and ETFs, may require daily monitoring.”

You can get into a lot of trouble if you don’t understand the more specialized funds. While most are pools of money tied to stock and bond indexes, many use borrowed cash to bet on up or down movements in stocks, bonds, commodities and currencies.

Exotic ETFs are useful if you need them to hedge specific risks such as a large exposure to the dollar, stocks or even specific government bonds. Still, you can easily lose money because some of the synthetic or “inverse” funds are designed to move up to 300 percent in the opposite direction of the index you’re hedging — or betting against.

“Synthetic products like leveraged or inverse ETFs are not appropriate for ‘buy and hold’ investors,” advised NASAA, “because an ETF may reset each day, and its performance may quickly deviate from the underlying index, currency, commodity or basket of assets it is attempting to mirror.”

Since the more complex ETFs contain derivatives — vehicles that react to but may not directly hold securities — there’s an ongoing concern that institutions may be able to trigger dangerous gyrations in ETF trading. That could ignite another “flash crash.”

“Sudden and large investor withdrawals triggered by market events or counterparty risk concerns can also lead to funding liquidity risk,” noted a recent report by the Bank of International Settlements on systemic risks of ETFs. Translation: A big crash involving ETFs is possible and you should be careful.

Here are some guidelines:

• If you’re a “buy and hold” investor, you can still invest in nearly all of the world stock and bond markets through ETFs. Some low-cost favorites that I hold include the iShares Barclays Aggregate Bond Fund, a basket of U.S. bonds, and the Vanguard Total World Stock Index Fund.
• What you see is not always what you get. Each index fund is slightly different than its peer. It all depends on what the fund holds. If you want a fund to reflect closely the index you want to invest in, find a fund with a low “tracking error.”
• Watch for fees. Except for plain-vanilla ETFs that don’t carry commissions, most exotic ETFs charge you for each transaction. Commissions can add up fast for frequent traders.
• Taxable Events. Outside of tax-deferred accounts, your ETF trading may trigger short-term capital gains that may not be offset by losses. For investors interested in sophisticated hedging or speculation strategies, you should consult with a registered investment adviser or certified financial planner for further guidance. You may be wasting your money on your own through over-trading or poor understanding of how ETFs really work. ETFs are much like cars and trucks. Most of the time, when used prudently, they can get you to your destination safely. It’s when you throw caution to the wind that you can end up in a ditch.

We have iPhones, iPods and iPads. Why not an “iBank?”

This wouldn’t be an electronic gizmo that’s obsolete in a year, though. It would be a public-private partnership to bolster America’s infrastructure. It will create jobs, cut the deficit and repair what needs to be fixed all over the country.

An infrastructure bank, or iBank, solves a lot of problems without busting the budget. Instead of providing direct government grants or earmarks for specific projects, loans are made by a government-banking entity.

The U.S. is inexcusably late to the game on this time-tested idea. The European Investment Bank has financed some $350 billion in projects from 2005 through 2009. China spent 9 percent of its gross domestic product — also roughly $350 billion — to build subways, highways and high-speed rail in 2009 alone. Brazil invested $240 billion over the past three years.

The idea is not without high-level support. President Obama recently called for the creation of an iBank. In backing a U.S. iBank, Senator John Kerry of Massachusetts testified last year that “a national infrastructure bank will make Americans builders again.”

If the iBank became reality — and really it’s a necessity to compete in a globalized economy — there’s no shortage of projects. According to the American Society of Civil Engineers, more than $2 trillion is needed to fix U.S. bridges, dams, waterways and wastewater plants.

The sheer scale of a big fix is staggering: Some 69,000 bridges need to be repaired. The outdated electrical grid needs to be modernized everywhere. You can build solar plants and windmills all you want, but if you have no power lines to transport the electrons from the deserts and plains, you’re whistling in the wind.

Several spin-offs of an iBank have been floating around for years, and the idea already has support across the political spectrum. A “Clean Energy Bank” would fund solar energy equipment. Sen. Bernie Sanders of Vermont, supports legislation that would install 10 million roof solar panels. Sen. Mark Kirk of Illinois proposed a “Lincoln Legacy” infrastructure bill.

How is the iBank different from just handing out the money to each Congressional district and letting the local representative decide where the money should go?

In Kerry’s vision, federal dollars would be matched with private dollars from pension funds and endowments. Kerry told the Time’s Joe Klein recently that “a $10 billion federal contribution will leverage about $640 billion in private investments.” Kerry claims he has support from business, labor and Republican Senators.

