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Welcome to the SwiftEconomics.com Glossary! Each word will come to life using witty jokes, satire, and colorful examples. The glossary is meant to amuse and educate; not to be traditional or academic. The SwiftEconomics.com team wants to hammer home a few vital ideas throughout the vocabulary lesson. For example, keep an eye on asymmetric information’s effect on health insurance. Please share the SwiftEconomics.com Glossary with colleagues, friends, and family!

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Balanced Budget

Something government rarely manages to do. It’s a very confusing concept for politicians. Government spending has to be equal to government income in the same period to achieve this feat. God forbid government runs a surplus. Then they would have to spend less then the income they receive from taxes and public services.


Balance of Payments

Another challenge for government, payments only balance when the total cash flow entering a country equals the total cash flow out of a country. All cash flows must occur in the same period otherwise we’d have a fun new loophole of copying and pasting cash flows from the last decade to balance payments. There are a couple of accounts involved here but there’s no reason to bore you with the different types of cash flow. One is the exports figure subtracting imports from exports.


Bailout

Merriam Webster’s ‘word-of-the-year’ for ’08 joined elite company. Previous winners include truthiness in ‘06, blog in ‘04, and w00t in ’07. Bailout still has more to give! Defined as “a rescue from financial distress” it generally involves citizen’s tax dollars being distributed by government to private firms without permission.


Bank

Powerful institutions, quickly becoming financial services malls. As financial institutions continue to merge, they quickly outgrow their original role as guardian of your cash. According to Wikipedia’s partial list of major U.S. bank mergers since 1930 (Wikipedia is exact enough for this point), 92 mergers occurred from 1990-2008. Compare that to 32 from 1930-1989. Some of the merged banks were foreign, and of course, many banks are global anyway.

These conglomerates are combining companies that started as specialized institutions. Consider JPMorgan Chase Bank One Washington Mutual Bear Stearns. The entity is still known as JPMorgan Chase & Co. (lots of company) but that’s just because continually tacking on new names eventually reaches diminishing marginal returns. Before the mergers, JPMorgan and Bear Stearns used to be investment brokers, managing client money. Chase used to be a bank with a national credit card network. WaMu used to be a savings and loan institution holding a significant number of mortgages, as well as a network of credit cards. Now, JPMorgan Chase & Co. does it all. This could be viewed as a positive development, due to economies of scale bringing financial services to you at lower prices. The other upside might be walking into one building or surfing one website to take care of all your financial needs.

More nervous people might have a legitimate fear of the concentration of power within banks; and the bank’s role in credit creation/distribution; and the Federal Reserve (Central Banking) control of currency.

A move to nationalize banks and merge the private and public sectors is upon the U.S. and many other countries. The government only gives federal money to private businesses with strings attached. These strings help determine how and when banks lend, as well as to allow federal agents to sit in on board meetings.

General Electric’s CEO, Jeffrey Immelt, is also an economic consultant for President Obama; the oscillation between corporate America top management and government officials is staggering. All of this gives some concerned citizens pause.


Bank Run

In the U.S. fractional reserve banking system, banks only carry 10% of their total deposits on hand. That is, if a bank has $1 million in deposits from people like you and me, they only carry $100,000 of physical cash on hand. A bank run occurs when depositors fear a bank may be insolvent. Depositors rush to their financial institution to pull all of their money out. Word-of-mouth spreads like wildfire and other depositors do the same. Before long, a pandemic occurs, and it doesn’t take much before a bank runs of out cash in their vault. Depositors from other banks catch wind and fear that their money isn’t safe either. The fear may be irrational and unfounded, but even solvent banks run a risk of cash shortages in a full-out bank panic.

The Federal Reserve was created way back in 1913 to stop bank runs (aka bank panics). During such a panic, the Fed steps in with a bag of money to bolster the bank’s reserves as well as bring confidence to bank depositors that the bank will remain solvent. Once a number of bank runs occurred anyway, despite the Federal Reserve, during the Great Depression, Congress passed the Glass-Steagall Act in 1933, which created the Federal Deposit Insurance Corporation (FDIC). For member banks, the FDIC guarantees reimbursement of deposits to bank customers in the event a bank becomes insolvent. Currently, depositors of member banks are protected up to $250,000 per account.


Bankruptcy

To err is human, to forgive is divine. In the Old Testament, debts were called to be released every Sabbath year (seventh). Bankruptcy is a quasi-clean slate, minus the black mark on your credit rating. It’s recognized as a court ruling that a debtor is unable to fulfill their financial obligations to creditors.

