Tuesday, May 17, 2011
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Hitting the Ceiling
The phrase "hit the ceiling" carries a multitude of connotations. One hits the ceiling with a temper flare. In fact, a web search for the phrase returns several definitions relating to losing one's cool, flipping a wig, seething anger, and so on.
It's interesting that none include reaching a debt limit. There's irony in the fact that hitting the debt ceiling has created both the American public and politicians alike to lose their cool, flip a wig and seethe with anger.
On Monday, May 16th, Treasury Secretary Timothy Geithner announced that the U.S. government hit the debt ceiling.
This comes as no surprise, as raising this limit has been the subject of much political debate ever since a budget agreement was finally reached. Our government spends more than it receives in revenue and has since the Civil War. The bigger government has become, the bigger the deficit.
It doesn't take a Ph.D. in economics to realize this can become a problem over time.
Yet for as simple as the concept of a balanced budget may be, it's equally as difficult to attain.
Consider the average household budget. We perform a steady job to earn a stated income. We calculate how much we can afford to pay for housing, food, insurance, transportation and other living essentials to remain comfortable within our means.
Then comes the unexpected. Health problems, costly car repairs, or home maintenance costs can quickly exceed the amount you've saved for such emergencies. Especially when they hit back-to-back.
And when economic troubles force a decrease in your salary, one must incur debt to simply tread above the water. That debt then becomes one more item to squeeze out of your reduced income. So you incur more debt to merely survive.
That budget becomes nothing more than a wish list.
Our government likewise carries debt. The debt includes money owed to the public such as those who buy U.S. bonds. It includes money owed to government trust funds like Social Security and Medicare.
In order to manage that debt, Congress set a cap which is currently $14.294 trillion. We've reached that limit.
The first limit was set in 1917 at $11.5 billion. Prior to then, Congress had to sign off every time debt was issued.
As we near our debt limit, debates start to ensue about raising it. In fact, the limit is actually changing each and every time lawmakers vote for a spending hike or tax cut. So the ongoing debate is actually no more than political fodder.
Since the amount we owe is already agreed upon by Congress, the only real debate is whether or not we will pay our bills.
Back to our home budget example for a minute. We've already incurred as much debt as we're comfortable assuming, but that salary decrease or job loss has made that limit impossible to maintain. Our choices are clear. Do we pay Debt A and skip Debt B? Do we pay each of them, but less than the amount we agreed upon? Or do we assume more debt to remain in good faith with those that helped when we were in need?
The responsible choice is to fulfill your obligations. Once you renege, no matter the circumstance, it can be hard to find someone to stand behind you when you need them the most. Your reputation is tarnished. You rationalize that this downturn is temporary and you'll soon be back on your feet.
And that's exactly what the federal government does each and every time it raises the debt ceiling. It's standing behind the reputation of the United States of America and declaring to the world that we have problems too, but we will overcome them.
Nobody knows for certain what might result if the debt ceiling is not raised. We do know that the Treasury Department would not be able to borrow any more money. And we wouldn't be able to keep paying our bills.
Should we default on our debt, U.S. bonds, the dollar and the stock market would lose their value. It could very well cripple the world economy.
We're past the point where budget cuts can make much of a difference. Yet they need to be part of the ongoing budget debates. Without them, government spending can spiral out of control.
Our lawmakers must somehow balance budget cuts with any future increases in the debt ceiling. And we have to pray that we've chosen the right folks to get the job done.
To repay Revolutionary War debt, the federal government issued $80 million in bonds in 1790. The U.S. investment market was born.
By 1792, some savvy stockbrokers saw the need for more structure to the system. A group of 24 brokers gathered around a New York City buttonwood tree to sign an historic agreement. The Buttonwood Agreement held only two provisions; first, that these brokers were only to deal with each other and second, their commissions were to be 0.25 percent.
They conducted business from a building at 40 Wall Street and named themselves the New York Stock and Exchange Board. In 1863, they adopted their current name of the New York Stock Exchange (NYSE) and moved to 10-12 Broad Street.
Other brokers took to trading in the streets. They came to be called "curbstone brokers" and typically specialized in stocks of small, newly created ventures. Their motto could very well have mimicked that of the post office. Neither snow, rain, nor the summer's heat kept them from working their street beat.
These curbstone brokers were a tough lot. They were risk takers. When gold was found in California, curbstone brokers created markets for mining companies to fund the new industry. When petroleum was discovered in western Pennsylvania, they began trading oil stocks.
