Finglish

A Financial English Primer

Call it “finglish,” or financial English. Financial and economic terms dominate the news nowadays, amid talk of fiscal cliffs and eurozone troubles. Plus, new financial terms crop up all the time for a new product or strategy, like quantitative easing.

Since the news is particularly ripe with financial terms right now, it is a great time for us to learn some common finance terms. Some finglish terms are often confused and used improperly in the media. Hopefully, this will increase your financial knowledge, help you to understand the key issues we’re facing and communicate better with your financial advisor.

Six Finglish Terms You Should Know

Federal budget deficit. This term is in the news constantly and for good reason—the deficit is huge, at $1.1 trillion. This means that the federal government is spending $1.1 trillion more than it is earning in revenues over a year. Why? Because entitlement spending, interest paid on the national debt and defense spending are much greater than revenue from taxes. And when the economy is weak, as it is now, tax collections are down.

National debt. A lot of people confuse the debt and the deficit. The amount of gross federal debt outstanding is a difficult-to-imagine $16.2 trillion. The national debt increases or decreases based on the annual federal budget deficit or surplus. But a surplus has not been seen since 2003 and the deficit is now growing at a rate of almost $1 trillion a year. Together with the budget deficit, this debt was one of the reasons Standard & Poor’s gave when downgrading the United States’ credit rating last summer.

Entitlement spending. This refers to Social Security, Medicare and Medicaid outlays by the government. Though we pay into this system during our working years, with rising costs of healthcare and longer lives, much more goes out than comes in. Our country’s leaders know that entitlement spending has got to be reformed to fix the debt problem. But it’s a political minefield, and a divided post-election government will make change difficult.

Debt ceiling. The federal government is limited by law on the total amount of debt it issues. This limit is known as the debt ceiling. Currently, the debt ceiling is $16.4 trillion, an amount that we will exceed in early 2013. Fortunately, the government can continue to operate and pay its obligations through various accounting mechanisms and Congress will mostly likely vote to increase the ceiling.

Quantitative easing (QE). This is a weapon in the Federal Reserve’s arsenal to help the country out of a recession when all else fails. This is sometimes referred to as “printing money,” but this term is misleading since very few new paper bills are issued and the Treasury prints currency anyway, not the Fed. The Fed tends to use QE when it has lowered interest rates to close to 0% and the economy doesn’t improve. Quantitative easing increases the money supply by flooding banks and other financial institutions with capital through the Fed’s asset purchases in an effort to promote increased lending and liquidity.

The Fed announced the third round of QE on Sepember. 13, 2012. Each month, for as long as it takes, the Fed will buy $40 billion in bonds and mortgage-backed securities, and keep rates close to zero until 2015. Many economists are concerned that open-ended asset purchases could lead to inflation, as there is still a fixed amount of goods for sale (too much money chasing too few goods leads to higher prices).

Yield Curve. When the Fed expands the money supply, it intends to spur borrowing by lowering interest rates further out on the yield curve. The yield curve is basically a chart showing borrowing costs for bonds of different maturities.

Naturally, longer maturities of 10 to 30 years come with higher interest rates to compensate the lender (the bond holder) for parting with that money for a longer time. Short-term debt usually carries a lower interest rate. By driving down long-term borrowing costs, the Fed hopes to encourage businesses to borrow more so they can invest and hire people.

Becoming a Better Informed Investor

The list above is only the tip of the iceberg when it comes to finglish. There are many others terms that you should be familiar with. Getting used to financial terms makes you a more empowered investor and a more informed citizen. Don’t let seemingly arcane vocabulary turn you away from investing and pursuing your financial future.

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Finglish Lesson #3: “Fiscal Cliff” and “Taxageddon”

Easy English Dictionary

Easy English DictionaryThe “fiscal cliff” and “taxageddon” refer to a convergence of fiscal events (or government spending and tax policies that influence the economy) slated to occur almost simultaneously at the end of 2012. If these terms aren’t on your radar yet, they are sure to be soon, as the media loves nothing better than drama and bad news and there’s plenty of that in this story.

The actors are the President, Congress, and U.S. taxpayers. The stage is the fragile U.S. economy. Like all good dramas, this one has lots of tension. The drama began decades ago when the U.S. started deficit spending, was exacerbated by the healthcare battle and the recent Great Recession, and came to a head last summer when the U.S. almost defaulted on its debt.