Instead of doling out pork-barrel funding for bridges to nowhere, an independent board would decide which projects are needed most. It’s the inverse of a military base closing commission. Instead of shutting down facilities, this entity would greenlight and finance the most-worthy projects.

One thing an iBank wouldn’t be is another big-check stimulus plan, which Congress passed in 2009. That nearly $800 billion package was a huge fiscal band-aid to help states, school districts and wage earners through the recession. Yes, there were some public works projects that created short-term jobs, but the bulk of the money went to tax relief and the states.

The U.S. needs a new approach to economic triage. The June jobs report was nothing short of dismal as employment growth hit a wall with only 18,000 new jobs coming on the market.

Crumbling infrastructure will cost the U.S. economy nearly 1 million jobs and shave $3.1 trillion from gross domestic product by 2020, the Society of Civil Engineers estimates.

What about the budget? Isn’t there a disconnect between the current passion for cutting the federal deficit and spending money to fix America?

There’s little question that putting people to work will help the economy. Working people pay income, sales and property taxes, which flow back into communities. The steadily employed buy homes, vehicles and appliances. Increased tax revenue in turn reduces the deficit.

The iBank may be able to accomplish what a decade of personal income and estate-tax cuts didn’t: Provide the necessary public-private capital to revive the economy. Not even Harry Potter can make magic work on the U.S. economy without some significant infrastructure investment.

With the U.S. debt ceiling crisis: It “ain’t over ‘til it’s over,” to quote my favorite philosopher Yogi Berra. And this one is definitely not over by a long shot.

Some $1.5 trillion in cuts in federal programs will be considered toward the end of the year. Credit agencies may still downgrade U.S. debt. And the harsh plan may ultimately damage the floundering American economy. Fortunately, you have time to protect your portfolio before another politico-economic reign of terror ensues.

Start with an assumption that the markets may frown on U.S. debt and the dollar in general. And there may not be much – if any – significant economic growth in the U.S. for some time. Here are six key portfolio themes that you can consider to bolster your portfolio and insulate it from global debt woes.

A bear market in U.S. bonds. The bull market that got its start in the 1980s may be at the end of its run. Will inflation or investor insecurity trigger a flight from what was seen as the safest debt in the world? If you’re really nervous about U.S. Treasuries, trim your holdings in the longest-maturity notes. To hedge against interest-rate risk depressing government bond prices, consider the Direxion Daily 20+ Year Treasury 1x Shares exchange-traded shares. If the index linked to these bonds goes down, the value of this ETF goes up.

A bear market in the euro and dollar. There’s no easy resolution to Eurozone and U.S. debt dilemmas. Are there “safer” currencies relative to the buck and Euro? You can either buy stocks or AAA-rated bonds in some of the better fiscally managed countries such as Australia, Canada and Switzerland, or currencies from those countries. A more precise way of hedging currency risk is to find a country like Switzerland that’s seen as relatively secure and invest in an ETF such as the CurrencyShares Swiss Franc Trust.

Dividends rule. Not subject to partisan wrangling or sovereign debt debacles, corporate dividends are based on real earnings. Most consistent dividend producers are multinational companies that derive their profit from global enterprises. To find a pool of regular dividend payers, invest in an ETF like the SPDR S&P Dividend ETF. The fund tracks a group of dividend “aristocrats” selected for their consistent payouts over time.

Emerging markets bonds. Though not in the same league as U.S. Treasuries – that may change – bonds issued by developing countries are worth eyeing for diversification and higher yield. The WisdomTree Emerging Markets Local Debt ETF tracks an index of such issuers.

Global real estate. While residential real estate markets in the U.S. and parts of Europe might be in the doldrums, that’s not the case everywhere. You can find decent yields in commercial real estate across the world. The SPDR Dow Jones Global Real Estate ETF provides international diversification.

Commodities will still be in demand. Developing countries like China and India have voracious appetites for raw materials. While investing in individual countries that provide them – Australia, Brazil, Chile – is one idea, a broad-based commodities index will spread out country-specific risk. The Powershares DB Commodity Index tracking fund is a worthy choice.

Keep in mind that a global recession is still a possibility, and the debt-reduction plan may trigger a double-dip U.S. recession. The agreement did nothing to create jobs and will likely result in loss of employment in federal agencies.
All of my choices carry some degree of risk that is multiplied during economic downturns. If you can’t afford any loss of principal, hasten a retreat to something ultra-secure such as federally insured certificates of deposit or money-market accounts.

Governments from Washington to Brussels are now in the “break-it-you-own it” phase of a global debt crisis. They’re trying to get out of fiscal china shops without wrecking entire social safety nets. It’s not entirely possible to avoid the  mayhem, but there are some reasonable places to duck and cover in the interim.

