Tag Archives: Economics

What is the difference between economic recession and depression?

An economic depression is a form of a recession. A recession is determined as two or more consecutive quarters of negative GDP growth; while a depression would be measured in years and not quarters.

In the Great Recession, the United States experienced 6 quarters of negative GDP growth (3rd quarter 2008 to 1st quarter 2010) so it was more than a simple recession but it did not quite meet the standard for a “depression” as we were only in a recession for about a year and half.

Had they been in official recession for say 8 quarters or more (there are four quarters in a year), a conversation could have been had whether it was a depression instead of just a recession.

Some argue that they were in a depression; however, the stigma associated with the Great Depression provides that the term is only used as a last resort. No government wants to admit they are in a depression as that word is automatically associated with the hardship of the early 30s.

What is the difference between Savings account and Checking account?

A checking account:

– usually accrues no interest
– can used to pay bills via checks, debit card transactions, and ATM withdrawals
– usually has no limit on the number of transactions that can be done

A savings account:

– accrues interest (though not much these days)
– typically limits the kind and number of transactions that can be done with it

So basically a checking account is where money for your day to day payments flows through, while a savings account is where you keep your savings.

In the US, when you put money into a checking account, the bank has to keep 10% (unless it is small bank, then the number is smaller) in reserve, and it can lend out the rest to people seeking loans (as long as it meets other conditions not relevant here).  If you put money into a savings account, the bank can lend out all of it without keeping any in reserve (as long as it meets other conditions not relevant here).

So, the bank can lend out more of the savings deposits than the checking deposits, which makes savings deposits worth more to them.

Because the regulators impose these differences in regulation between the two accounts, they don’t want banks to create something which is called a savings account but acts like a checking account.  So they have regulation D, which forces banks to limit savings account, such as “6 transactions per month” limit.

What is BitConnect and how people lost all their money on it?

BitConnect was a ponzi scheme using their own cryptocurrency, the BitConnect coin. Ponzi scheme means that a company offers a supposed investment opportunity to its customers, promising above-average returns (in this case 40% per month). They intend to make good on that promise by attracting more and more investors, so that the payouts can be paid by an ever increasing stream of money. In order to make this possible, they rely on multi-level marketing: They encourage the investors to do the marketing for them, by telling their friends, family and online communities.

The end-game for a ponzi scheme is that at some point, when no more people come in and investors start demanding money, they go bust. But not before the people who created it all siphon away all the money they can.

The way this worked here was that people bought the BitConnect coins with BitCoins, and then “lent” it to the BitConnect platform. At the end of it, investors wouldn’t get back their money in BitCoins, but the BitConnect coin – which is pretty much worthless everywhere else.

So what happened was that BitConnect grew so big that it attracted media attention, and people rightfully called it out for what it was. Due this and the recent Bitcoin crash then, they decided to close their platform, presumably keeping a lot of the Bitcoins that people gave them for their worthless cryptocurrency.

Why can’t governments regulate cryptocurrencies?

Governments can, and have, regulated cryptocurrencies, in at least a few ways (exchanges have to perform anti-money laundering/know your client checks on users trading large amounts, etc). However, if you’re willing to play outside of the more mainstream businesses, it gets really tricky. Some of the design principles for Bitcoin are:

  • Censorship resistance: no central authority can suppress your transactions.
  • Decentralisation: anybody can participate in the network, from anywhere. There is no privileged authority, so no single point that you can eliminate to take out the network.
  • Anonymity: As long as you don’t reuse addresses, it’s comparatively hard to track your money flow.

All of these things mean that, while governments could regulate cryptocurrencies, enforcing that regulation is another matter entirely. Still, regulation does have something of an effect, and you can see prices drop whenever a major government changes the rules.

How do insurance companies not go bankrupt when a natural disaster happens?

Natural disasters are force majeure and usually not covered, and for those policies that do cover them, they have actuaries (data scientists) making sure that the loss of disaster is lower than the expected premium plus investment earnings earned.

Furthermore, your insurance company doesn’t always hold your policy any more than Walmart makes your Nintendo console.

Many consumer insurance companies simply resell the risk of the insurance to an even larger company.

The insurance industry has enough money to pay these sorts of things off because people pay a ton of money for insurance, and not just health insurance.

In the developed world on average 9% of all the income of every dollar spent in an entire year goes into insurance. In the US that’s almost 2 trillion dollars every year that goes straight to pay for these sorts of things and sits there until it’s needed.

Do governments have bank accounts? If not, where do our taxes go when paid?

Most governments have a national bank. For example Bank of England or the Federal Reserve. And the different parts of the governments have bank accounts so they can interact with the rest of the banks and keep track of their spending and income.
However, there can be a lot of things happening behind the scenes depending on the country. Normally the government is the one who prints money so when you pay taxes they can just burn the money you just paid and when they pay a bill they can just print the money they need. So a government bank account may not even have a balance. Income and expenses is being tracked like normal with budgets and ledgers but the actual money does not have to be tracked.
But printing money when you need it is not the best option as it causes inflation which can cause economic collapse. So the central bank will issue bonds to loan the money it needs. And when it gets income it will be used to pay back the bonds.
The exact details of how a government handles its money is up to them but as you can see they have a few more options then a normal business. They do not even have to follow the banking laws as the laws that decide how the government should handle its money can override the banking laws.

Why do gift cards have an expiry date?

Gift cards are put on the balance sheet of the company as a liability. They have a debt in order to provide a product or service at a future date. Many gift cards are never redeemed but the company cannot know which cards are never going to be used. If they never expired then such debts would accrue over time into a large sum of debt which will never actually be called in.

Why is this a problem? Because the value of a company is determined in part by considering their assets compared to their debt. If you have $100 million in assets but owe $120 million in debt then your company isn’t really worth anything at all. So building up excess gift card debt which can never be paid off is something to be avoided.

Why doesn’t the government simply print more currency notes when a country is short of money?

No country would embank on currency printing frenzy unless it wants to bring on hyperinflation and ruin its economy as Germany did in the decade of 1920s.
The point is that if a government’s central bank prints more money and puts it into circulation, it effectively devalues that currency and reduces its buying power by the same amount. In other words, if a hundred dollar note is just another printed paper like a handbill or a leaflet then why should anyone see it as having any more value than just another piece of paper? People with fattened pockets will have to pay more for the same product because wages and raw material that went into manufacturing that product have been paid for with more currency notes.

In short, double the money supply and the buying power of that money goes down by half. People lose confidence in such currency. That is why years ago countries often used to tie-up how much money they had in circulation with how much gold the government had in their vaults. This meant that for every dollar in circulation in a country like the US, there was a dollar’s worth of gold reserve with the central bank. This tie-up of gold with currency was called the gold standard. It has how been abandoned because times have changed.

Today, with international trading of currency and stokes and shares, it’s the strength of a country’s economy and a government’s control over it that determines the strength or weakness of currency.

More reading:
Gold standard (Wikipedia)
Hyperinflation (Wikipedia)
Monetary system (Wikipedia)

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Which is the highest denominated US dollar note?

It is $ 100,000 currency note bearing President Woodrow Wilson’s portrait, but has never entered public circulation since very few people would take the risk of keeping such valuable piece of paper in their custody and even fewer people would be inclined to accept it by way of payment. These notes are used only in the US government for internal transactions.

The highest value currency notes in circulation are those for $ 10,000 which were released by the US Federal Reserve between 1985 and 1945. These were gradually withdrawn after the World War II, but 200 such notes still remain in circulation as legal tender.

More reading:
United States dollar (Wikipedia)
Large denominations of United States currency (Wikipedia)

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