How to Speak Money

This is an interesting book. Organized into three sections.

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Section A: Author’s view on how Institutions and Professionals intentionally complicate the world of economics and financial instruments — affording as little transparency as possible to the common man.

Section B: A lexicon of words and author’s commentary on each. Words picked by the author do indeed now allow me to read and understand the daily economic news with a little more sense.

Section C: His conclusions and wishes on making things better.

SOME LEXICON I READ CAREFULLY IN THE BOOK

AAA — Mistakes made by agencies in assessing the riskiness of debt, especially in the AAA category played a big part in the credit crisis of 2008.

Abenomics — Name given to the policies of Shinzo Abe, PM of Japan. How he is handling slow growth, deflation (aka inflation) and Zombie banks in Japan.

Amortisation: Process by which value of something is reduced or ‘written down.’ Companies pull accounting tricks with it.

Arbitrage: Process of using differences in prices to make guaranteed profits. Buy Cocoa futures in London for 1000$ and sell in US for 1001$.

Assets and Liabilities: Two main components in a Balance sheet.
Assets = Liabilities + Equity.

Austerity: Actually means spending cuts!

Bail-in: More complicated than just the opposite of Bail-out.

Balance of Payments: Balance between amount of money brought into the country the the amount going out. A positive BP is a good thing.

Balance Sheet: And how everything is recorded twice, as an asset in one place and as a liability in another.

Basel III: Ongoing attempt to come up with set of rules for International Banking.

Bear: Someone who thinks the price of something is going to go down.

Behavioural Economics: Study of the way people make decisions and calculations, using experiments and real-life data. Example Models — loss aversion, hindsight bias, nudge. Read Thinking, Fast and Slow by Daniel Kahneman.

Black Swan: Coined by Taleb. An event so rare it does not fit in normal models of statistical probability.

Bond Market: Much bigger and much more important than Equity World.

Bund: German’s equivalent of T-Bonds of USA.

CDS (Credit Default Swap): A form of insurance. You pay someone a fee to take on the risk of default, and in return, in the event of a default, they pay you the money you are owed. The worst part: you can insure not your loan, but somebody else’s. That’s less like insurance and more like gambling. CDSs played a big role in 2008 crisis.

Core Capital: Measure of money bank has in reserve to meet its obligations on a rainy day. Based on accounting techniques, there are ways to make banks sound safer than they are.

Correlation and Cause: Confusing these two is the commonest mistake.

CPI (Consumer Price Index): Figure made by calculating price of a representative basket of goods and services, excluding housing costs (mortgage, council tax — which are included in Retail Price Index).

Currency Wars: When countries adopt BEGGAR THY NEIGHBOUR policies.

Default: Missing a deadline to payback a debt.

Deflation: When money gains value over time. Japan is experiencing this. Economic growth stops. Deflation helps people of yesterday, inflation the people of tomorrow.

Derivative: Selling your wheat crop ahead of time for a fixed price.

Downsize: Sacking people.

EBITDA: A bit like looking at someone’e earnings before tax, mortgage payments, credit-card payments, alimony, and clever accounting advice.

Fat finger mistakes.

Fiscal and Monetary. Fiscal means to do with tax and spending, and is controlled by the government; monetary means to do with interest rates, and is controlled by the Central Bank.

Free Trade: System in which countries trade with each other without tariff and taxes.

GDP: Measure of all goods and services produced inside a country. Imagine you came across 10$. You buy 2 socks for 10$. Shop owner spends it on wine. Wine merchant spends it on movie tickets. Owner of cinema spends it on chocolates. Sweat shop owner spends it on a bus ticket. Owner of bus company deposits in bank. That initial 10$ has been spent six times and has generated 60$ of economic activity. In a sense, no one is better off yet the movement of money makes everyone better off. The GDP is 60$ in this case. It is not a measure of size but of velocity. It measures activity.

Gold Bugs: Name given to investors obsessed by gold.

High frequency trading: Nobody really understands it. Cause of flash crashes?

Insolvent: Your liabilities are greater than your assets and you don’t have enough cash to meet your immediate debts.

