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101 Things Everyone Should Know about Economics
2ND EDITION
From Securities and Derivatives to Interest Rates and Hedge Funds, the Basics of Economics and What They Mean for You
Peter Sander, MBA
AVON, MASSACHUSETTS
DEDICATION
101 Things Everyone Should Know about Economics, 2nd Edition is dedicated to you who are in charge of your finances today—or will be someday—who strive to make sense of the complex economic world around you. You want to understand how it all affects you, your family, and your future; you seek what you should know and why you should know it. This edition in particular is dedicated to making sense of the dismal years of the Great Recession, to learning its lessons, and to doing well for yourself and your family regardless of the current economic climate.
Contents
INTRODUCTION
CHAPTER 1:
The Basics
CHAPTER 2:
Economy and Economic Cycles
1. INCOME
2. CONSUMPTION
3. SAVING AND INVESTMENT
4. GROSS DOMESTIC PRODUCT (GDP)
5. UNEMPLOYMENT AND UNEMPLOYMENT RATES
6. RECESSIONS
7. DEPRESSIONS
8. BUSINESS CYCLE
9. DELEVERAGING
10. MISERY INDEX
11. CONSUMER CONFIDENCE
12. PRODUCTIVITY
13. ECONOMIC INDICATORS
14. DISTRIBUTION OF INCOME AND WEALTH
15. THE WEALTH EFFECT
CHAPTER 3:
Money, Prices, and Interest Rates
16. MONEY
17. MONEY SUPPLY
18. INFLATION
19. DEFLATION
20. STAGFLATION
21. INTEREST RATES
22. PRIME RATE
23. YIELD CURVE
24. RISK PREMIUM
25. BOND PRICES VERSUS INTEREST RATES
26. GOLD STANDARD
CHAPTER 4:
Banks and Central Banking
27. COMMERCIAL BANK
28. INVESTMENT BANK
29. CENTRAL BANK
30. FEDERAL RESERVE
31. TARGET INTEREST RATES
32. FED OPEN MARKET OPERATIONS
33. FRACTIONAL RESERVE BANKING
34. REFLATION
35. PARADOX OF THRIFT
36. RESERVE REQUIREMENTS
37. LOAN LOSS RESERVE
38. TIER 1 CAPITAL
39. DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT OF 2010
CHAPTER 5:
Government and Government Programs
40. U.S. TREASURY
41. FEDERAL BUDGET
42. FEDERAL DEFICITS AND DEBT
43. SECURITIES ACTS OF 1933, 1934, AND 1940
44. SECURITIES AND EXCHANGE COMMISSION (SEC)
45. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
46. GOVERNMENT-SPONSORED ENTERPRISES (GSES)
47. TAX POLICY AND INCOME TAXATION
48. CREDIT PROTECTION
49. BANKRUPTCY LAW
50. ENTITLEMENTS: SOCIAL SECURITY AND MEDICARE
51. RETIREMENT PLANS
52. UNEMPLOYMENT BENEFITS
53. HEALTH INSURANCE PROTECTION: COBRA AND HIPAA
54. OBAMACARE
CHAPTER 6:
Economic Schools and Tools
55. FISCAL POLICY
56. MONETARY POLICY
57. KEYNESIAN SCHOOL
58. CHICAGO OR MONETARIST SCHOOL
59. AUSTRIAN SCHOOL
60. SUPPLY-SIDE ECONOMICS
61. TRICKLE-DOWN ECONOMICS
62. REAGANOMICS
63. BEHAVIORAL ECONOMICS
64. NEW DEAL
65. PLANNED ECONOMY/SOCIALISM
CHAPTER 7:
Finance and Financial Markets
66. DERIVATIVES AND DERIVATIVE TRADING
67. ASSET-BACKED SECURITY
68. COLLATERALIZED DEBT OBLIGATION (CDO)
69. CREDIT DEFAULT SWAP (CDS)
70. MUTUAL FUND
71. EXCHANGE-TRADED FUND (ETF)
72. HEDGE FUND
73. PRIVATE EQUITY
74. LEVERAGED BUYOUT (LBO)
75. INSTITUTIONAL INVESTORS
76. MONEY MARKET FUND
77. CREDIT RATING AGENCY
78. STOCKS, STOCK MARKETS, AND STOCK EXCHANGES
79. BONDS AND BOND MARKETS
80. COMMODITIES, FUTURES, AND FUTURES MARKETS
81. CURRENCY MARKETS/FOREX
82. BROKERS, BROKER DEALERS, AND REGISTERED INVESTMENT ADVISERS
83. FINANCIAL ADVISERS
84. ELECTRONIC AND HIGH-FREQUENCY TRADING
85. INSIDER TRADING
86. MARGIN AND BUYING ON MARGIN
87. SHORT SELLING
88. MEDIAN HOME PRICE
89. HOUSING AFFORDABILITY
90. FORECLOSURE/SHORT SALE
CHAPTER 8:
Trade and International Economics
91. GLOBALIZATION
92. CURRENCY POLICY AND EXCHANGE RATES
93. CURRENCY DEVALUATION AND DEPRECIATION
94. FOREIGN DIRECT INVESTMENT
95. BALANCE OF TRADE
96. BALANCE OF PAYMENTS AND CURRENT ACCOUNT
97. TRADE AGREEMENTS
98. PROTECTIONISM
99. INTERNATIONAL MONETARY FUND (IMF) AND WORLD BANK
100. WORLD TRADE ORGANIZATION
101. G8 ECONOMIC SUMMITS
COPYRIGHT
Introduction
What is the world coming to?
You read the headlines. Two appeared recently on the front page of the same newspaper (for those of you who still read newspapers)or your favorite news portal:
Public Wary of Deficit, Economic Intervention
Historic Overhaul of Finance Rules
The public is wary of the deficit and economic intervention? I’m part of the public, so I guess I had better be wary too. And a big change in the rules? Better keep up with that one too. I earn, save, borrow, spend, and invest money, so I’d better find out about any changes in the rules.
Truth is, headlines like this have become part of daily life. Sure, a few years ago, headlines about GDP growth or trade deficits or interest rates were mostly background noise, to be ignored unless you were an economist. Things were going pretty well. We had money to spend, everything was growing just a little each year, our retirement accounts were growing steadily, our jobs were reasonably safe …
And then it happened.
It is the Great Recession, the economic crisis—that big crisis of 2008–2009, the effects of which have lasted well into 2013, after years of good times. Good times? Not for everyone, but for a lot of us. During those times (remember when?) our homes earned more than we did. Those of us who earned any income at all—and most retirees—could borrow money cheaply and almost without any questions asked. We used our homes as ATMs. We could buy anything we wanted, and who cared about the debt, or deficits, or inflation? That was covered too, because home prices and other investment prices were going up. But it all went “poof” starting in 2007. The speeding locomotive of real estate prices, supported by lax lending practices, suddenly went into reverse.