All kinds of political machinations took place to avoid a default—deals and compromises that were short-term stop-gaps, and all are coming due at the end of this year. You might say, “Surely the President and Congress can do something to stop Taxageddon?” Yes they can, but they won’t until after the November elections, leaving everyone at the edge of their seats—a true cliff hanger.

Hang on to your seats, and keep reading. Here is the fiscal cliff script:

  1. Tax rates for every income group will rise to levels not seen since 2001 (better known as the expiration of the Bush tax cuts). The current 10%, 25%, 28%, 33% and 35% rates will shift to 15%, 28%,31%,36 % and 39.6%.
  2. The tax rate on long-term capital gains will go from 15% to 20%. The maximum rate on dividends will increase to 39.6%.
  3. Some 3 million Americans will lose unemployment benefits.
  4. The Pentagon will start 2013 with a $55 billion budget cut; the budget for non-defense spending will be cut by the same amount.
  5. Soon after the beginning of the year, federal payments to doctors who treat patients covered by Medicare will be slashed by about a third.
  6. Higher-earning individuals ($200,000 for individuals and $250,000 for families) will be subject to an additional tax of 3.8% on all investment income: interest, dividends, capital gains, rents and royalties.

If all of these spending cuts and tax increases become reality, a significant slowdown (recession) is likely to result. This translates into continuing high unemployment, a volatile and downward-trending stock market, and generally unstable economic conditions.

In the final act, Congress and the Obama administration will fight it out over the last six weeks of 2012, negotiating, compromising, eliminating one thing, extending another, and once again avoiding disaster. But what remains to be seen is whether the U.S. economy will right itself or remain perched on the edge of the cliff.

How do you think this story will end?

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“Finglish” Lesson #2: Common Terms Used by the Media, Economists and Financial Pundits

The running of the bulls, photo.

The running of the bulls, photo.It feels like 2008 all over again as stock markets worldwide gyrate to the whims of panicked investors. Headlines are dominated by market activity and news articles proliferate struggling to explain what the heck is going on! Because not all industry jargon is comprehensible to the average reader, the following list endeavors to explain the more commonly used “Finglish” in current media:

Market correction: refers to a “mini-bear”  market which isn’t expected to turn into a long-term bear market (down market), but it can be a predictor of worse to come. The phrase “it’s just a correction” is commonly heard when markets are dropping (by 10-20%) – but this is the best guess at the time and only future stock market activity can determine the true outcome.

Double-dip
: no, it isn’t your stomach doing a flip-flop when the Dow plunges over 500 points in a day. The term refers to a double-dip or W-shaped recession where the economy emerges from a recession, then goes on to a brief spurt of growth but then falls back into a recession.  We don’t know if we have double-dip yet – it’s too soon to tell. The Great Recession which lasted from December 2007 through June 2009 was the worst since WW II. A recession is identified by a long period of falling activity visible in real GDP (Gross Domestic Product) growth, falling employment, income and production.

Bear marke
t: a declining stock market over a period of time and some say defined as a  price decline of 20% or more over at least a two month period.
New to me:  this market trend is also referred to as a “Heifer Market!”  Bear markets usually accompany recessions and periods of high unemployment or inflation. The bear market that coincided with the Great Recession started with the Dow at 14,164.43 on October 9, 2007 and ending on March 5, 2009 at 6,595.44.

Bull run: refers to a  “bull market” which is a rising stock market over a period of time. The last bull run started in March of 2009 when market pessimism reached its lowest point. To be determined is whether the market drop of last week is “just a correction” during a bull run or the start of a new bear market.

Non-farm payroll report
: an employment report released by the U.S. Bureau of Labor Statistics on the first Friday of every month. It heavily affects the U.S. dollar and bond and stock markets when it is released. Last Friday’s report was the one bright spot in a bad week when it was announced that the U.S. economy had added 117,000 jobs in July – higher than expected. From 1939 to 2010, non-farm payroll averaged 116,870 jobs reaching a high of 1,114,000 in September of 1983 and a low of -1966 jobs in September of 1945.

