The Economy is not the stock market, but the stock market can be affected by measurements of our nation’s economic health. If you would like to know more about the terms you hear about in news reports, this glossary can help:
Appropriations – This is the money set aside for various governmental projects. All appropriations start in the House of Representatives. The President and Senators may support spending bills, and they may even call for such appropriations. But the sole power to introduce spending — the so-called “Power of Purse” — belongs exclusively to the House of Representatives.
Bureau of Economic Analysis (BEA) – The Bureau of Economic Analysis is the governmental entity charged with gathering statistics about the Nation’s economic health. If you are looking for Gross Domestic Product (GDP) or Personal Income Outlays and Savings, this is where you go.
Bureau of Labor Statistics (BLS) – The Bureau of Labor Statistics focuses on the statistics regarding the American workforce. They produce monthly reports on the number of jobs created and the rate of unemployment in the U.S. They also compile the Consumer Price Index, described below.
Budget (Surpluses and Deficits) – While many States require their governmental budgets to be balanced to expected revenues, the Federal government is not constrained in this way, which is a major source of controversy between political parties. When governmental spending is less than revenues, a surplus is created. When spending outpaces revenues, a deficit is created. In the federal government, deficits are financed by the sale of Treasury securities. Fun fact: the last time the U.S. ran a surplus was in 2001 at the conclusion of the Clinton Administration.
Consumer Price Index (CPI) – measures the changes in price over time of a market basket of goods and services used by urban consumers. Groceries, rent, transportation, gasoline, home heating, and even entertainment are incorporated into the CPI.
Debt Ceiling –The debt ceiling has nothing to do with capping spending. It was originally introduced in 1917 in order to allow the U.S. government to finance its participation in World War I. Not everyone in Congress was pleased that the U.S. was siding with the British and French, so a compromise was reached. Congress would allow the Treasury Department to issue bonds without its specific approval for each issue, but only to a point that would be subject to further approval. Failure to raise this artificial limit would result in the U.S. defaulting on Treasury securities, which would be catastrophic for the value and reputation of the U.S. dollar, the country’s credit rating, and all those using any branch of government, which would immediately shut down.
Deficit vs. Debt – Deficits are created when spending outpaces revenue, and the Treasury sells securities (also known as debt instruments to cover the deficit. The accumulated obligations this creates is known as the National Debt.
Discount Window – the Federal Reserve Bank offers short term loans to banks to support liquidity in the banking system. Banks have reserves, but often the reserves are invested and may not be immediately cashable. If a bank has less cash on hand than it needs to meet withdrawal demand, it can apply to the discount window. It is called the discount window because it once was an actual window at each Federal Reserve bank from which these short-term loan transactions were conducted. Banks consider the Fed’s discount window the lender of last resort. Use of the discount window is associated with poor cash management, so many banks are reluctant to use the discount window.
Economy vs. the Stock Market – The U.S. economy is all the goods and services created and sold inside U.S. territories. Measures of the U.S. economy include reports on jobs created, unemployment, goods imported and exported, gross domestic product, etc. The U.S. stock market is a both a physical place and virtual space where people come together to purchase and sell shares of securities issued by U.S. companies and the U.S. Treasury.
The economy and stock market do not move in lockstep. For example, the government ordered the nation to shelter in place during March 2020 and many companies had to slow down or cease operations to slow the spread of COVID-19. For one month the market plunged. Because the government stepped in with numerous programs to prop up employment and modify operations to help people and companies follow public health guidelines, the more than 20% fall of the stock market into bear territory was swiftly over. The economy was near a standstill, but markets were predicting economic recovery before it happened.
Employment/Unemployment – The number of jobs created by the U.S. employers is compiled and reported each month by the Bureau of Labor Statistics.
Federal Reserve – This is a banking system across the U.S. The system is divided into regions: New York; Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; Minneapolis, Kansas City, and San Francisco. The Federal Reserve lends money to commercial banks thus assuring the flow of money throughout the economy. If one considers the economy as a machine, the Federal Reserve serves as the team keeping that machine well-oiled and running smoothly.
