“Money talks,” “Money speaks all languages.” John Lanchester, in his new book How To Speak Money, teaches us the language of money. The book is summarised in the Daily Telegraph (and will continue to be for the next 2 weeks). For more on business, economics and finance regarding the school curriculum visit this website’s page Curriculum Support.
Here are some useful terms of money speak taken from the Telegraph’s summary.
This is, I think, the strangest piece of political/economic vocabulary to have come along in my adult lifetime. What “austere” means in normal life is, in the words of the fifth edition of the Concise Oxford Dictionary, “harsh, stern; morally strict, severely simple”. But that’s a general quality that doesn’t really mean anything tangible, which is a problem, since in this context only the specifics matter.
What we’re talking about here is spending cuts. Funds are either cut or they aren’t; there’s nothing abstract about it. The word “austerity” is an attempt to make something moral-sounding and value-based out of specific reductions in government spending that cause specific losses to specific people. I think it would be useful if people made a distinction between cuts and “austerity”, and used the latter word to mean an overall reduction in government spending as a percentage of GDP.
A rude term fusing banker and gangster. It originally dates from the Great Depression of the Thirties but has had an understandable revival since the credit crunch. As Warren Buffett once said, about financial-sector conduct during a previous boom: “It was the bankers who were wearing the ski masks.”
The study of the way people make decisions and calculations, using experiments and real-life data. Instead of the big broad models used in economics, in which “rational actors” behave in ways designed to “maximise their utility”, behavioural economics studies the kinds of calculations people make in real life, with a particular emphasis on things we do that are demonstrably not rational in the strict economic sense.
Example: a famous-to-economists finding in behavioural economics concerns pricing, and the fact that people have a provable bias towards the middle of three prices. It was first demonstrated with an experiment in beer pricing: when there were two beers, a third of people chose the cheaper; adding an even cheaper beer made the share of that beer go up, because it was now in the middle of three prices; adding an even more expensive beer at the top, and dropping the cheapest beer, made the share of the new beer in the middle (which had previously been the most expensive) go up from two-thirds to 90 per cent. The fact of having a price above and a price below makes the price in the middle seem more appealing.
This experiment has been repeated with other consumer goods such as ovens, and is now a much-used strategy in the corporate world. Basically, if you have two prices for something, and want to make more people pay the higher price, you add a third, even higher price; that makes the formerly higher price more attractive. Watch out for this strategy. (The research paper about beer pricing, written by a trio of economists at Duke University in 1982, was published in the Journal of Consumer Research. It’s called “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis” – which must surely be the least engaging title ever given to an article about beer.)
This is too big a subject to sum up in a lexicon entry, but one point worth stressing about it is that the thing that is supposed to be pre-eminent in it is capital. Not people, capital. When I wrote a book about the credit crunch I thought that the reaction to it would be broadly divided along political lines, but I was pleasantly surprised by the amount of positive feedback I had from people on the political and economic Right, many of whom are just as angry about the failings of global finance as anyone on the Left.
A big part of that is that the banks grew so powerful and so big that they were no longer capitalist institutions but rather monstrous hybrids of state sponsorship and privatised profit, ones whose main interest was in the remuneration of their own senior employees, rather than the functioning of capitalism per se. One private equity investor – a 100 per cent red-meat-eating free-marketer – put it to me like this: “The banks broke capitalism.”
This is one of the most useful ideas in economics, something it’s worth doing in your own life when you face a tricky decision – and also, strange as it seems, when you’re not facing any particular decision, and life seems just to be pottering along.
The idea is to draw up a calculation of what something – a purchase, a change of job, a house-move, any life choice – costs, on the one hand, and what benefits you receive from it, on the other.
This might sound obvious, but the critical factor is to include the costs of both making the choice, and also of not making it. That’s the factor that we often instinctively leave out: the cost of not-doing, of going on as we are.
Dead cat bounce
An apparent but illusory recovery in a falling market. It’s the same kind of bounce a dead cat would give if you chuck it out a window: not a very big one. If you’re wondering who on earth would be so sick as to come up with a metaphor like that, greetings, and welcome to the world of money.
Eating their lunch
To outdo or defeat someone, often by outcompeting them or stealing their customers.
GDP (gross domestic product)
The measure of all the goods and services produced inside a country. Imagine for a moment that you come across an unexpected £10. After making a mental note not to spend it all at once, you go out and spend it all at once, on, say, two pairs of woolly socks. The person from the sock shop then takes your tenner and spends it on wine, and the wine merchant spends it on tickets to see The Bitter Tears of Petra von Kant, and the owner of the cinema spends it on chocolate, and the sweet shop owner spends it on a bus ticket, and the owner of the bus company deposits it in the bank.