Regulators have finally gotten the message that structured products can be hazardous to your wealth .

Structured products are notes that promise a high yield and are linked to derivatives sold by a bank or broker. After I wrote a column based on a study I conducted for The Nation Institute on May 17 exposing the dangers of these vehicles, the SEC and industry regulator FINRA issued two warnings.

The SEC followed up with a sweeps probe of brokers selling these products and released the results July 27. The agency found evidence of unsuitable recommendations, omission of material facts and “questionable sales practices.”

Why are regulators finally telling you to stay away from retail structured products? They carry embedded risks and high costs that brokers and banks are not clearly disclosing to you. Since the sales commissions on these notes are high, many brokers are aggressively selling them.

The Georgia Secretary of State, for example, is probing the sale of reverse convertible notes, which are bets tied to underlying stocks. The state has subpoenaed UBS AG, Morgan Stanley and Ameriprise seeking information on product sales and customers. The companies have denied wrongdoing.

Watchdogs have reason to be concerned as structured products are now finding their way into variable annuities. The pitch is beguiling: Do you want market gains with downside protection? Sounds pretty sweet, doesn’t it?

A structured product will pair an options contract linked to a securities index or zero-coupon bond. Of course, it’s rarely disclosed in plain language how those options are priced or how much the note will cost you. While at first blush it sounds like a good deal, when you add up the commissions and internal costs, it’s usually a dubious investment in which you’re stuck for a few years. And you could lose principal, so nothing is guaranteed.

The one exception to structured notes is a structured certificate of deposit that is also linked to market indexes, but carries FDIC deposit insurance. In these products, your return of principal is guaranteed while your market exposure is limited.

Chasing yield has drawn investors into a number of other risky products. In its most recent investor warning, FINRA also cautioned against risky leveraged exchange-traded funds, high-yield and floating-rate bonds.

“With yields on many fixed-income investments at historically low levels and a volatile stock market, investors may be tempted to chase returns,” the regulator warned.

With yield-chasing often comes a blind eye towards risk. Every higher-yielding vehicle will expose you to greater market and credit risk and it may not be worth it. You may be dazzled by the high yields without reading the fine print. That’s why more than $54 billion in structured notes were sold last year and some $75 billion poured into high-yield bonds.

Here are some guidelines to keep in mind when considering these products:

Higher credit risk
Since high-yield or “junk” bonds carry lower ratings, they are much more likely to default. Don’t buy single bonds and find a large, responsibly managed mutual fund such as the Vanguard High-Yield Bond fund.

Higher volatility
Floating-rate funds, for example, invest in short-term bank loans. They can offer higher yield in rising-rate environments, but may move the other way when rates fall.

Leveraged returns
Some ETFs borrow money to enhance returns. You could lose money if your bet goes sour.

With all high-yield products, you always need to ask about total costs. How much are the commissions? What are the annual management expenses? What does it cost to buy options within the note? What are the other embedded expenses? Not everything is disclosed in a term sheet or prospectus.

There also may be conflicts of interest between the broker and the bank. Their compensation could be higher for selling you select notes, which many not be in your best interest.

Since disclosure and explanation of how these products achieve their returns is poor, you should consider vetting them through fiduciaries such as registered investment advisers or certified financial planners. And if you don’t understand how the product works — even after your financial adviser explains it — that’s the best reason to avoid it.

The devilish deficit dance going on in Congress right now has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity.  Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

For taxpayers, the bailout begun in 2008 worked as a mega-banking stimulus unrivaled in history. The largest banks were saved and became bigger. Their trading profits and brokerage operations were protected. Then they were able to pour their taxpayer-enabled profits into lobbying against the needed financial reforms of the Dodd-Frank law. Undaunted, banks are still free to lend out money to credit card holders for 14 percent or more.

In the economy at large, though, layoffs continue, the housing market is still in intensive care and the Federal Reserve’s stimulus plan is a bust.

Despite their soaring profits, megabanks still owe U.S. taxpayers money from the bailout. A new study of released by the Center for Media and Democracy shows that $1.5 trillion of the $4.8 trillion in federal bailout loans are still outstanding.

An even bigger boondoggle is the government’s effective nationalization of the U.S. home mortgage market. Through the purchase of mortgage backed securities and debt from government-seized Fannie Mae and Freddie Mac, the Fed has supported the moribund housing market.

The Obama Administration has yet to put forward a plan to resolve its ownership and continued funding of Fannie and Freddie, two fiscal black holes.  Meanwhile, homeowners are still getting foreclosed upon with no end in sight.