Federal Reserve Open Market Committee (“Fed”) – When you hear that interest rates are rising or falling, it is this committee that is deciding those movements. The Fed sets U.S. Monetary Policy. It consists of twelve members: seven representing the Board of Governors of the Federal Reserve System, the President of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
Filibuster – This is a political tactic used in the U.S. Senate to obstruct the passage of a piece of legislation by keeping the debate on it open and thus blocking a vote. It is not mentioned at all in the Constitution, so it is not a constitutional right. The U.S. Senate has been called the “most deliberative body in government” because it allows unlimited debate on bills. Prior to 1917 the Senate had no way to end a filibuster, but that year they instituted a new rule that would allow two-thirds of the Senate to vote to end a filibuster. In 1975 the number was changed to 60 members of the 100 member Senate. This a called a “cloture vote.”
The only filibuster most people have seen is the fictional depiction in Frank Capra’s 1939 film Mr. Smith Goes to Washington. Jefferson Smith, played by Jimmy Stewart, stands on his feet and a talks for hours trying to save a small piece of land adjoining Willet Creek for a boys’ camp. It ends with Senator Smith collapsing in exhaustion and disappointment, but also in his antagonist’s shame and embarrassment for his role in lying to the folks back home. In the end Senator Smith’s goodness conquers evil graft and corruption.
Not all filibusters are so clear cut. Huey Long had a series of filibusters in the 1930s over legislation that he felt favored the rich over the poor. Strom Thurmond managed to stand and talk for over 24 hours to filibuster the 1957 Civil Rights Act. In 2013 Ted Cruz staged a filibuster in opposition to The Affordable Care Act. Here is what the Guardian newspaper said about this:
It is the stuff of which legends are made, and Cruz, with his speech, took a step to becoming a Senate legend. In a political climate that prizes zeal above all virtue, Cruz proved a zeal that no articulation of an idea or voting record could demonstrate. He proved it with his feet and back and legs. He proved it with his spine. He proved it with his apparently steel-clad bladder.
Even during the ACA debate Senate rules allowed a Senator to simply mark a bill as requiring a cloture vote, so Senator Cruz did not have to stay on the floor all that time holding his water. He did it to display his passion for his cause. The ACA passed nonetheless, so while filibusters can be dramatic, they are not always effective.
Gross Domestic Product (GDP) – is the total market value of the goods and services produced inside the borders of a country during a year. In the U.S. the Bureau of Economic Analysis compiles the GDP.
National Debt – The source of National Debt is pretty simple, despite what political parties will argue. We spend more than we generate in revenue. Appropriation bills are not the only culprits. Congressional action that thwarts the Internal Revenue Service from obtaining the tools and personnel it needs to enforce the tax code suppresses revenue. While many Americans dutifully pay their taxes, others do not. If the IRS does not have enough sophisticated auditors, they cannot enforce the tax code for the biggest cheaters.
Also, bills cutting taxes do not always work as planned. For example, in 2017 Donald Trump signed the Tax Cuts and Jobs act, which allowed the majority of the tax cuts to benefit the wealthiest 1% of Americans, who were hailed as America’s job creators. At the time the national debt stood at $19.95 trillion. In 2018, when the national debt was at $21 trillion, the Trump Administration raised tariffs on imported goods, which the President claimed would allow his administration to begin paying down the national debt “like it’s water.”
But the tariffs started a trade war which began to hurt American farmers. Tariffs raised about $36 billion in revenue, but this was hardly enough to pay the interest on the National Debt, much less begin to pay it down. To shore up farmers, the Trump Administration introduced a state aid program distributing approximately $16 billion to farmers. By 2019 the National Debt grew to $22 billion, then in 2020 COVID-19 made extraordinary governmental spending absolutely necessary to rescue the economy. By December 31, 2020, the National Debt was at $27.75 trillion up 39% from the total on the day he took office. 1
1 Propublica, “A Closer Look” by Allan Sloane and Cezary Podkul, January 14, 2021.
As with all things financial we see that the sources of problems are usually a confluence of circumstances. No single piece of legislation or Presidential decree will fix the problem. It will take a concerted effort on the part of all branches of government to enact policies that will address the problem’s sources.
