Let’s face it. We are electing a new President next year and so far the pickins are ……….You fill in the blank. I have voted in every Presidential election since I was eligible and am proud to say that I have voted for both Republicans and Democrats. I can confidently say I am a moderate.
Soon there will be more and more debates and I wanted to give a quick tutorial so that when watching the debates, you are more knowledgeable. I am not saying that you don’t already know this information, but for those of you who need a refresher, here you go!!!!
1. What is the difference between a stock and a bond?A stock is part ownership in a company and a bond is a loan. If someone has a company and needs a loan, but they don’t want to give up ownership to their company, they sell bonds.The government sells bonds when they need YOU to LOAN THEM MONEY!!! You can buy Starbucks stock, but not HEB stock.
2. What is the difference between fiscal policy and monetary policy?Fiscal policy are the tools politicians have to speed up or slow down the economy. Basically taxes and government spending. If we are at the peak of our business cycle (think Bill Clinton, everyone has jobs and money) you want to cut government spending and raise taxes- contractionary fiscal policy). If we are at the trough (recession) lower taxes and raise government spending- expansionary fiscal policy.Monetary Policy are the tools the Federal Reserve (privately owned, but publically managed) has to speed up or slow down the economy. Open Market Operation, Discount Rate, Reserve Requirement. OMO is the most important and least understood. Reserve Requirement (amount banks have to keep in vaults (10%) hasn’t changed in many years. Discount Rate is the most publicized, but least used (amount the Fed charges banks to borrow money).
3. What is OMO?Open Market Operations is when the Federal Reserves buys and sells bonds in order to speed up or slow down the economy. It’s basically controlling the money supply. It is the MOST IMPORTANT TOOL the Federal Reserve has to regulate the economy. When we are in a recession and the Fed wants us to spend money, they will make it where there is more money in the economy. They will do this by BUYING bonds from us. They buy our bonds because they want us to have money to go on vacations, buy TVs, go out to eat, etc. They will make it very unattractive for investors to buy bonds (low interest rates). When they want to slow down our spending (we are at the Peak and they fear inflation), they SELL BONDS to us so that they are taking money out of circulation. They making buying bonds very attractive (high interest rates).
4. What is quantitative easing?Quantitative easing is a type of monetary policy used by the Fed when the traditional tools (OMO, DR, RR) have not worked. This was used when we were in the depths of the recession. The Federal Reserve buys financial assets from banks and other financial institutions so that they will free up money that the banks can lend to customers at a low interest rate (hoping to stimulate the economy). They buys these assets (which tend to be toxic ones- loans that people have defaulted on) in hopes that banks will then have money to lend.
There you go! Who is ready to watch another Presidential Debate?