S&P’s AAA rating vs. AA+ rating
:  Friday, August 5,  Standard & Poor’s took the unprecedented step of lowering the top credit rating for U.S. long-term debt (notes and bonds that come due in more than a year). A downgrade is basically a warning to buyers that there is an increased chance (however slight) that they won’t get their money back and in theory should lead to higher borrowing costs for the government as investors will want to earn a higher interest rate for the increased risk. The 10-year Treasury note is considered the basis for all other interest rates so higher rates on it could mean higher rates on everything from mortgages to car loans, to borrowing costs for state and local governments and companies.

But it’s not clear that S&P’s downgrade will have an effect on rates. Treasury securities are still considered one of the safest investments in the world. As stocks plunged the last two weeks, the price of Treasurys soared because demand was high, even though investors knew there might be a downgrade. Since yields on debt securities fall as prices rise, the yield on the 10-year note dropped from 2.96 on July 22 to 2.39 on Friday.  The reality is that no other market is as large or as liquid as the U.S., even though it has its own set of problems.

The next weeks and months will determine whether the bull or the bear prevails and whether fiscal or monetary policies are instituted that redirect the U.S. economy (and yes, I will explain fiscal and monetary policies in a future Finglish tutorial). Stay tuned for “Finglish” tutorial #3.

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A “Finglish” Tutorial

A recent article in the Wall Street Journal by Brett Arends, “A Tip for Financial Advisers: When Possible, Use English,” began with the statement, “If you’re in the finance industry, there’s a simple way to make your clients a lot happier: speak English.” But it’s not as easy as it sounds.

The reality is that financial and economic terms are confusing—and not just to non-finance types. Plus, new financial terms crop up all the time to label or explain a new product or strategy (QE2 anyone?). It’s enough to make anyone’s head spin.

Since the news is particularly ripe with financial terms right now (due to the dismal state of the U.S. economy), I’ll take a stab at explaining some commonly used examples of “Finglish.” Hopefully, this will increase your financial knowledge, or, at the very least, prevent your eyes from glazing over the next time you read “yield curve.”

Federal budget deficit: This term is in the news constantly and for good reason—the federal deficit is huge at $1.4 trillion. This means that the federal government is spending $1.4 trillion more than it is earning in revenues over a year. Why? Because entitlement spending, interest paid on the national debt and defense spending are much greater than revenue from taxes. And when the economy is weak, as it is now, tax collections are down.

Entitlement spending: Another ubiquitous concept, entitlement spending refers to Social Security, Medicare and Medicaid outlays by the government. Even though we pay into this system during our working years, with rising costs of healthcare and longer lives, much more goes out than comes in. Our country’s leaders know that entitlement spending has got to be cut to fix the debt problem, but it’s a political minefield, and things will probably not change much until after the elections of 2012.

National debt: The amount of gross federal debt outstanding is an unable-to-imagine $14 trillion. The national debt increases or decreases based on the annual federal budget deficit or surplus. But a surplus has not been seen since 2003 and the deficit is now growing at a rate of $1 trillion a year. Together with the budget deficit, this debt was one of the reasons Standard & Poor’s gave when downgrading the United States’ credit outlook to “negative” on April 18, 2011.

Debt ceiling: The federal government is limited by law as to the total amount of debt it can issue. This limit is known as the debt ceiling. Currently the debt ceiling is $14.3 trillion, an amount that was technically exceeded on May 17. Fortunately, the government can continue to operate and pay its obligations through various accounting mechanisms and Congress will mostly likely vote to increase it.

And finally, quantitative easing (QE). This is a tool in the Fed’s arsenal to help the country out of a recession when all else fails. This is also referred to as “printing money.” The Fed tends to use QE when interest rates have already been lowered to near 0% levels (as they are now) and the economy doesn’t improve. Quantitative easing increases the money supply by flooding banks and other financial institutions with capital in an effort to promote increased lending and liquidity. The downside is that this could lead to inflation as there is still a fixed amount of goods for sale (too much money chasing too few goods leads to higher prices and inflation). The Fed will complete QE2 in June. There is much controversy over what effect this will have on interest rates, Many economists expect them to rise, causing another set of issues for the economic recovery.

This would be a good time to explain “yield curve” because when the Fed expands the money supply it also has the effect of lowering interest rates further out on the yield curve.  But I think this is enough of a Finglish tutorial for one blog post—I just know your eyes are glazing over. Stay tuned for the next Finglish lesson. I plan to write at least one blog post a month on the topic!

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