2020’s top economic jargon

If the economic concepts that arise this year don’t make much sense to you, congratulations: you’re not alone. To give you a fighting chance at keeping up, we have borrowed from The Age columnist, Jessica Irvine’s top 10 list of economic jargon words or phrases you’ll need to avoid looking silly at dinner parties this year.

Source: Jessica Irvine, Senior Economics writer with the Sydney Morning Herald.  Published in The Age, Thursday 9th January 2020.

Unconventional measures: First, a quick update. Australia’s official cash rate is 0.75 per cent and economists are tipping it to fall again to 0.5 per cent when the Reserve Bank board meets for the first time this year on the first Tuesday of February. If rates fall one more time again, to 0.25 per cent, our Reserve Bank governor, Phil Lowe, has signalled he will consider deploying “unconventional measures”, as needed, to stimulate us out of the economic doldrums.

Now, fashion trends in the central banking world are not entirely dissimilar to the fashion world at large. Some trends that seem unconventional at first – such as  miniskirts – quickly enter the realm of acceptability, once social norms catch up. Other trends – such as wearing socks with sandals – remain truly unconventional, an eyesore all reasonable human beings would wish to eliminate.

In countries such as Japan, the unconventional measures Phil Lowe is talking about have become a bit like miniskirts – acceptable fashion. Lowe, however, is clear that such measures must remain sandals and socks here in Australia. But just in case unconventional measures catch on, here are the main measures you need to know.

Quantitative easing: If Lowe does go for an unconventional measure, this is the one he’s most likely to deploy. QE might sound like a tactful euphemism for a prolonged visit to the smallest room in the house. In fact, it refers to the purchase of assets by central banks. Also known as money printing, the central bank increases the supply of money by buying up either private sector or government bonds. The idea is to increase demand for those assets, and thereby decrease the interest rates that need to be paid out on them to attract investors, helping to ease the cost of borrowing across the economy.

Extended liquidity operations: Again, nothing to do with going to the toilet. This is when central banks lend more to commercial banks, or on more favourable terms, so that the latter can keep doing helpful things such as lending to businesses and individuals, which is pretty essential for economic growth. Such operations have proved best deployed during times of acute crisis. They’re not on our horizon, for now, but are worth noting for the cheap toilet gag.

Negative interest rates: A socks-and-sandals combo in the most abhorrent hue. Think pink and red. Once upon a time, every economist believed that if you had money, you would always also have the opportunity to do something clever with it and earn a return. If somebody wanted your money, they had to compensate you for this “time value of money” by returning your money “with interest”. What economists failed to foresee were economies so depressed that nobody could think of anything productive or worthwhile to do with money. A world where investors, such as large pension funds, actually paid governments to keep their money, with a guarantee of getting less back. It has happened in several countries, but Lowe says it is “extraordinarily unlikely” here. We must all keep the faith that clever people will, in the long run, be able to think of things to do with money, and keep interest rates positive.

Inverted yield curve: Is a pose in yoga where you place your forehead on the ground, put your legs in the air and … no. It’s when the yield (interest rate) payable on government bonds is bigger in the short term than the longer term. Usually, it’s the other way around, because investors demand higher returns for locking their money away for longer. When they’re willing to invest their money long-term for less than they could get in the shorter term, it means they’re really worried about what’s around the corner. This happened in several countries in 2019, although pressures have eased.

Geo-political risk: The increasingly important concept that there exist other countries, located geographically elsewhere, which are run by politicians of less than distinguished calibre. Given that some of these people run some of the biggest and oldest economies in the world, it’s just worth keeping in mind when economic forecasting.

Scenario analysis: Because if we’ve learnt one thing this summer, it’s that the increasing frequency of drought and extreme weather events is not only a significant human crisis but poses significant economic challenges, too.

Welcome to 2020, folks. Things are a bit strange already.

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