An Economic Primer by a Non-Economist

The news today is dominated by economic data, which seems to always be bad. When the colored graphs in the newspapers and websites always point down, that usually is not a good sign. The only up pointing graphs seem to be an increasing amount of bad stuff (unemployment, foreclosures, etc.).

With economics on the front pages, I thought it could be helpful to understand economic terms that are now so casually used without definition or explanation. If you were a political science major like I was, some definition and guidance could be essential. So here is what I have come to understand about common economic terms.

Toxic assets. This is a difficult one. How can something that is an asset be toxic? It appears to me that this is a case where an investment banker declares an obtuse financial instrument that normal people (including high paid executives evidently) cannot understand an ‘asset,’ sells it to someone else, who then implodes, and the guy who sold it gets a bonus.

Negative growth. How can growth be negative? This is another oxymoron. It is as though politicians and economists fear using the word 'down,' so they call it 'anti-up.' This is a phrase created to avoid saying more pejorative terms like we’re all going down the drain.

Infrastructure. Governments spending money on infrastructure is very popular across the world. Governments everywhere are going into debt to fund infrastructure projects. Since you will have to pay for it, you should know just what is ‘infrastructure?’ It is anything the Government wants to spend money on (house insulation, college scholarships, tanks, etc.).

Global Recession. When a politician blames the ‘Global Recession’ for everything that goes wrong and for an inability to balance the budget, he/she is saying “Don’t blame me; it’s the other guy’s fault.” In that sense, a global recession is how my soon to be ex-wife viewed our marriage.

Economic Stimulus. This goes hand in hand with Global Recession. The phrase means politicians can spend money that they do not have because there is a Global Recession. The worse the Global Recession appears, the more money politicos are allowed to spend. When you hear one of them conjuring up memories of the Great Depression, be prepared for truly massive spending.

Liquidity Crisis. When banks don’t make loans necessary to sustain business, it leads lots of people to drink; hence a liquidity crisis.

Mark to Market. This is a strange accounting technique used to force companies (like banks) to write down assets that are otherwise performing just fine. By writing down assets, banks no longer have appropriate reserves or balance sheet capacity to make new loans, which causes borrowers to default and requires even more mark downs in an unending downward spiral. I think the concept was invented based on a guy named Mark, who went to market but lost his money gambling while he was supposed to be buying groceries.

Retention Bonus. This phrase was made famous by AIG recently, who paid traders in London retention bonuses after they lost a trillion dollars. Unlike a performance bonus, a retention bonus is earned by going to work every day and doing your job. I suspect the unions were caught by surprise when they read about AIG. They must all be asking themselves, “Why didn’t I think of that?” I can see the new bargaining position – no major salary increases just big retention bonuses for everyone.

Softening Conditions. I never realized conditions could be ‘soft’ like toilet paper. This is a polite way of saying things are going from bad to worse or we are about to be flushed.

Promising. This adjective can apply to investments, economic conditions, or even your social life. Generally it means past performance is pathetic but things are unlikely to get worse.

Productivity. This is an economic term that measures how much stuff is produced per worker. When productivity is rising, it means each worker is producing more stuff; and it generally leads to rising employment levels. When productivity is declining, it usually means people aren’t buying as much and you still have lots of workers who aren’t producing so much. Declining productivity is a precursor to rising unemployment as companies fire unneeded workers. Similarly, when a politician produces a lot of words that do not accomplish anything, it is political productivity. As long as their productivity remains high, politicians are unlikely to lose their jobs.

Default. This word has two different meanings. It can mean the norm or the condition achieved when no other direction is given as in the default position. However, if you read this word in the business section in the newspaper in Australia, it means ‘stuffed’ as in the company is stuffed because of too much debt and too few banks.

Economic Cycle. Things that go up eventually go down and vice versa. Think of a bicycle tire that rotates as you peddle. Any point on the tire rotates to the top and then to the bottom. The economy is similar; in recessions economic activity declines and in periods of growth or expansion, activity increases. So where are we in the economic cycle today? Think of a flat tire.