Small industrial companies such as iron and steel, textiles and chemicals sprang up after the Civil War. Curbstone brokers quickly saw their potential and began selling their stock.
The New York Stock Exchange continued to grow as well. It published the first stock ticker, the Dow Jones Industrial Average, in The Wall Street Journal in 1896.
Traders earned the right to trade shares on the NYSE by buying seats. The term stems from the fact that NYSE sat in chairs to trade up until the 1870s. Originally, only 533 seats were allotted. But that number increased over the years to the present 1,366.
These seats were a hot commodity. Prices varied over the years. The most expensive seat sold on an inflation-adjusted basis was in 1929 for $625,000. Today, that would be over six million dollars. Seats have sold as high as $4 million in the late 1990s. The lowest a seat sold for was $17,000 in 1942. Today, one-year licenses to trade on the exchange replace the seat system.
Seat prices didn't deter traders, as even more space was needed to conduct business. The new building at 18 Broad Street boasted one of the largest volumes of space in New York City when it opened in 1903. It was added to the National Register of Historic Places in 1978.
By 1922, a building for offices and new trading floor were added at 11 Wall Street. Additional space was added again in both 1969 and 1988. But both rooms were closed in late 2007 when electronic trading moved transactions away from the traditional floor.
The curbstone brokers continued to flourish as well. They moved their operation to Broad Street, where clerks would communicate buy and sell orders to their brokers from office windows using hand signals.
They, too, saw a need to organize in order to promote sound and ethical dealings. They established trading practices in 1904. Seven years later they created the New York Curb Market with a constitution that set higher brokerage and listing standards.
The New York Curb Market moved indoors in 1921, and renamed to the New York Curb Exchange in 1929. Increasing share volume made them the leading international stock market in 1930.
The New York Curb Exchange changed its name to the American Stock Exchange (Amex) in 1953. They launched Radio Amex to broadcast stock prices, market index movements and other market information. They automated a system to quickly obtain closing prices for broadcast. The value of its shares continued to grow.
The NYSE and Amex consolidated automation and service facilities in forming a new jointly owned corporation, the Securities Industry Automation Corporation (SIAC) in 1971. Both entities continued their own separate operations.
Money was tight, investment funds were drying up. The Amex launched a creative idea by selling options in 1975. Why not sell a contract that gives a buyer the right, but not the obligation, to purchase an asset at a specific price by a certain date? If the asset increases in value, you have a winner. If it doesn't, you can back out of the deal by merely paying the cost of the contract.
They introduced derivative trading in 1993 with the first exchange traded fund (ETF). An ETF is a security that tracks an index and is traded like a stock. Amex's Standard & Poor's Depositary Receipts (SPDRs), nicknamed "spiders" is the largest ETF in the world.
On March 7, 2006, NYSE merged with Archipelago Holdings, Inc. to create a for-profit publicly traded company called NYSE Euronext. It was the largest-ever among securities exchanges up to this point. Amex joined the group in 2008.
Today, the group has 2,317 listings with a market cap of $13.39 trillion as of December 2010. And it all started under a buttonwood tree.
Many readers had never heard of the IMF until yesterday. Those that had likely only had a vague idea of what they do. If it weren't for the criminal charges levied against managing director Dominique Strauss-Kahn, the group who controls the world's money flew pretty much under the radar of Joe Q. Public.
The International Monetary Fund, or IMF, is the global economic watchdog. They provide emergency loans to countries in crisis, help stabilize economies of developing nations, monitor economic and financial developments and provide technical assistance and training.
They receive funding from their 187 member countries. But the richest nations pay the bulk of the cash.
The IMF's mission is to work to "foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."
IMF's role ebbs like a tide. When economies are strong, they sit in the background and enjoy some downtime. In difficult times, they're front and center, ready to provide whatever assistance is required.
In the late 1990s, the IMF was instrumental in guiding East Asia out of a financial crisis. They got involved in the current European crisis, bailing out Greece, Portugal and Ireland rather than placing the burden on the rest of the European Union.
But they don't simply loan the money. They place strict conditions that force troubled countries to change whatever practice got them into the mess.
The arrest of the Strauss-Kahn isn't expected to interfere with IMF performance. While nothing yet has been announced, it's likely that he will be forced to resign his position. The search will be on to find a replacement. But in the meantime, it's business as usual according to a fund spokesperson.
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