By Gary Anderson
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follow Gary Anderson 2017 Apr 23, 7:33pm
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Economic subjects organized for ease of study. This site makes the issues of the day in economics much easier to track:
First Five Topics: 1. Housing Bubble Causes 2. Great Recession Causes 3. Tracking a Potential New Housing Bubble 4. Hoarding the New Gold (bonds) 5. New Normal and Economic Theory
For economics students, this is a great overview of topics of the day in economics. For the long time Patrick people, it would help some understand the issues of the day.
So, there is now a glossary of terms for the articles written at the link above. If you have any suggestions on definitions to add I would consider them:
Base money is Fed money, called High Powered money sometimes. It is money that is not created by banks out of thin air. That money is called broad money. Base money is backed by securities, with the exception of Eurodollars. Eurodollar money is likely to become regulated more and more.
Broad money is created when banks make loans. It is created out of thin air.
Transparent centers where derivatives are cleared, and given collateral to back them. Clearing houses are intermediaries between buyers and sellers.
Counterparties take on risk in order to achieve a loan, or for other reasons. Banks often use counterparties to push risk off their balance sheets.
Derivatives are securities whose price is based upon the price of underlying securities. Derivatives are contracts between prices, based on underlying price. Over the counter derivatives sometimes are blind, and do not have collateral backing. Clearing house derivatives have collateral attached, and clearing houses can be unstable through systemic risk if the counterparties they bring together are unstable. Derivatives are used for speculation and hedging.
Eurodollars are US dollars deposited in foreign financial institutions. Eurodollars are used in a Eurodollar market, a money market. Eurodollars cannot be created out of thin air and are loaned out as base money.
Rate banks usually charge customers for swaps. This is the higher fixed rate. Sometimes swaps are required by banks for midsized and small firms qualifying for loans. Banks often take the floating LIBOR rate, which is a lower rate.
In 2005, Greenspan pointed out efforts to raise short term rates should have pushed long rates up. But of course, that did not happen. The conundrum is that long rates stay low. The reason is there is massive demand for long bonds. It is simple supply and demand, not a conundrum. Greenspan's structured finance has created the derivative/collateral/new normal financial monstrosity we now have.
Putting up collateral in the derivatives markets requires some collateral to take a haircut. Often times this is corporate debt, not as pristine as treasury or other sovereign debt. Haircuts can be as much as 20 percent of the value of the collateral.
IOR or IOER
Interest on reserves and interest on excess reserves. These are terms used interchangeably. The Fed pays banks interest on reserves which are base money.
London Interbank Offered Rate. Libor is a floating rate as opposed to fixed swaps rates, which are higher unless there is a financial meltdown. Where a financial meltdown happens, the LIBOR rate can exceed the fixed rates, freezing the banks.
The discipline in economics most concerned with overall GDP (gross domestic product) and large economic issues such as interest rates and Fed behavior, as opposed to microeconomics.
The discipline in economics most concerned with the behavior of firms and individuals and how they react to the greater macroeconomic environment.
New gold is actually debt. It can be corporate debt, or it can be treasuries. Treasuries are the highest form of debt, and are considered better collateral than real, physical gold in the swaps, or derivatives markets.
Abnormally slow growth and low long bond yields, once thought to be abnormal, are now normal after the 2007-2008 credit crisis and the Great Recession of 2008-2012.
Sterilization is the act of the Fed tightening in one aspect of policy in order to loosen the money supply in another aspect of policy.
Structured finance, often using swaps, pushes risk off banks and onto counterparties. It often puts risk onto clearing houses as well.
Exchanging one form of loan for another. Banks most often, but not always, take the lower LIBOR rate which is a floating rate, in exchange for their customers who want inflation protection and take the higher fixed rate. This usually works into the banks favor and when it doesn't the banks freeze up and Great Recessions with credit crises begin.
Westfalia or Westphalia Peace
This was an agreement between sovereign European nations to treat each other with respect. It is the perfect sovereignty, as opposed to the perverted sovereignty of Adolph Hitler or even Donald Trump. The excesses of globalization, ie. with banks having too much power over the nations, is another failure of interaction of the nations that destroys perfect sovereignty.