Economics
SuperCurrency

The head of China's central bank touched a raw nerve when he called for a shift to a "super currency" that countries could accumulate as foreign currency reserves in lieu of dollars. His goal, I think, was to express frustration with U.S. fiscal and monetary policies that effectively forced Asian countries to accumulate dollar reserves -- the alternative, after all, would be foregoing exports to the United States that keep tens of millions of Chinese, Taiwanese, Malaysian, Vietnamese, Korean, etc workers employed. 

But frustration isn't a policy. China grumbles about accumulating dollars, but has yet to make a serious effort to redirect all those resources now used to create exports into domestic goods -- rural infratructure, greener energy facilities, housing, medical care, consumption durables like cars, refrigerators and air conditioners. So for the foreseeable future, the United States remains the locomotive of global economic recovery: If America doesn't keep on running trade deficits and China doesn't keep on lending Americans the dollars to pay to live above their means, the global economy won't regain its verve.

READ MORE
 
Personal Finance
Taxing Mutual Funds

Is the worst behind us? Are happy days really here again? I don't know -- and anybody who pretends to know is not to be trusted. But with optimism rearing its comely head, this is as good a time as any to talk about a little-understood fact about mutual fund investing: When markets are going up and the fund shares you own are doing well, you may get stuck with a surprising tax bill at the end of the year.

Here's why. When a stock or a bond or a piece of land you own appreciates in value, you aren't taxed on the profit until you "realize" the gain by selling the asset. But mutual funds are different. When a fund sell securities in its portfolio for a profit, the IRS taxes the owners of the fund shares for the income earned on their behalf. Which is fair, of course, but can be a bit of a shock because the owners must pay the tax even if they have chosen to hold onto the fund shares. 

Enter the idea of a "tax efficient" mutual fund -- a fund that minimizes these nasty year-end taxes for share owners, primarily by holding assets a long time before realizing gains. Now, most managed funds aren't tax-efficient because the fund managers turn over securities all the time, if only to prove to the fund owners that they are earning their hefty pay. By contrast, index funds that simply try to match the market are typically quite tax-efficient because they sell assets only to track the underlying index or to make cash available for owners redeeming their shares. And among index funds, the most tax-efficient of all are exchange-traded funds (ETFs) because they never have to redeem shares.

Want to know how tax-efficient your mutual funds are? Most funds won't tell you, and it's a tough calculation to make on your own.  The Morningstar investment service makes these calculations available online, but you have to pay $175 a year to have access to Morningstar's "premium" content.  And in any event, the tax-efficiency of a managed mutual fund may vary quite a bit from year to year along with the investing strategy of the managers.

The bottom line: Tax efficiency is one more reason to stick with index funds, and a pretty good reason to buy exchanged-traded index funds instead of the traditional variety. Oh, and before I forget, none of this applies to mutual funds held in retirement accounts (IRAs, 401(k)s)because you pay no taxes on accumulated retiement income until you make a withdrawal.