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| Dr. Ben S. Bernanke (Image: FRS/Wikipedia) |
When I suggested to a friend that she read the speech, she read a bit of it and said "English, please. What did he say?"
(For a highly condensed summary of the speech, see Part Deux.)
Her comment inspired this glossary of economic and financial terms Dr. Bernanke used in his speech. Almost without exception, these terms are loosely defined in this glossary, as used by Dr. Bernanke, and in general use.
Advanced Economies – Europe, U.S. and Canada, Japan, Australia.
Asset – A real asset or a financial asset. See Balance Sheet.
Balance Sheet – An itemized list showing on the left the values of assets (cash, investments, receivables or amounts owed by customers, inventories of supplies and products, equipment and real estate), and on the right the values of claims against those assets. The upper part of the right side lists the liabilities, the debts of the company (suppliers, banks, mortgages, long-term lenders and taxes), and the lower part is the equity, the value for the owners, which always equals the total assets minus the total liabilities.
Balance Sheet Strength – A strong balance sheet shows liabilities relatively small compared with assets. A strong balance sheet usually implies liabilities less than 30% of assets. A strong balance sheet shows short-term assets (cash, marketable securities, receivables, inventories) relatively large compared with liabilities, especially Short-Term liabilities (amounts coming due within one year). Characteristics of strength vary from industry to industry, and individual circumstances can warrant exceptions.
Bond – A certificate representing promise to pay a specific amount (traditionally $1,000 in US markets) at a specific time, generally long-term, and interest payments (semiannual in US markets). Governments and large corporations use bonds as a way to borrow money. The purchaser of a bond (the lender) may sell the bond to another person who then receives the payments. The bond is an asset for the lender and a liability for the borrower.
Capital, Banking – Owner's equity on the balance sheet, and (depending on context) sometimes includes very long-term debt.
Capital Formation – Gathering some money to create or run a business.
Central Bank – Usually, a department of government that issues and maintains the national currency. To that end, the central bank regulates the soundness of financial institutions and lends money to the best borrowers when no one else will. See Federal Reserve.
Commodity – Usually refers to goods sold in large quantities, where the distinction between individual elements isn't important in context. For example, limestone, rice and gold are commodities, but Carlsbad Caverns (which are made of limestone), a mushroom risotto at Luigi's Restaurant, and your grandmother's engagement ring are not commodities.
Consumer Durables – Household appliances, beds, motorcycles and passenger cars purchased without intent to use them principally to produce income.
Credit Availability – If a person of good character with willingness and ability to repay can easily find a willing lender, then credit availability is good. Usually coincides with liquidity.
Credit, Tight Conditions – The opposite of credit availability
Cyclical – Of or pertaining to a recurrent (or presumed to be recurrent) event affecting most of the economy.
Default – Inability or unwillingness to make a promised payment, so that the payment doesn't occur.
Deficit, Trade – For a national economy, the amount by which the value of imports in a year exceeds exports.
Deficit, Fiscal – For a government, the amount by which the expenditures in a year exceed tax revenues.
Delinquency – Lateness in making promised payment.
Demand – The aggregate desire for something, usually considered as the quantity of the article sold, or the number of willing buyers emerging, during a time interval when the article is offered at a particular price.
Demand, Pent-up – An accumulation of demand delayed by some impeding condition.
Depression – A bad recession. The last depression that politicians will acknowledge was the Great Depression of the 1930s.
Economy – The system of production and distribution of goods and services. We sometimes find a little comfort or momentary convenience in the illusion of economies with geographic boundaries, but in truth there is only one economy.
Emerging Market – The world other than the advanced economies.
Expansion – a good word to use when you tire of using “growth”.
Extension of Credit – Lending or willingness to lend.
Equity – Total assets minus total liabilities. See Balance Sheet.
The Fed – Federal Reserve.
Federal Reserve – a.k.a. The Fed. The central bank of the United States, managing the money supply, regulating banks and having a legal mandate to promote sound banking, economic growth and full employment. Formally organized as a company with the commercial banks in each region owning shares in the regional Fed, and the regional reserve banks acting as a syndicated Federal Reserve System. In practice, the Fed is an autonomous department of the government.
Financial – Of or pertaining to money or claims on assets.
Financial Assets – Cash, stocks, bonds, mortgages, etc.
Financial Crisis – A financial problem becomes a crisis when it significantly disturbs or prevents the distribution or movement of real assets. A financial crisis is a loss of signal, in the sense that an amount of money offered in a particular place and time provides a signal directing the distribution and movement of real assets. A financial problem such as inability to get a cashier's check when the bank is closed for the weekend isn't a financial crisis (for the community).
Federal Funds – Money, usually from deposits, which a bank can use to satisfy US regulatory daily reserve requirements. A bank with deposits in excess of requirement can lend or trade the money to a bank that hasn't enough. A lively market in federal funds exists among banks. The Federal Reserve participates as a trader in the federal funds market to influence interest rates and the quantities of money in circulation.
Fiscal – Pertaining to revenues and expenditures, especially of governments.
