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Showing posts with the label economic language

What is quantitative easing?

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Quantitative easing is when a government pumps 'new' money directly into the economy. It  does this is by buying assets - usually financial assets such as government and corporate bonds.  The financial institutions selling those assets (e.g banks) can then boost the economy by lending this new money to businesses. Why is QE unusual? The normal way a government stimulates economic growth is by a) reducing the cost of borrowing  b) lowering taxes, particularly on business investment. The problem in the current financial crisis has been that interest rates are already at historic lows. As a result some governments (notably the US and to a lesser extent the UK) have attempted to inject money directly into the economy.  The European  Central Bank has resisted QE until recently. Some would argue that this has been a factor in the weakness of the European economic recovery English Language 100 FAQ Teaching Pack   -  only £1.99 using discount code  CQDWKF0

What is mission creep? Where does the phrase come from?

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Mission creep is when an original plan or objective is progressively widened by events on the ground. Significantly the phrase has military origin Originating in Somalia in 1993, the modern term “mission creep” became part of official U.S. Army vocabulary a decade late r. Field Manual 3-07,  Stability Operations and Support Operations  (February 2003) acknowledges two types of mission creep. The first occurs when “the unit receives shifting guidance or a change in mission for which the unit is not properly configured or resourced.”  Lewis and Clark In other words limited objective you start with expands to the point where it is no longer clear.  Mission creep has also been used to describe non-military matters - financial regulation  for example . The Dictionary of Military Terms English Language 100 FAQ Teaching Pack     -  only £1.99 using discount code  CQDWKF0

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 'nudge' theory?

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'Nudge theory' comes from Richard Thaler/Carl Sustein book  Nudge: Improving Decisions About Health, Wealth, and Happiness .  It is based on the idea that we are inherently lazy and tend to take the default option in most circumstances. The 'nudge' is to gently push us in the right direction for our benefit or the general good. One example would be making automatic kidney donation the default - you would need to carry an 'opt-out' card. The central question, however, is who is doing the nudging? The government? If so, do you trust them to look after your best interests? Interesting discussion of the issues in this BBC Radio show Analysis .

What is the gold standard? And gold bugs?

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The gold standard is when the value of a currency is directly linked to the amount of physical gold held by a country. Britain had the gold standard until 1931 and the USA only abandoned it in 1971. They did this in the belief that the gold/currency link was too inflexible. Some have argued that the gold/currency link was a key element in the Great Depression, forcing economic austerity in contracting economies. So the gold standard is a recipe for trouble? Life without the gold standard is also not without major problems. The US dollar, for example, has declined in value and many libertarians (most notably former Presidential candidate, Ron Paul) have argued that restoration is essential to restore economic prosperity. Some also argue that the gold standard is the only guarantor against long-term financial catastrophe.  Freed from restraint, governments can choose 'quick fixes' like quantative easing in difficult economic circumstances - only to create hyper-inflati

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 the 'fiscal cliff'?

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Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.   Mr Micawber in Charles Dickens David Copperfield (1850) The ' fiscal cliff ' is the phrase used by Federal Reserve Chairman Ben Bernanke to describe the situation US economy will face in January 2013 if political agreement is not reached in Washington. At that time a series of tax rises (the expiration of the 'Bush tax cuts') and spending cuts (part of a previous agreement) will take effect. As things stand the Democrats - including the freshly re-elected President - are refusing to cut expenditure on programs like Medicare. They insist on tax rises for 'the super rich' or 'millionaires and billionaires' as it expressed in electoral rhetoric. Both sides are hemmed in by the 'debt ceiling' - a legal limit to the amount that can be borrowed - and the a previous agr

What is the difference between fiscal and monetary?

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When economists talk about fiscal policy they are referring to raising and spending taxes. Monetary policy is what central banks do to control the amount of money in an economy. Normally they do this either raising/lowering interest rates. Raising interest rates restricts the amount of money circulating and should reduce inflation. Lowering interest rates encourages expenditure as there is more money available. But as everyone know these are not 'normal' economic times. Interest rates in the advanced western economies have fallen to close to zero - but the recovery remains this. To counter this some central banks have introduced something called quantative easing .  Put simply means pushing more money directly into the economy via the banks - see here for more details.

What is an escrow account?

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An escrow account is an account managed by a bank and dedicated to a special purpose - for example, the 'bail-out fund' created by the European Union to refinance member states. If Portugal did not have the funds to repay it debts, it could (temporarily) avoid credit default by drawing funds from the escrow account. That might work for the smaller economies. But for Italy? Or France? Who will finance this safety net? And if they money was needed, would this mean a severe  haircut  for those funding the escrow account?

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 debt default?

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To default on a debt is to stop repaying it. A sovereign debt default is when a country cannot make an agreed repayment on money it owes - as happened to Argentina in the early 1990s, for example. An early sign of a possible default is when the credit rating agencies downgrade the credit rating of the country concerned to 'junk bond status' - see here for a brief description (with audio) of what this means. What is a debt default? (mp3) What happens when a country defaults? Usually the national currency falls in value and this helps to make the goods of country concerned more affordable. International institutions like the IMF also arrange repayment plans or write offs/markdowns of debt. Why would a Greek default be such a big deal? It's a small country! 1. Because it owes massive amounts to some of the biggest European banks. They will lose money or 'have a hair cut' as financial traders put it. 2. Greece cannot devalue i

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 crowd sourcing?

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A widely used neolgism with an imprecise definition. Crowd sourcing is the equivalent of 'asking the audience' in a radio show. It is a very popular concept in marketing as this example from a furniture design company illustrates: "We figured that consumers would be the best judges for us," he says. Made.com gives designers the opportunity to submit ideas and then asks customers to vote on them. Only the top vote getters are offered for sale. The term crowdsourcing is only a few years old, but the idea's been around for a decade. That's when online T-shirt seller Threadless, a pioneer crowdsourcing website based in Chicago, launched. Last year, according to Forbes , Threadless had sales of $30 million. Since then, companies as diverse as P&G, GE and Anheuser-Busch have used crowdsourcing to percolate product and advertising ideas.  Full Time article here  and a remarkable recent example in education here :

What is mission creep?

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Mission creep is when an original plan or objective is progressively widened by events on the ground. Significantly the phrase has military origin Originating in Somalia in 1993, the modern term “mission creep” became part of official U.S. Army vocabulary a decade late r. Field Manual 3-07, Stability Operations and Support Operations (February 2003) acknowledges two types of mission creep. The first occurs when “the unit receives shifting guidance or a change in mission for which the unit is not properly configured or resourced.” Lewis and Clark  In other words you start with a limited objective but this expands to the point where it is no longer clear. This phrase has also been used to describe non-military matters - financial regulation, for example . The Dictionary of Military Terms