- Industry: Economy; Printing & publishing
- Number of terms: 15233
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The rate of interest that top-quality banks charge each other for loans. As a result, it is often used by banks as a base for calculating the interest rate they charge on other loans. LIBOR is a floating rate, changing all the time.
Industry:Economy
When monetary policy becomes impotent. Cutting the rate of interest is supposed to be the escape route from economic recession: boosting the money supply, increasing demand and thus reducing unemployment. But Keynes argued that sometimes cutting the rate of interest, even to zero, would not help. People, banks and firms could become so risk averse that they preferred the liquidity of cash to offering credit or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policymakers. Keynesians reckon that in the 1930s the economies of both the United States and the UK were caught in a liquidity trap. In the late 1990s, the Japanese economy suffered a similar fate. But monetarism has no place for liquidity traps. Monetarists pin the blame for the Great depression and Japan’s more recent troubles on other factors and reckon that ways could have been found to make monetary policy work.
Industry:Economy
The proportion of their assets that firms and in¬dividuals choose to hold in varying degrees of liquidity. The more cash they have, the greater is their desire for liquidity.
Industry:Economy
How easily an asset can be spent, if so desired. Cash is wholly liquid. The liquidity of other assets is usually less; how much less may be measured by the ease with which they can be exchanged for cash (that is, liquidated). Public financial markets try to maximize the liquidity of assets such as bonds and equities by providing a central meeting place (the exchange) in which would-be buyers and sellers can easily find each other. Financial market makers (middlemen such as investment banks) can also increase liquidity by using some of their capital to buy securities from those who want to sell, when there is no other buyer offering a decent price. They do this in the expectation that if they hold the asset for a while they will be able to find somebody to buy it. Typically, the higher the volume of trades happening in a marketplace, the greater is its liquidity. Moreover, highly liquid markets attract more liquidity-seeking traders, further increasing liquidity. In a similar way, there can be vicious cycles in which liquidity dries up. The amount of liquidity in financial markets can vary enormously from one moment to the next, and can sometimes evaporate entirely, especially if market makers become too risk averse to put their capital at risk in this way.
Industry:Economy
An attempt to explain the way that people split their income between spending and saving, and the way that they borrow. Over their lifetime, a typical person’s income varies by far more than how much they spend. On average, young people have low incomes but big spending commitments: on investing in their human capital through education and training, building a family, buying a home, and so on. So they do not save much and often borrow heavily. As they get older their income generally rises, they pay off their mortgage, the children leave home and they prepare for retirement, so they sharply increase their saving and investment. In retirement, their income is largely or entirely from state benefits and the saving and investment they did when working; they spend most or all of their income, and, by selling off assets, often spend more than their income. Broadly speaking, this theory is supported by the data, though some economists argue that young people do not spend as much as they should on, say, being educated, because lenders are reluctant to extend credit to them. One puzzle is that people often have substantial assets left when they die. Some economists say this is because they want to leave a generous inheritance for their relatives; others say that people are simply far too optimistic about how long they will live. (See also permanent income hypothesis and relative income hypothesis. )
Industry:Economy
Human life is priceless. But this has not stopped economists trying to put a financial value on it. One reason is to help firms and policymakers to make better decisions on how much to spend on costly safety measures designed to reduce the loss of life. Another is to help insurers and courts judge how much compensation to pay in the event of, say, a fatal accident. One way to value a life is to calculate a person’s human capital by working out how much he or she would earn were they to survive to a ripe old age. This could result in very different sums being paid to victims of the same accident. After an air crash, probably more money would go to the family of a first-class passenger than to that of someone flying economy. This may not seem fair. Nor would using this method to decide what to spend on safety measures, as it would mean much higher expenditure on avoiding the death of, say, an investment banker than on saving the life of a teacher or coal miner. It would also imply spending more on safety measures for young people and being positively reckless with the lives of retired people. Another approach is to analyze the risks that people are voluntarily willing to take, and how much they require to be paid for taking them. Taking into account differences in wages for high death-risk and low death-risk jobs, and allowing for differences in education, experience, and so on, it is possible to calculate roughly what value people put on their own lives. In industrialized countries, most studies using this method come up with a value of $5m–10m.
Industry:Economy
A policy of promoting liberal economics by limiting the role of government to the things it can do to help the market economy work efficiently. This can include privatization and deregulation.
Industry:Economy
Buying a company using borrowed money to pay most of the purchase price. The debt is secured against the assets of the company being acquired. The interest will be paid out of the company’s future cashflow. Leveraged buy-outs (LOBs) became popular in the United States during the 1980s, as public debt markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. Although some LBOs ended up with the borrower going bust, in most cases the need to meet demanding interest bills drove the new managers to run the firm more efficiently than their predecessors. For this reason, some economists see LBOs as a way of tackling agency costs associated with corporate governance.
Industry:Economy
One of the main functions of a central bank. When financially troubled banks need cash and nobody else will lend to them, a central bank may do so, perhaps with strings attached, or even by taking control of the troubled bank, closing it or finding it a new owner. This role of the central bank makes credit creation easier by increasing confidence in the banking system and minimizing the risk of a bank run by reassuring depositors that their money is safe. However, it also creates a potential moral hazard: that banks will lend more recklessly because they know they will be bailed out if things go wrong.
Industry:Economy
Economic crystal balls. Also known as cyclical ¬indicators, these are groups of statistics that point to the future direction of the economy and the business cycle. Certain economic variables, fairly consistently, precede changes in GDP and certain others precede changes in inflation. In some countries, statisticians combine the various different leading indicators into an overall leading index of economic growth or inflation. However, there is not necessarily any causal relationship between the leading indicators and what they are predicting, which is why, like other crystal balls, they are fallible. Contrast with lagging indicators.
Industry:Economy