“The Federal Reserve and the Treasury have spent $1.6 trillion in a bank-shot to save the housing market by using the same financial companies that got us into this mess,” said Conor Kenny, lead author of the Center study. “That’s more than 800 times what they’ve spent directly to keep homeowners in their houses, and the banks have only made money off the whole thing.”

For American taxpayers, the social return on the bailout has been dismal. Bank foreclosures have resumed their rise. So-called “robo-signing” abuses in home purchases where mortgages are fudged to the benefit of banks also continue. And jobless claims are rising.

It’s time for banks to pay back their debt in a profound way. Yet first, an attitude adjustment is in order: Financial speculation in bank profits should be taxed to pay for education and health care. This trading tax will also reduce the federal deficit over time.

A “Robin Hood” tax like this would even the social capitalism balance sheet. Such a plan is afoot in the U.K. and it should be on the table in any larger discussion

I grimaced when I looked at my money-market fund statement the other day. I was earning zero percent yield.

You’re probably in the same boat. With the cost of money at or near zero, after you subtract taxes, inflation and management fees, you’re looking at negative returns, although it doesn’t say that on your statement. You can do better.

Like most money funds, mine’s not insured by the federal government and strives to maintain a price of $1 a share. But nothing is guaranteed as our fearless leaders haggle over a federal debt ceiling increase and euro zone woes continue.

So it’s time to look around. For as long as I can remember, uninsured money-market mutual funds typically paid more than insured products. Not any longer. I found several FDIC-insured money market accounts that paid up to 1.15 percent annual yield. That’s nothing to shout about, but it’s a whole lot better than zero. Progress!

When I scanned my favorite savings search engine at www.bankrate.com, Sallie Mae — an online bank affiliate with the student lending company — was offering 1.15 percent (as of July 22). There were no monthly fees, FDIC insurance up to $250,000 and easy access to funds. Sallie’s nearest competitors were 0.10 percentage points lower.

As with all high rates, you have to be careful. They are typically only offered for a limited period and may change at any time. Unlike a certificate of deposit, a money-market account doesn’t lock in a rate for a given period. And watch out for hidden fees, which must be disclosed.

What if I didn’t need access to my money and wanted to lock it up for at least a year? The best yields I could find were from Sallie (1.2 percent annually) and Aurora Bank.

The insured accounts stand in stark contrast to the uninsured money fund world. I wandered over to the money fund website iMoneyNet and surveyed the dismal yields available.

The highest-yielding retail money fund on iMoneyNet was a paltry 0.06 percent (as of July 25). You’d do worse on an all-government securities fund: 0.04 percent.

All savings yields now are languishing in this low-yield environment. Institutions can only pay investors based on the short-term debt they buy on the open market. Money funds roughly track the federal funds rate, which was around 0.06 percent at last reading. This is what depository institutions charge each other for lending.

Since the Federal Reserve has been keeping interest rates artificially low — and will continue to do so for the near future — there won’t be any major rise in yields anytime soon. There are two wildcards, however. Inflation could come back (not likely in the short term) or some financial calamity such as the U.S. government not paying its debts could cause rates to soar.

So far, the Fed’s “quantitative easing” policy that keeps rates near zero has been suppressing yields, although it’s a bust for the general economy. Jobs keep evaporating, corporations are sitting on trillions of dollars and the housing market is still in shambles.

There’s one more thing you can do to improve your savings: Reduce the cost of your household debt. It’s still a great time to refinance your mortgage and reduce the monthly costs of credit.

The best deal is still to get a cash-back or other rewards card and pay off the balance in full every month. That way you pay nothing in finance charges. If you roll over your balance every month, you could pay from 11 percent to 16 percent annually on the balance — and even more if you’re late or your credit rating is poor.

If you carry a monthly balance, the math is compelling for credit-card payoffs. Let’s say you have a $10,000 balance at 15 percent annually and pay $500 a month. It will take you two years to pay it off. Raise the monthly payoff amount to $750 and you’re out of debt in 15 months.

Once you’re down to a zero balance, you can start saving the money you would’ve paid to the bank. Of course, if the government doesn’t raise its debt ceiling, you’ll see higher yields, but you may have to stay away from money market vehicles containing U.S. Treasuries. In that case, maybe Swiss Francs would be a safer bet if U.S. debt turns into Swiss cheese.

No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.

Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.

As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”

No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.

Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:

“Broaden the tax base”
This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.

The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.

