One of the things which makes it so hard to read and understand economics papers and articles is the the language they use. I am not suggesting this is done in order to confuse or obfuscate: all professions have jargon and they have it for good reason, usually. But it does tend to put the lay person off when trying to understand what is being said. Since jargon is comprised of neologisms and/or words which have a specialised meaning in the field, divorced from the ordinary meaning, it is not only difficult to understand, but it is also quite hard to retain. So for my convenience I am going to post the definitions as I come across them, here. I am hoping it will serve as a quick reference for me and for anyone else who needs it. I am only going to post them as I encounter them so I expect this post will be edited a lot if I carry on with this attempt to understand economics. But I might get bored soon
CDS (Credit Default Swaps): A form of insurance against loss which allows the buyer to take out insurance against a fall in value of an asset which he has no interest in: like being able to take out insurance on your neighbour's life.
Deleverage: Pay off debt
Financial Intermediaries: Institutions which channel money between savers and borrowers otherwise than directly through the financial markets. They are of three main types:
1. Monetary Financial Institutions (MFI's) : this includes
banks (also called credit institutions) and
money market funds2. Insurance Corporations and Pension Funds (ICPF's)3.Non- monetary Financial Institutions other than ICPF's (OFI's) . This includes Investment Funds; Financial Vehicle Corporations (FVC's); Central Counterparties (CCP's); Financial Holding Companies; Venture Capital Companies; Securities and Derivatives traders; and development companies.
Hedge fund: a parcel of investments which aims to achieve a high return through using the funds to lend more than they have and through other activities such as "selling short". These are usually unregulated and are open to a limited number of investors who have a lot of money to invest,and are seen to be "sophisticated". (This explains the statement from Odey Asset management, which I quoted in the NHS privatisation thread. It is usual for them to be private limited partnerships in structure. ) Originally hedge funds were intended to reduce risk: but that is no longer true. Now they just want to get a high return and they are more risky than other types of funds.
Interest swap: Two parties pretend to have lent money to each other and each pays interest on the pretend money: Party A has an external obligation to pay a fixed rate of interest on a loan and Party B has an external obligation to pay a variable rate of interest on a different loan. For whatever reason each wants to change to the kind of interest they are not currently paying. So they agree to pretend they have lent to each other and party A pays variable interest on that imaginary money to Party B: and party B pays fixed interest on that same pretend sum to Party A. The variable interest is tied to some outside reference point and the aim is to make the net transfer = 0. One consequence of this is that nothing appears on the balance sheet as an asset or a liability: but the interest does appear on the income and expenditure account.
IS-LM: Stands "Investment/Savings - Liquidity preference/Money Supply". Which is not much help at all. It is really a model of how folk behave, and it purports to explain the relationships between interest rates; the production of real goods and services; and the money supply. Neo-Keynesians see it as an explanation of Keynes general theory: but even its inventor later agreed that it is not. Nevertheless it is widely used by neo-Keynesians such as Paul Krugman.
The basic ideas seem to be:
IS1. Investment and savings are in equilibrium when total spending = total real world output
2. There are different points where that can be achieved
3. Those points are dependent on the interest rate: lower interest rates lead to higher investment.
4. Higher investment leads to increase in GDP
5. Therefore low interest rates increase prosperity
This set of assumptions generates what they are pleased to call a curve (though it is a straight line: one of many sources of confusion when trying to understand economics) which slopes downward from left to right on a graph where the x axis is interest rate and the y axis is gdp. For this equation GDP is dependent on interest rates.
And:
LM1. The money supply is fixed. (that is the real money supply, I think. They define it as money divided by price: so it follows that if you presume an increase in money=an increase in price that makes sense)
2. The demand for money is determined by the interaction of income and interest rates
3. Those things are plotted against each other and they produce an upward sloping curve (again this is actually a straight line, for some reason)
4. They are plotted on the same graph as IS: so the x axis is again interest rates: and the y axis is GDP (also called income)
5. An increase in GDP leads to an increase in interest rates
It follows that for this equation interest rates are dependent on GDP. Which is directly the opposite of the IS equation. This confuses me. But it is maths, so that is no surprise. Anyway the upshot is that this line slopes upwards. And therefore it inevitably crosses the IS line when plotted on the same graph. The point where it crosses is the level of interest which will make the money supply=the demand for money, I think
Leverage: lending more than you have got.
Maturity Transformation: Converting short term deposits into long term loans
Measures of money supplyM0: Liquid or cash assets held by the central bank + the amount of physical currency in circulation. Also known as "narrow money.
M1:Physical money (notes and coins)+ "demand deposits" (money on deposit which can be instantly accessed)
M2: M1 + "time deposits" (money on deposit not available for instant access) + non institutional money market funds
M3: M2 + more or less everything else (eg.) institutional money market funds; large liquid assets, etc
Marginal cost the cost of producing on extra unit of whatever a firm is selling
Marginal revenue the revenue received from selling on extra unit of whatever a firm is selling
NGDP is Nominal Gross Domestic Product (that is not adjusted for inflation)
OTC: stands for over the counter. A "financial instrument" which is not traded on a recognised and regulated market like a stock exchange
Rehypothecation: A dealer recieves collateral to secure a loan he has made, and then uses it to act as collateral for a completely different transaction he makes on his own behalf. The term is mainly used when Hedge funds do this: but other types funds also do it and then it is sometimes called "re-pledging". The right to do this means that the original asset can be the basis of a whole series of financial transactions which are all secured on that single asset.
Repo: A repurchase agreement: A seller sells a security but agrees to buy it back from the purchaser at a higher price, at some point in the future, called the "settlement date" ( or the maturity date). The higher price is interest, effectively, and it is at a fixed rate, obviously. The security itself is "collateral" for what is to all intents and purposes a loan
Reverse Maturity Transformation: Converting long term savings into short term savings
Shadow banking: Financial institutions which are involved in creating credit but are not subject to regulation even at the inadequate level that banks are. They are not regulated because they do not take deposits from ordinary folk as banks do. The term also covers the same type of activity undertaken by regulated institutions, such as trade in Credit Default Swaps which are not subject to regulation
Edited by FionaK - 1/9/2012, 13:34