That initial £10 has been spent six times, and has generated £60 of economic activity. In a sense, no one is any better off; and yet, that movement of money makes everyone better off. To put it another way, that first tenner has contributed £60 to Britain’s GDP.
Seen in this way, GDP can be thought of as a measure not so much of size – how much money we have, how much money the economy contains – as a measure of velocity. It measures the movement of money through and around the economy; it measures activity. If you had taken the same 10 quid when it was first given to you and simply paid it into your bank account, well, the net position could be argued to be the same – except that the only contribution to GDP is that initial gift of £10.
All this means that GDP is both indispensable as a measure of what’s happening in a country, and also a very rough-and-ready tool. Many good things don’t contribute to GDP and many bad things do. The famous-to-economists example is divorce: when people get divorced they pay lots of lawyers’ fees. All this adds nothing to anybody’s happiness except the lawyers, but it adds plenty to GDP. Your house has just burnt down, and you’ve lost everything? That’s too bad; on the other hand, it’s great for GDP, because you’re going to have to rebuild it and re-buy all your stuff.
Hot waitress index
One of several fanciful techniques for predicting the direction of the economy. Some of them are genuine attempts at working out which way things are going by looking at wider social trends: one of them is the idea that skirts get shorter during boom times, presumably because people feel frisky.
Some of them are so obvious they hardly need stating: the better the economy in an area is doing, the harder it is to find a taxi, or the more cranes you see when you look out the window. The hot waitress index is a joking variation on that: it suggests as the performance of an economy improves, good-looking women get better and better work – what the girls in Lena Dunham’s Girls refer to as “pretty-girl jobs”, as gallery receptionists and suchlike. When times are harder, the girls who would otherwise get pretty-girl jobs instead end up working as waitresses. So the worse the economy is doing, the hotter the waitresses.
If I had to pick one term that summed up my reason for wanting to write this, it would be interest rates. I must have heard interest rates mentioned in the news thousands of times before I found out why they were so important. When the financially literate talk about interest rates, they’re bringing to bear a whole set of linked ideas about inflation, unemployment, the cost of borrowing, the exchange rate, the political impact of rising mortgages, the conditions of trade for business, the price of exports, the balance of payments and the growth or contraction of the economy – all packed into two words, “interest rates”.
Blink, and all the ideas packed into these two words have gone zooming past. To people who don’t speak finance, the language can seem impenetrable and the interlocking ideas too complex to grasp or unpack at the necessary speed.
The reason interest rates matter so much is because the interest rate is the cost of money at any given moment. It’s also the rate at which it is possible to invest risk-free, because you can buy a government bond at the prevalent interest rate, and it’s guaranteed to pay you back. This means that when interest rates go up:
1. life is harder for businesses, because money is more expensive, and
2. people will tend not to invest in companies, preferring to invest in risk-free bonds, and
3. the stock market will fall for that reason, so
4. confidence in general will fall. In addition,
5. people with mortgages will find it harder to make their repayments, and those who are coming off fixed-rate deals may suddenly have a dramatic increase in their monthly repayments. That means
6. mortgage defaults will rise, so
7. there will be downward pressure on house prices, and
8. some people will be in negative equity, which will stop them spending money. Also,
9. the currency will rise, because higher guaranteed rates of investment will attract money into buying the country’s debt, so
10. life will become harder for manufacturing businesses, because their exports will be more expensive. Not only that, but
11. inflation will fall – remember, inflation means money is worth less, whereas a rise in interest rates means money is more expensive.
There’s more, too, but these 11 things are a starting point for all the things that are completely taken for granted by people who speak money when they hear “interest rates”.
The most influential idea ever to have arrived in the world on a cocktail napkin. Arthur Laffer (b. 1940) is an American economist who explained his theory to two officials in the Nixon administration in 1974. The idea in essence was that governments would raise more tax by cutting tax rates.
Laffer drew a curve that plotted tax rates against the income raised from tax. He made the point that at 0 per cent tax, the government raises no money, but at 100 per cent tax, again, the government raises no money, because nobody would do any work if the government confiscated all the proceeds. So the tax rate that raises the most money isn’t automatically right at the top end of the scale; governments will often raise tax revenue by cutting rates of tax.
As you can imagine, this idea is very, very popular with rich people. Reagan’s administration was the first to put the theory into practice. The two officials to whom Laffer pitched the idea were Donald Rumsfeld and Dick Cheney, so it is literally the case that the same people who cooked up the second Iraq war also brought us tax cuts for the rich. To quote the napkin itself: “The consequences are obvious!”