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Term Definition
ARRA

The American Recovery and Reinvestment Act of 2009

Consumer Price Index (CPI)

An index of the cost of all goods and services to a typical consumer published by the US Department of Labor. To calculate the rate of inflation or deflation for a given period, divide the change in CPI by the base period CPI.

Credit Default Swaps

Unregulated inurance contracts that insure the value of credit instrumets including mortgagte-backed derivatievs, corporate bonds, etc. -- the undoing of AIG, one the world’s largest insurance companies.

Deflation

Decrease in the cost of living and the value of assets (see CPI above)

Depression

Starts when you lose your job. There is no universally accepted definition of this term, but generally, a depression is a very severe, prolonged economic downturn brought on by the collapse of the banking/credit system, accompanied by decreased asset values (see “Deflation”). For a really good discussion of the difference between a depression and a recession (and detailed definitions of both terms) see Difference between recession and depression article in Economist.com. Depression is also a clinical diagnosis made by psychiatrists and psychologists, which is on the rise as a result of the economic recession (or depression) and is providing a stimulus to the pharmaceutical industry.

Gross Domestic Product (GDP)

The total market value of all the goods and services produced within the borders of a nation during a specified period (as per The American Heritage® Dictionary)

Inflation

Increase in the cost of living (see CPI above).

Mortgage-backed derivatives

Forget what you learned about derivatives in calculus class and see “Toxic Assets” below. Financial derivatives are contracts having values derived from the values of the underlying assets, in this case bundled mortgages. The problem is that the values of bundled mortgages are difficult to asscertain because the “bundle” generally includes a mixture of “prime” and “subprime” mortgages. The buyers of the derivatives don’t know exactly what is in their “bundle”. Derivative contracts based on credit instruments are frequently backed by “credit default swaps”.

Ponzi Schemes

Ponzi schemes are a type of pyramid scheme named for Charles Ponzi, who defrauded thousands investors during the 1920s. Typically, Ponzi schemes work because the investors are promised very high yields on their investments. Some early investors are paid off with capital invested by new investors, making the scheme appear legitimate, until the pyramid collapses when too many investors try to cash-out their investments. To avoid becoming a victim of this and other financial scams remember that if it’s too good to be true, it probably is!

Recession

Starts when your friend or neighbor loses his/her job. Technically, it’s two consecutive quarters of declining GDP (Gross Domestic Product). The current recession is generally believed to have started in the US in the December, 2007. It’s impossible to determine the start date of a recession without hindsight.

Shovel-ready

A project that is ready to begin as soon as funding is provided. Also, a feature advertised by a work boot company.

Smart Grid

The term used to describe an updated electrical grid that includes technology to measure and report energy usage by individual homes and businesses. It also includes back-end functionality to dynamically manage electrical distribution to meet anticipated demand.

Stagflation

High inflation rates combined with a stagnant economy (little or no growth in GDP and high unemployment rates). This was the condition of the US economy during the 1970s and we’ll be there again soon if the government continues printing money to fund the multi-trillion dollar deficits. See Stagflation Article for additional historical background.

TARP

Troubled Asstes Relief Program. The $750,000,000,000 government fund established to try to save the U.S. (and world) financial system.

Toxic Assets

Apparently not an oxymoron. Assets (mostly mortgages) that are worth much less than their original selling price.

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