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    Orderly Markets

    May 14 • Demand, Supply, and Markets, Financial Markets • 346 Views

    No one has figured out the cause of the “flash crash”. Some background information might help, though, when we try to understand what happened.

    1. On May 6th, the Dow Jones Industrial Average plunged close to 1000 points, then made up some of its loss, and closed down 348. Most of the drop happened from 2:40 to 3:00.
    2. Historically, the New York Stock Exchange (NYSE) was the epicenter of buying and selling stock. Yes, there were other stock markets but the NYSE was king.
    3. Now, the NYSE is only one of many stock markets in which NYSE listed companies’ stock trade each day. For example, before 2003, Procter & Gamble shares were traded almost exclusively through the NYSE. Now, as shown on an Economist chart titled “Flash Crash Mish Mash,” Nasdaq, ArcaEx, Direct Edge, and BATS, and others also trade NYSE listed equities.
    4. Simplifying considerably, we can say that not only are stocks individually traded, but also “packages” of stocks are traded, and beyond that, people trade stocks that are based on stocks. And beyond all of this, not only are people buying and selling, but also, trying to make pennies on each transaction, we have computers doing very speedy trades with other computers.  In fact, these high frequency trades now represent more than 60% of daily stock trading.
    5. Fundamentally, stock prices fall when the number of shares people (and computers) want to sell exceeds the amount people want to buy. If there is an avalanche of sell orders, the NYSE has slow down rules that are designed to let it maintain an orderly market. The other markets have (or don’t have) their own rules and no one necessarily has the same rules.

    Can you see why no one knows why the Dow dove suddenly? And yet, to maintain investor confidence, regulators need to prevent it from happening again. 

    The Economic Lesson

    The first rule of “Investing 101″ is, “Maintain an orderly market.” Orderly means that upward or downward price changes should unfold in steady increments; it means that trading will be halted whenever the buy or sell side becomes unmanageable. For several centuries “specialists” in trading posts on the floor of the NYSE were charged with maintaining orderly markets in the securities when they matched buyers and sellers. On May 6th, with no new news about the company, consulting firm Accenture’s stock tumbled 99% to one penny from above $40 a share and then returned to prior levels. Most of the drop occurred between 2:40 at 3:00. For Accenture, the market was not orderly.

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    A Woman’s Impact

    May 13 • Gender Issues, Households, Labor • 332 Views

    In a Washington Post article with the heading, “‘Potty Parity’ hearing set for today,” I discovered that the U.S. Congress was working on a bill to increase the number of female restrooms in federal buildings. Testimony began yesterday.

    Watching the PBS NewsHour, I also learned that with two women on the Supreme Court, attorneys occasionally referred to each by the other’s name because they were the “female” justices. Now, they wondered whether a third woman on the court would become the “tipping point,” normalize the female presence, and all would blend as justices.  

    These new facts started me thinking about how the number of working women had changed. I found some answers in a BLS paper on women’s changing participation rates. Some stats follow. Called participation rates, the percents represent the women who are in the labor force compared to those who could be in the labor force.     

    1960: 37.7%;  1970: 43.3%;  1980: 51.6%;  1990: 57.5%;   2000: 59.9%;  2005: 59.3%;  2008: 59.5%

    A very interesting participation rate stat: For women 65 and older, the rate was 8.1% in 1980, 13.3% in 2008 and projected to be 17.5% in 2016.

    The Economic Lesson

    Formally defined, the participation rate is a statistic that compares the size of the labor force to its potential total.  When we refer to women’s participation rates, we are looking at the women who are in the labor force compared to all who could be in the labor force. For example, if 100 women could be in the labor force and 40 of those 100 are in the labor force, the participation rate is 40%. 

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    A Plastic Penny?

    May 12 • Government, Money and Monetary Policy • 369 Views

    How do you feel about the penny and the nickel? If you care about the federal budget, you might want to mint them more inexpensively. But, if you own a laundromat, you disagree.   

