As the world economy appears to lurch from crisis to crisis you’ll hear experts using many unfamiliar terms, but what do they actually mean? Here we decipher a few.
Currency War
Also known as competitive devaluation, a currency war takes place when countries try to deliberately lower the exchange rate of their currency against competing currencies.
Ponzi Scheme
A fraudulent investment scheme that pays returns to investors from their own money or money paid by subsequent investors. It is named after the swindler Charles Ponzi.
The term was recently given a new twist by Mitch Feierstein, a hedge fund manager, who in his book ‘Planet Ponzi’ claims that for 30 years governments have perpetrated a global ponzi scheme, creating a credit bubble by borrowing excessive amounts of money and printing more money to pay off their debts.
Quantitative Easing or QE
QE is essentially the printing of money in order to stimulate economic growth. It has been used by governments such as those of the US and UK in recent years to protect their banking sectors, finance borrowing and to try and improve the state of their economies.
Hyperinflation
This occurs when a country experiences very high, accelerating rates of inflation so that the currency quickly loses real value. It is often associated with wars, social or political upheaval. Three examples include Weimar Germany (1923), Hungary (1945-46) and Zimbabwe (2006-09).
Deflation
This is a decrease in the general price level of goods and services. It increases the real value, or purchasing power, of money over time.
Stagflation
This describes when inflation occurs at the same time as the economy stagnates, i.e. economic growth has plateaued but inflation means that people’s purchasing power is eroded. The UK economy experienced this in the 1970s.
Fiscal Deficit
The budget deficit is the annual amount the government has to borrow to meet the shortfall between current receipts (tax) and government spending.
National Debt
The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts.
Bear Market
Bear markets are defined as an asset price’s decline of at least 20% from a recent peak over at least a two-month period. During a bear market, widespread pessimism tends to persist among investors and to continue growing.
Market Correction
A correction is a short-term trend that has a duration of less than two months.
Bull Market
This is one in which the market in a tradeable asset, often equities, rises over the course of a number of years. During this period, most investors become increasingly optimistic and confident that prices will keep rising.
Monetisation
This is the process of converting or establishing something into legal tender, such as the printing of banknotes by central banks.
Monetising Debt
Monetising debt is a two-step process whereby the government issues debt in the form of bonds to finance its spending and the central bank then purchases the debt, holding it until it comes due and leaving the system with an increased supply of money.
Real Interest Rate
This is the interest rate after adjusting for the rate of inflation to reflect the real cost of funds for the borrower and the real yield for the lender.
Negative Real Interest Rate
When the real interest rate is in negative territory, the nominal interest rate is less than the rate of inflation, e.g. the interest rate may be 2% but inflation is running at 3% and therefore any interest earned on savings is outstripped by the reduction in purchasing power.
