Posts

Showing posts with the label financial language

What is the gig economy? A zero hours contract?

Image
The gig economy is the reverse of the old Japanese idea of the 'salary man' - the worker who spends his/her working life with a single company in return of job security, a regular salary, pension etc.

What is quantitative easing?

Image
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 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 the gold standard? And gold bugs?

Image
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 debt default? The debt ceiling?

The above video gives a very good description of the debt ceiling. But some might put more emphasis on the current scale of US debt - which has edged up towards $17 trillion at an alarming rate - see debt clock here .  What brought the debt ceiling back into political play has been growing consensus that the debt is now unsustainable in the long term. What Democrats and Republicans battle over is what to do about this. It is universally agreed debt default (see below) could have a potentially catastrophic impact on the world economy. This prospect will eventually lead to some sort of deal but the two parties will fight bitterly until the last moment. What is a debt default? A failure to meet a legally agreed payment. This usually means that the agreement - for example a mortgage - is no longer valid and the lender can take steps to recover the value of the loan Why would a US debt default be a disaster? Usually the national currency falls in value and this helps to make the

What is a 'hair cut' in the financial world?

Image
A 'haircut' is a loss in the value of an investment or security: see  here  for an example. 

What is the 'fiscal cliff'?

Image
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?

Image
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 Liar's Poker?

Image
Michael Lewis Liar's Poker opens with the description of a famous wager made on a Wall Street trading floor in 1987. The CEO of the (soon to be bankrupt Salomon Brothers approached his star trader with an outlandish challege, 'One hand, one million dollars, no tears'. The 'hand' or game he was referring to was 'liar's poker (aka 'cheat' or 'spoof'in the UK). It involved no playing cards but a combination of statistical calculation and bluffing (convincing your opponent of a falsehood). Players hold random dollar bills with close attention to their own bill serial number. The objective of the game is to bluff the opponents into believing that your bid does not exceed the combined sum of all of the serial numbers... The game requires great mathematical skill because the probability calculations are extremely complex. But even more essentials is a 'poker face', the ability to lie convincingly. if one player bids three 4s, he

What is a T-Bill?

Image
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?

Image
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 credit default swap?

Image
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?

Image
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?

Image
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