Kleptocracy: A system of government characterised by theft, particularly theft by the most powerful people in a society. A big problem in the developing world. Suharto of Indonesia amassed 35 billion$!

Libor: London interbank offered rate. Single most important number in international financial markets. Libor scandal?

Limited Liability Company: Central to modern capitalism. Investor in a company not personally liable for any outstanding debts, and could end up bankrupt. Unlimited Liability — this ensures that shareholders are a lot more careful. One suggestion to fix excessive risks in modern banking is to make them unlimited liable. Might be viable for investment banks.

Long and Short: To be long on something is to think that it is going to go up in value, and to have invested accordingly.

Margin Call.

Micro and Macro Economics.

Options: A type of financial derivative which gives the holder the right, but not the obligation, to buy or sell something at the specific price on a specific date.

A Futures contract is the same as an option, but there is an obligation to buy or sell the SECURITY at the agreed time.

P/E Ratio: If only one piece of information is allowed in stock markets, this is it. The p/e is the real cost of a share — how expensive the share is in terms of what company is actually earning. Low p/e companies are called ‘value stocks.’

Progressive Taxation: System in which rich pay more tax than the poor.

QE (Quantitative Easing): An ‘unconventional’ technique used by Govts and Central banks when interest rates are too low to go any further down, but the need for economic stimulus still exists. QE involves a govt buying back its own BONDS using money which doesn’t actually exist.

Repo: A repurchase agreement, in which A sells B something, while simultaneously promising to buy it back at a specified future date. A bit like selling something to a pawn shop. To get cash to balance their books. Shady- when Lehman used a repo to hide $50 billion of dodgy assets from the Feds.

Rightsize. Sacking people.

Savings and Investments: Savings is money you put aside so you get it all back when you need it. Investments are stuff you bought with hope will bring in returns in the future — but your money is at risk.

72. A useful number. How long it takes for the power of compound interest to double your money. At 6 percent interest, your money is doubled in 72/6 = 12 years. 12% will double it in six. Can be used for inflation too.

Stagflation: Stagnant economic growth and high inflation. Ex: UK.

Synergy: Mainly bullshit.

Synthetic: A synthetic financial instrument mimics something without having any of the components of the actual thing. Say a fund that tracks value of GOLD without actually buying GOLD. A huge number of synthetic financial instruments played a big role in 2008 crisis — well explained in Michael Lewis’s book The Big Short.

Traders, Analysts, Quants: People not in banking regard all as bankers. But the tribal divisions inside the profession are strong. Stereotype is that traders are aggressive and testosterone fueled, analysts are earnest, M&A types are smooth and corporate, and quants are nerdy mathematicians with no social skills.

Trail Commissions: It’s a commission to a financial adviser for recommending a product, but unlike upfront commission, it keeps on being paid. Banned in UK now.

Yield: Of particular relevance to bond market.

Zero Hour Contract: Gives employer flexibility to call on an employee whenever needed but no guaranteed pay or benefits.

SO, WHAT CAN ONE DO BY LEARNING ALL THIS ECONOMIC LANGUAGE?

Its up to us.

Something is profoundly wrong with the way we live today? Pursuit of material self-interest? We know what things cost but have no idea of what they are worth! We no longer ask of a judicial rule or legislative act.

2008 is a reminder that unregulated capitalism is its own worst enemy.

People feel there is nothing they can do. A sense of bafflement, impotency, alienation and passivity. People lose jobs all the time — for no good reason or for no fault of their own — its just the way economic things are.

What you believe is humanity’s greatest collective achievement?

When people say it can’t go on like this (environment crisis, economic crisis, …), what do they hope? But what usually happens is that it does go on like that, more extendedly and more painfully than anyone could possibly imagine; it happens in relationships, in jobs, in entire countries. It goes way past the point of bearability. And then things suddenly and abruptly change. That’s where we are today?

How to Speak Money

SOME LEXICON I READ CAREFULLY IN THE BOOK

SO, WHAT CAN ONE DO BY LEARNING ALL THIS ECONOMIC LANGUAGE?

FURTHER READINGS SUGGESTED BY AUTHOR