“Enacting a $500 billion down payment … ”
One of the key elements of this Senate concept carves up Social Security. Instead of the current formula for cost-of-living adjustments, the Senate (and deficit commission) would substitute a “chained” Consumer Price Index. Through economic legerdemain, this new index would shave an estimated 0.25 percent annually from the current cost-of-living payments. That means a lower Social Security payment!

What about bringing more government workers into the system, immigration reform or simply raising the cap on earnings subject to Social Security and Medicare taxes? None of this is mentioned. After all, to “broaden” the tax base — at least in this perverse definition — “reformers” will reduce benefits. Note: There was no COLA paid in January due to low inflation, even though for millions of retired folks the cost of medicine, food and energy rose. The takeaway here is that “entitlement reform” means cutting benefits and raising your out-of-pocket costs for Medicare and Social Security.

“Repeal the CLASS Act”
The Senate document doesn’t even bother to explain what this is, but I will. The CLASS Act was one of the better ideas to emerge from Washington in recent years. It would have given workers the option to buy lower-cost long-term care insurance through their workplace. If you’ve seen a nursing home bill lately, you know that decent care costs more than $70,000 a year. It’s estimated that 70 percent of Americans over 65 will need long-term care at some point. Right now, either families or the Medicaid program absorbs these exorbitant costs — and Medicaid funding has one of the biggest bulls eyes on it. So middle-class and lower-class families will pay more.

There is some good news in all of this. If you’re a hedge fund, private equity manager, bank, corporate treasurer or securities investor, you’ll be just fine. No one has suggested raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.

As  the People’s Republic is entering a “whack-a-mole” phase — where unrest and economic pressures keep rearing its head in different places — it makes it hard to predict whether or not China’s volatility over a strained economy will result in a major meltdown in Chinese stocks. The country has weathered storms before and bounced back.

But if the U.S. defaults on its debt, China will acutely feel the pain, since it’s banked more than $1 trillion in U.S. Treasuries. That’s why you need to ask yourself: Is now the time to “China-proof” your portfolio? While a holding of more than 25 percent of any investment could be hazardous to your wealth, China could be a perilous investment if the country unravels. Here are four cautionary scenarios:

Slow or no growth in the U.S. and Europe
With Eurozone and U.S. debt and housing woes dominating the global financial headlines, you have to ask what impact this will have on China’s export-based economy. Since North America and Europe are China’s biggest customers, this will hurt the expansion of the most populous country in the world. Any high-flying growth stock there will suffer there. A “double-dip” recession is still possible in the U.S. and abroad.

A banking bubble
This has long concerned China watchers and fund manager James Chanos, who said he became bearish in 2009. Are banks honestly reporting their earnings in The People’s Republic? A good question.

A real-estate bubble
Any economy running at a double-digit clip is prone to this malady. The demand for building seems to be slowing down, but will prices turn south?

The currency dilemma
China holds more than $2 trillion in foreign exchange reserves, most of that in dollars. Since its currency is pegged to the buck, it could be hurt even more if the U.S. economy sags — or Congress defaults on U.S. debt. China has also been funding everything from American tax cuts to the running of two wars for the U.S. through its aggressive buying of Treasury debt. How long this continues is anyone’s guess. But when China is able to, it might start dumping dollars.

Keep in mind that China’s political relationship with the U.S. is often tenuous. U.S. economists and policymakers have repeatedly called for China to let its currency float higher, which the Chinese have embraced as warmly as a wet noodle. And nothing is guaranteed if trade or military tensions flare.

“So far China’s financing of the U.S. has come on exceedingly generous terms — and has been remarkably stable,” write Brad Setser and Arpana Pandey for the Council on Foreign Relations.

“Creating a more financially balanced global economy will be difficult as long as China’s government continues to peg tightly to the dollar and add large sums to its foreign assets,” they add.

There are also some justified concerns about whether the auditing of the books of Chinese public companies has been transparent; U.S. analysts are skeptical on earnings numbers, particularly in “reverse merger” stocks.

Reducing your exposure to China may be a good idea. A balanced emerging markets fund like iShares MSCI Emerging Markets Index ETF is a good start. The fund only has about 17 percent of its holdings in Chinese stocks and includes Brazil, India, Russia and other developing countries.

If you really want to go bearish on China, a major speculative bet would be the Direxion Daily China Bear 3X Shares ETF. The leveraged fund moves 300-percent in the opposite direction of a basket of Chinese stocks. It’s definitely not a play for conservative, buy-and-hold investors.

Whatever you do, spread your money out among the world’s largest and developing economies. In the interim, you might want to pay attention to what’s happening in China and double-check your portfolio.