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What is a zero-sum game?

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A zero-sum game is  a competition/conflict in which 'the winner takes all'. Whatever is gained on one side is lost on the other.

What is a debt default? And the debt ceiling?

To default on a debt is to fail to make a scheduled payment on a loan.  A sovereign debt default is when a country defaults on money it owes - as happened to Argentina in the early 1990s, for example. What is the 'debt ceiling'? The above video describes the political dimension of the debt ceiling. The US debt now stands at $21 trillion - see debt clock here .  Some economists argue that this debt level is unsustainable in the long term. The key question  Democrats and Republicans battle over is what to do about this.

What is the difference between inflation & deflation?

Put simply, inflation is when prices rise. The result is that money loses its value.  Deflation is when prices go down and money increases its relative value.    Financial historian Amity Shales summarises the issues Deflation ... hurts good people, strivers who over-borrow. {It} can cause depressions, as the U.S. saw in the early 1930s ... In the Great Depression, there wasn’t enough money around -- literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed. { But }..... Deflation doesn’t always spell apocalypse. It can coexist with prosperity -- or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard.   Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier. For example Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II.

What is a 'run' on a bank?

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A run on a bank is when a large number of customers withdraw their funds simultaneously. If a run on a bank gains momentum it can quickly 'fail' or go out of business, as  happened with Lehman Brothers in 2008. This is what George (James Stewart) is trying to prevent in the famous scene (above) from 'It's a Wonderful Life'. With institutions that are 'too big too fail' a government or international financial organisation may rescue the bank by either taking it over or injecting huge amounts of cash. This is the role the EU is currently playing in Cyprus. Unfortunately the proposed solution, which involved seizing ten per cent of depositor cash has created a crisis of confidence that threatens the banks, the role of Cyprus in the EU and ultimately the EU project itself. How do you stop a bank run? With great difficulty. The traditional remedies are: a) delay -  ....the bank is going to open again next week ... the key requirement is to 'buy tim

What is a run on a bank? What does James Stewart teach us in It's a Wonderful Life???

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A run on a bank is when a large number of customers withdraw their funds simultaneously. If a run on a bank gains momentum it can quickly 'fail' or go out of business, as  happened with Lehman Brothers in 2008. This is what George (James Stewart) is trying to prevent in the famous scene (above) from 'It's a Wonderful Life'. With institutions that are 'too big too fail' (see The Royal Bank of Scotland) a government or international financial organisation may rescue the bank by either taking it over or injecting huge amounts of cash. This can prove ruinously expensive (see the current situation with the Spanish banks). How do you stop a bank run? With great difficulty. The traditional remedies are: a) delay -  ....the bank is going to open again next week ... the key requirement is to 'buy time' to organise refinancing. This means slowing down the rate at which customers can withdraw their funds. At the end of the scene above George agrees to r

What is a T-Bill?

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Treasury Bills are what the US government uses to borrow money. A T-Bill has always been seen as one of the safest forms of investment because it offers a guaranteed return - barring the complete collapse of the world financial system! WiseGeek   explains how it works: The smallest face value for a T -Bill is $1,000 US Dollars (USD). The T -Bill is sold at a discount, which is determined by the Bureau of Public Debt, but the Treasury pays the full face value when it is redeemed. For example, an investor might purchase a 90-day T -Bill for $900 USD, and earn a $100 USD return on the investment when the T -Bill is redeemed. Unlike many other securities, a T -Bill does not bear interest, but the return on a T -Bill is highly predictable and very stable.  T-Bonds have come to the fore recently as the US Treasury struggles to manage the financial crisis - see here

What is a credit default swap?

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Warren Buffett famously described 'derivatives' like CDS as 'financial weapons of mass destruction'. Here is a description of how they work. The Big Short: Inside the Doomsday Machine Warren Buffett Invests Like a Girl: And Why You Should, Too (Motley Fool)

What is a basis point?

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The cost of insuring Treasuries rose five basis points to 54.5 basis points, according to CMA prices for credit-default swaps. Credit-default swaps' were the primary cause of the financial collapse in 2008. A basis point is 1/100th of one percent (0.001%). Not a commonplace calculation and most accountants would not need to trouble with it in most transactions. But basis points are part of everyday conversation in Ireland, Greece, Portugal and now Italy. This is because the cost of insuring government debt is calculated to basis points as this recent example from the financial press shows:  Italian five-year CDS was 69 basis points wider at 512 basis points, nearing its record of 521 basis points hit on Sept. 21, according to data-provider Markit. A CDS is a credit default swop - a form of insurance of mind-bending complexity. You can see a short video explanation here. Financial Accounting As a Second Language Wall Street Lingo: Thousands of Investment Terms Explain

What is a Ponzi scheme?

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Texas Governor Rick Perry caused some controversy in recent Republican Presidential Debat by referring to the US social security system as a Ponzi scheme. Here's what he was alluding to: A Ponzi or pyramid scheme attracts investors by offering very high and consistent profits. In reality these 'profits' do not exist - early investors are paid with the money contributed by later ones. The original Charles Ponzi (1882 -1949) was not the first to run a pyramid scheme, but the collapse of his Boston-based financial fund in 1921 became an international scandal. All Ponzi schemes are eventually destroyed by the thing that sustains them: confidence. While the scheme is successful there does not appear to be a problem. The infamous Madoff fund prospered for decades until the financial crisis of 2008. It was when investors tried to withdraw their capital that the fraud was revealed. The use of the term Ponzi Scheme is no longer restricted to describing direct financial f