Another way to classify funds that are provided by a saver to an investor is whether they are in the form of debt or equity. These are the two main forms of contract through which one person or company can provide funding to another. Note that governments, which are very important actors in the financial system, can only… Continue Reading
Category Archives: MFin
Key financial concepts: securities
Securities are a very important and useful piece of financial technology, including bank notes, shares and bonds. They make possible a wide range of financial transactions and provide competition to the other main source of funding, banks. * A security is a certificate representing a contract between two or more people which promises to pay… Continue Reading
Key finance concepts: exchange rates
Exchange rates are among the most important macrofinancial prices, influencing many aspects of an economy. This post introduces exchange rates and their importance for macroeconomic adjustment * What is an exchange rate? An exchange rate is a ratio, the price of one currency relative to another. All prices are ratios, but normally they’re expressed in… Continue Reading
How can retail finance customers avoid being ripped off?
A condition for any market to work well is that consumers have enough information to make good decisions. This is rarely the case with services such as finance. * Theory, backed up by a lot of practical evidence, suggests that markets are a good way of organising many economic activities. But for markets to work,… Continue Reading
Key concepts in finance: liquidity
What exactly is liquidity? The word liquidity is used in many different ways, often confusingly. It’s important to keep clear the centrally important concept of what liquidity is: the ability to turn assets into money quickly and at low cost. * It’s common to read in the financial press that central banks are keeping up… Continue Reading
What exactly is “the” exchange rate?
Exchange rates are ratios of the price of one currency to another. We should be careful about saying “the” exchange rate without being clear as to which particular ratio we mean and why. * Exchange rates often dominate the financial news. In 2016 the Chinese exchange rate has been frequently mentioned as a source of concern.… Continue Reading
David Bowie innovated in finance too
David Bowie, among his many other creative achievements, was an innovator in finance, with the first ever intellectual property rights securitisation. * Nearly everyone seems to have been affected by the death of David Bowie, a uniquely creative and influential musical artist. I’ll add my own personal memories to the list. I think the first… Continue Reading
The IMF includes the RMB in the SDR basket
On 30 November 2015 the IMF voted to include the RMB (the Chinese “people’s currency” denominated in yuan) in the basket of currencies it uses to calculate the value of the Special Drawing Rights, from October 2016. This is largely symbolic but should encourage further international financial reform in China. * What does it actually… Continue Reading
The true story of the Euro crisis
Most economist agree on the causes of the repeated crises of the Eurozone but that explanation is not the one that many governments, and the European Commission, want you to believe. * The problems of the Eurozone – bank failures, sovereign debt crises and bailouts and above all a protracted recession and mass unemployment –… Continue Reading
Changes in the Federal Reserve’s measurement of short term interest rates
The Federal Reserve, the US central bank, is making some changes to the measurement and monitoring of the short term interest rate between banks, which is its key target for monetary policy, * Most central banks have goals such as low inflation and high employment. After experimenting over the years with tools to achieve these goals, most… Continue Reading
Cash remains king
Despite the increasing ease of electronic payments, cash remains popular in the UK, according to the Bank of England. * Money is anything that fulfils the three functions of money: i) a means of payment; ii) a unit of account; and iii) a store of wealth. Physical cash does all of these rather well and… Continue Reading
Global foreign reserves are now falling
The foreign exchange reserves held by governments, having risen for over a decade, have recently fallen. This is mainly because they are being used, as intended, to protect against turbulence in financial markets that would otherwise hurt the developing economies. * Foreign reserves are assets held by governments as a safety net against abrupt changes… Continue Reading
Is a market determined exchange rate always a good thing?
For years there has been pressure on China to allow its exchange rate to be determined by market forces rather than by the central bank. Now that seems closer to happening but it might mean a fall in the RMB, which is not what most of China’s critics wanted. * For years, China held down… Continue Reading
Thinking about the risks to global economic growth
The fundamentals of global economic growth seem broadly positive but there are some reasons for caution, which can be understood through the savings-investment framework described in the previous blog. If savings are “too high” or investment “too low” then the equilibrium rate of interest that makes savings and investment equal may be negative. That means… Continue Reading
The elements of macro-finance
Macroeconomics is a complicated subject but it’s possible to understand quite a lot about the key questions in macro, and some of the policy challenges, by considering a few key concepts. This blog gives the elements of what ties macroeconomics to finance. I’ll apply these concepts in a follow-up blog to try to explain why there… Continue Reading