Bankruptcy comes in many forms and is handled differently throughout the world. Some forms call for basic liquidation of assets, some a reorganization of assets, and some with reorganization along with a payment plan to make good on debts. In any case, B-A-N-K-O was his name-o.

The United States government may be staring bankruptcy in the face soon enough. The U.S. ran out of digits to display their debt on the Times Square national debt clock. The only reason politicians are able to keep spending is by borrowing money from other countries and printing new money out of thin air. Countries like China, Japan, and Russia may not want to buy U.S. Treasury debt forever. Worse, they may elect to sell U.S. Treasuries they already own. Printing new money lowers the value of the dollar’s already in circulation. Citizen’s bank accounts, paychecks, and retirement are instantly worth less. In addition, Standard & Poor’s may decided that U.S. credit worthiness isn’t what it used to be after an analyst walks by the Times Square clock a few more times. They’ll proceed to lower the U.S. government’s credit rating. If this happens, interest rates on borrowed money increase and it becomes far more difficult for future generations to chip into the mountain of debt.


Barter

Currency flies out the door. Bartering brings fictional college midterm scenarios of chickens and coconuts into play. But it really happens, even in modern times; namely if hyper-inflation plagues a currency or high taxation plagues an economy.


Basis Point

A small but contributing reason why people’s heads blow up whenever economics or finance-speak is uttered. A basis point is simply a hundredth of a percentage point. If the Fed hikes interest rates 25 basis points, they’ve decided to buy up securities on the open market, lowering the money supply, to hit a target rate 0.25% higher. See how a headline like “Fed Hikes Interest Rates 25 Basis Points” doesn’t quite tell the whole story of what’s actually happening?


Bear

Grylls. Of Man vs. Wild fame. He may be the scarcest, most precious resource of all.

In a market situation, a bear is an overall pessimist about the value of an underlying asset. A stock market bear may feel the S&P 500 average will fall this month or a housing bear may feel the real estate in Orange County, CA will depreciate this quarter.


Behavioural Economics

A really cool branch of economics studying the actual behavior of humans, not assuming “rational expectations” like the rest of economics. This is a psychologist’s candy store. Behavioural economics tackles such issues like cognitive dissonance, representation bias, familiarity bias, mood and optimism, endowment effect and status quo bias. This is only scratching the surface. Behavioural economics gives explanations to why people spend more when they swipe a credit card and how decision making is driven by fear of loss over potential for gain.


Black Economy

Synonymous with the underground economy. Insert drug smugglers, unlicensed plastic surgeons, and things politicians don’t report on their taxes here (okay, okay, include tax evasion by all).


Boom and Bust

Even when not driven into the ground by greedy businessmen and corrupt politicians, the economy inevitably goes through ups and downs. Markets cannot grow forever for a variety of reasons. The phrase “boom and bust” is most reminiscent of contagions and bubbles where markets are overheated; think dot coms and hot real estate markets.


Brand

An indicator of quality, trust, and stability. Now let me go work on my Ryan Swift, Inc. brand on Facebook; profile pics to load, status’ to change.


Bridge Loan

A loan designed to “bridge” one’s finances from its current state of affairs to another, hopefully improved, position. Mom and pop could give their child a loan in-between paychecks for a continued education course at the local community college. Likewise, taxpayers could loan huge sums of money to large firms. Famously referenced by “the big three” U.S. automakers in 2008 seeking taxpayer money to help meet operating expenses. On the day GM, Ford, and Chrysler CEO’s journeyed to Capitol Hill seeking their bridge loan, they boarded a private jet. For symbolism and a free commercial’s sake, take a car from your factory! Maybe I’m just a romantic.


Bubble

Occurs when speculation drives a market. Eventually, expecting an asset price to continually appreciate becomes irrational. Speculation, by definition, is a form of investment for a quick profit and little attention is paid to an asset’s underlying fundamentals. Speculative investors look to make a quick buck and do not hold assets long-term. Participants in a bubble tend to show irrational exuberance because of a hot market.


Budget

All economic agents (that means you) should have a budget and be actively tracking their inflows and outflows to see if they’re hitting the target. At the government level, budgets tend to be laughable. They provide an outline of total government spending usually for an upcoming year. The government then decides what the finance mix for the spending will be. In other words, what sources of inflows will cover the desired spending benchmarks. Some of the money flowing in will arrive via taxation, some government services, and the rest borrowed.


Bull

No negative BS. A bull is an overall optimist about the value of an underlying asset. A stock market bull may feel the S&P 500 average will rise this month or a housing bull may feel the real estate in Austin, TX will appreciate this quarter.

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