Rampant Government Spending

Will the safest bonds in the world be defaulted on? Take a look.


Part 1: Did someone say rampant government spending?

It has been a long time since I felt a new president would actually better our lives...Then Obama comes along. I think I am not alone in thinking he was going to rescue our dying nation. Finally someone different is in the White House.

So much for the GREAT WHITE HOPE, or should I say, BLACK HOPE. The rush of the new, the wonderful honeymoon period has long since worn away, and Obama sits in the White House writing checks on an account that has been overdrawn for decades. If I was doing that I'd be in jail by now. The rest of the world is sitting back watching us bury ourselves in debt and wondering when we will begin to default. Top White House aids have gone to China to convince the country we will not default on our interest payments. That is key because we need to be able to continue borrowing if we are gonna be able to finance all the spending going one. Where is the money going to come to insure the 47 million uninsured peoples? The federal reserve has dropped rates to next to zero and our economy remains largely unaffected. The same thing happened to Japan beginning in the 90's and they cut rates to zero and still could not stimulate spending and the following 9 years of recession started.

Already the powers that be are looking at the US in terms of creditworthiness and watching very closely. Could this fabulous country we live in get downgraded? What if we got downgraded to junk? Is that possible for a world leader? And what about the dollar? Do I see a free fall in the near future? Someone please listen to the Oracle of Omaha, and pay attention to your mounting debt that you are saddling our children with. Please...

Financing America

Have you ever wondered how corporate America keeps growing and expanding? What keeps companies like Intel and Cisco Systems on the top end of the food chain, and for so long? It all has to do with ways they grow their company, and here are some of those ways.

At one time I worked for a private entity in a large brokerage and we initially had one client, Cisco Systems. At the time Cisco had about 44,000 employees with stock options and our job was to advise them about exercising their options and how to go about reinvesting them. Some had a few hundred shares, while others, like John Chambers, had millions of shares. One of the ways Cisco would grow their company was through the use of granting employee stock options to the movers and shakers of the companies that had the technologies they needed.

For example: say that Sun Microsystems has a particular technology that Cisco has identified as something they need. They can try to develop it themselves or they can offer key people in Sun Microsystems large quantities of stock options. They would offer the options at pennies a share so the new share holders can exercise and sell the options at a huge profit. When you exercise your stock options you pay for them at whatever the price was set at, then you can hold the shares like any common stock or you can sell them at the current market price. A person in high demand might get two million options at the price of three cents a share. He pays the three cents and sells the shares for fifteen dollars a share. Pretty good deal isn't it? I realize that is an oversimplification of the very detailed and paper intensive process, but there is really no reason to go into it here.

Another way Cisco grew and kept up with the latest advances in technology was through the acquisition of smaller companies that already had the technologies they needed. The group I was with helped facilitate the transition by working with the new employees. Many of those new people had never had stock options and they needed to be educated. So had had then before but needed advice as to the tax ramifications of exercising the options.

For example: if you exercise your options but do not sell them, it is still a taxable event. Your are taxed on whatever gain there is between the option price and the stocks current market price. Many people have a hard time swallowing that pill. How could they owe taxes if they did not realize the gain? The answer is, the realized a gain, but it was a paper gain, and that still counts.

Some those new very happy employees had just become instant millionaires and needed to what to do next. For the guy making fifty thousand a year, suddenly having ten million dollars can be a overwhelming experience. They needed to know how to protect that once in a lifetime windfall. At that time that I was with the group Cisco bought several companies every year so we kept very busy running back and forth to their campus in Santa Clara.

Not everyone has the capital to go on a billion dollar buying spree, so those are left to the other ways to grow and to finance that growth. 

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