    Pennies are actually copper coated pieces of zinc while nickels are nickel (but mostly copper). It costs close to two cents to mint a penny and sometmes as much as nine cents for a nickel. Making them more cheaply could mean replacing the copper in a penny with an aluminum alloy. The nickel and the penny could both be made of plastic.

    However, just switching from copper to zinc in the penny was controversial when President Reagan proposed it in 1981. A recent WSJ article described the uproar.  Some said we should not become dependent on foreign zinc suppliers (Canadian). Others said tradition was crucial. Vendors wanted to avoid retooling their coin machines. Plastic coins stir up even more emotion.

    Do care if your penny is plastic?

    The Economic Lesson

    Anything can be money, a piece of paper, a circle of zinc, or a seashell, if it has three basic attributes:

    1. It is accepted as a medium of exchange. For example, you and I are willing to use the commodity in a supermarket. A peso or a tie is not a medium of exchange in the United States. The nickel is a medium of exchange.
    2. It is a unit of value. We all know how much purchasing power a nickel represents but not necessarily the yen.
    3. It is a store of value. We all like our money to retain its purchasing power if we do not spend it immediately.


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    Choosing Means Refusing

    May 11 • Economic Debates, Government, Thinking Economically • 345 Views

    In yesterday’s Washington Post, Robert Samuelson reminded us that most developed nations will have a growing proportion of senior citizens. Comparing 2005 and 2030, for Greece, the 65 and older group will increase from 18% to 25%, for Spain, from 17% to 25%. According to 2000 US census projections, between 2010 and 2030, the 65 and older population will pop from 12.97% to 19.3%.  

    Calling it a “welfare state death spiral,” Samuelson believes that this simultaneous aging across borders eliminates the chance that one nation can extricate itself from a “bind” through help from a healthier country. Because, he says, of everyone’s unemployment insurance, health insurance, and old age assistance, governments will have excessive expenses that will be difficult to fund.

    The Economic Lesson

    Also, the causes relate to opportunity cost. Let’s assume that a politician can vote for or against an old age benefit. Therefore, the opportunity cost would be the best alternative that was not selected: choosing means refusing. One benefit of voting “yes” is reelection. Another benefit is giving money to a very needy person. By contrast, the benefits of voting “no” could include creating less debt for grandchildren and slowing economic growth. Each alternative has a high opportunity cost.

    Your choice?


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    Grading a Country

    May 10 • Businesses, Government • 311 Views

    We could say that the graders of sovereign debt use a “rubric” to decide whether a country has a high or a low score. In the classroom, students are given rubrics which specifically describe how a test is graded. A rubric is a list of facts and ideas that compose a high grade or a low one.

    When NPR’s Planet Money visited Standard & Poor’s to find out their “rubric”, they described a two step process. First S & P checks a variety of topics that include the country’s debt, monetary policy, exports, imports, budget, and election results. They look at objective and subjective data, even including what the media is saying. Next, all information is given to a 5 person committee that decides what the rating should be. 

    Recently, The Guardian described what the three major ratings agencies, Standard & Poor’s, Fitch, and Moody’s, do and listed the grades of nations ranging from Albania (B+) to Vietnam (BB). The grades are based on how likely a nation is to pay back its debt fully and on time. Because the United States and Canada, for example, are considered very likely to pay back all that they borrow, they received the highest rating: AAA. The lowest grade is a CCC and maybe even an R.

    Controversial during the subprime crisis, the ratings agencies generate criticism for their sovereign debt ratings also. Bill Gross, a prominent bond investor and the co-founder of PIMCO, questions how Spain, “a country with 20% unemployment… that has defaulted 13 times during the past two centuries” can have AA and AAA ratings.

    The Economic Lesson

    When countries borrow, they most typically issue bonds. Bonds are IOUs that pay interest in exchange for money from the lender for a specific period of time. A lender can be a person, a business, or another country. A country’s loans can be called sovereign debt.

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