Recession – There is a technical definition and then there are the things that can happen when a recession is measured. Technically, an economy is in recession when it has two consecutive quarters of “negative growth.” This means the measure of quarterly GDP is lower than the previous measure for two quarters running. Essentially, this means we cannot know that we are in a recession until after we have been in it for at least six months.
Recessions usually mean corporate belt-tightening such as job cuts. Companies that were just holding on might cease operations. Certain industries might be harder hit than others. It stands to reason that if an industry swelled in the time before a recession, it has further to recede. If you have ever flown over a drought-stricken area and noticed the dried-up mud-caked rings around the water, that is what a recession is like. The economy has shriveled like an unreplenished, sunbaked reservoir.
Treasury Securities or Debt Instruments of the U.S. Government – The U.S. government sells a variety of debt securities to fund government operations. All are backed by the full faith and credit of the U.S. government and the profits from these instruments are taxable if the instrument is held in a taxable account.
Savings Bonds (EE, I Bonds) – These can only be purchased directly from the U.S. Treasury and must be held in a separate after-tax account. They cannot be held by a broker. Unlike most Treasury issues, these can be purchased in $25 increments electronically and as $50 savings bonds on paper. Paper bonds are issued in $50, $100, $200, $500 and $1000 denominations with engraved drawings on quality paper, making them popular for gift-giving. All savings bonds can be cashed in without penalty after being held for at least 5 years.
EE- Series – These bonds are guaranteed to double the purchase price in 20 years. (Using the rule of 72 see Investment Term Glossary, we find that an EE Series issued today would have a guaranteed 3.6% interest rate annualized.)
HH bonds were only issued until 2004, but they had 20 years to maturity. So, it might be possible that you obtained a HH bond in the past that is still earning interest until 2024.
I bonds are designed to protect against inflation. They have a term of 30 years to maturity, so that is how long they will earn interest. The maximum allowed purchase is $10,000 per year, per individual. I bonds are issued with a composite interest rate that combines a fixed issue rate with the inflation rate over the last six months as measured by the non-seasonally adjusted Consumer Price Index. Rates change every May and November.
Treasury Bills (sometimes referred to as T bills) – T bills have a maturity date within one year. They can be purchased with a term to maturity of 4, 8, 13, 17, 26 or 52 weeks. The bill is purchased at a discount and reaches its face value at maturity. The “interest” is the difference between what you paid for the bill and the value at maturity. Treasury Bills are sold at auction, so the discount (or interest you can earn) changes daily. T bills are purchased in $100 increments and the minimum purchase is $100. If you buy a 52-week T bill with a face value of $100, and it costs $95, then the profit when the bill matures will be $5.
Treasury Notes (sometimes called T notes) – Treasury notes are sold with terms of 2, 3, 5 7, or 10 years to maturity. They are sold in increments of $100 with a fixed interest rate payable every six months over the life of the note. The interest a bond pays is also called the “coupon rate,” because the notes were originally issued with a fringe of tear off coupons to redeem at the Federal Reserve bank. You can sell Treasury notes on the secondary market through a broker, but the value of the note may be greater or less than what you paid based on prevailing interest rates. If your note has a coupon rate higher than the prevailing interest rate, it may sell for a premium. If your note has a coupon rate lower than the prevailing interest rate, it may sell for a discount. The term to maturity may also influence the price.
Treasury Bonds – can be purchased from the U.S. Treasury in increments as low as $100, but the $1000 denomination is much more common. The same principles discussed above in Treasury Notes apply to Treasury Bonds, but the term to maturity of Treasury bonds is either 20 or 30 years. Given the economic cycles and the fluctuation of interest rates over such a long-time span, Treasury Bond values may fluctuate quite a bit over their lifespan.