Flexible Capital Market – When businesses can easily acquire loan or equity funds with minimal impediment from policy or custom, and lenders and equity investors can easily make investments with minimal impediment from policy or custom.
Flexible Labor Market – When employers can easily hire or discharge employees with minimal impediment from policy or custom, and workers can easily leave current employers and find new employment with minimal impediment from policy or custom.
Forward Guidance – What we expect to happen, but we won't call it a forecast or prediction, because we don't want you to sue us if it doesn't come true or if we change our minds tomorrow.
GDP – Gross Domestic Product. The total of all incomes in an economy during one calendar year.
Growth – Increasing levels of GDP.
Growth Fundamentals – Key productive economic characteristics for an economy. For the U.S. these include size of economy, diversity of industry, international competitiveness, open markets for products, flexible capital markets, flexible labor markets, research, entrepreneurial culture.
Guidance – A hint (usually reluctantly given) from a regulator how the regulated persons might comply with a regulation, except see Forward Guidance.
Healthy Growth – Sustainable growth, without significant speculative bubbles.
Historical – Of or pertaining to a known previous event.
Income – Revenues, minus costs.
Investment – Buying something in anticipation that it will produce future income exceeding the cost.
Level – Usually, a quantity or number. For example, the employment level is the number of people employed.
Liability – A requirement or promise to pay.
Liquidity – The ability to sell an asset for cash within a week. Usually coincides with credit availability.
Long-run – Long-term.
Long-term – In finance: more than five years. In economics: more than two years in the future or more than five years in the past.
Market – A real or virtual place where buyers and sellers meet and agree to trade (such as the bazaar in Tunis). Also, the aggregate of trades in a range of articles traded (such as the potato market) or a limited interval (such as this summer's market for camping equipment) or a geographic location (such as the Australian market). Also, the conditions or moods prevailing among buyers and sellers (for example, a “hot” market for entertainment equipment).
Monetary policy – Policy pertaining to the amount of money in circulation, how rapidly it passes from person to person, and rates of interest.
National Income – GDP
Policy – Laws, regulations and procedures of government.
Productivity – The ability of a business or worker to create value exceeding the cost of creation.
Profit – Income.
Real Asset – Something valuable that you can bite (such as a producing peach orchard or a gold ingot), and not a financial claim on an asset (such as a stock certificate).
Recession – A period of reduced commercial and industrial activity, marked by GDP declining for two or more consecutive calendar quarters.
Recovery – An interval between recessions. Also, general economic activity leading to growth after a recession.
Resource Utilization – How much stuff we use to make products.
Revenue – Money coming in, usually from sales. For charities, money from donations. For governments, money from taxes.
Risk – A condition combining value and uncertainty. Low risk implies either little value or little uncertainty. A blizzard in Honolulu is a low risk event. Even though the blizzard would have high value because it would impose large costs on the community, we have no uncertainty about the blizzard occurring. If there is no uncertainty, then there is no risk. If you leave a common pencil on a table at your neighborhood cafe and depart for a 6-week tour of Italy, then you can't be certain you will find the pencil when you return. But there is low risk, because the pencil has little value. If there is no value, then there is no risk. If you leave $25,000 in 100-dollar bills on the cafe table, there will be higher value at stake, so the risk will be higher.
Scenario – A story, usually about the next two or three years.
Shock – A sudden event in which many people lose significant value, money or future income.
Short-run – Short-term.
Short-term – In finance: less than 1 year. In economics: shorter than long-term.
Sovereign Debt – Government debt.
Stagnation – Several consecutive years of high unemployment, low manufacturing output, low growth.
Structural reform – Change in the kinds of institutions and the nature of transactions they effect. For example, until 1978, the Civil Aeronautics Board set prices for airlines in the US. Deregulation, allowing each airline to independently set its own prices, without government approval, was a structural reform. For another example, in 1999 the US Congress repealed the Glass-Steagall Act of 1933, which had prohibited banks from dealing in investment securities, and the Glass-Steagall Act was a structural reform, and its repeal was a structural reform.
Supply chain – All the workers and equipment and regulations and techniques in the sequence of events between the original sources and the final use of a product.
Sustainable growth – Growth under conditions that can or will persist indefinitely.
Systemic – Of or pertaining to an object or characteristic that we can't remove from a system without permanently and significantly changing the system. In the financial crisis of 2008-2009, controversy arose over whether the financial firms Lehman Brothers and Bear Stearns had systemic importance.
Trade Policy – Usually, policy governing transactions between persons in different nations.
Transparent – opposite of “mysterious.”
Underwater – A mortgage is underwater when the house is worth less than the loan.
Volatility – Price increases and decreases within an interval of time. Large, rapid price changes characterize high volatility. Prices will fluctuate.
"...will fluctuate."
J.P. Morgan (1837-1913)
Image: Public Domain, Wikipedia
Sources:
Ben S. Bernanke, Washington Post (Nov. 14, 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/10/24/AR2005102400893.html retrieved Sep. 3, 2011).
Bernanke, Ben S., The Near- and Longer-Term Prospects for the U.S. Economy, Federal Reserve System (Aug. 26, 2011, http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm retrieved Sep. 3, 2011).
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