liquidity preference

*noun*; the tendency for the public to want to hold income in cash relative to its willingness to hold it as interest-bearing savings (bonds).

The liquidity preference is analogous to a supply curve for lendable funds. If the price for lendable funds--that is to say, the interest rate--is high, then the amount be be large. If the interest rate is low, then the public will be more inclined to hoard income as cash.

Income held as cash is not spent on goods and services, so if the amount increases abruptly then there will be a recession. If it is held in some interest-bearing form, then it can be spent on fixed capital, thereby increasing output and employment.

During a recession, if the liquidity preference is high, a lot of money is going to be held as cash. One could free up some cash for job-creating investment by raising interest rates, but that would eradicate a lot of business opportunities. So monetary authorities monetize debt instead, creating a new supply of credit to replace the savings lost by falling interest rates.
...An individual’s liquidity preference is given by a schedule of the amounts of his resources, valued in terms of money or of wage-units, which he will wish to retain in the form of money....

John M. Keynes, *General Theory of Employment, Interest, and Money* (1936), Ch.13
by Abu Yahya March 04, 2009
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Keynesianism

*noun*; a school of economic thought prevalent after World War 2; around 1980, Keynesianism was supposedly superseded by monetarism, and then by the rational expectations hypothesis. Theory is named for John M. Keynes (1881-1946), who argued against the then-mainstream view that the economy was "self correcting." Keynes' book introducing his economic theory was The General Theory of Employment, Interest, and Money (1936).


*Basic Concept*
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The basic concept of Keynesianism is that each economy has a level of aggregate demand, which does not respond to price or income levels in the same way that classical economics says it should. Rising income, for example, *does not* lead to a matching increase in consumption or business investment. Business investment is driven by investment opportunity, not {only by interest rates. Savings is driven by liquidity preference, not only by interest rates.

Keynes suggested that, for any economy, there was a marginal propensity to consume that was less than one. Hence, if the national income rose by 10%, consumption would rise by something less than 10%. This would lead to some production not being consumed, waste, and unemployment.

*What Keynesianism Says We Should Do*
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In 1936, when Keynes wrote *The General Theory*, most of the world was suffering from the Great Depression. Keynes recommended that the national government stimulation aggregate demand through a policy of deficit stimulus. In other words, the country should create adequate levels of aggregate demand by spending more than it took in as taxes (fiscal policy).

Also, Keynesianism held that aggregate demand could be stimulated *up to a point* by lowering interest rates (monetary policy).

*Application*
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In the USA and other large industrial countries, fiscal and monetary policy has been attempted often. After 1980, the Federal Reserve chair (Paul Volcker) was a monetarist, who claimed to reject Keynesianism. Nobel laureates in economics almost unanimously attacked Keynesianism as outmoded and wrong-headed, but governments continue to use fiscal stimulus and interest rate cuts in response to recessions.
Keynesianism held out the prospect that the state could reconcile the private ownership of the means of production with democratic management of the economy.

Adam Przeworski, *Capitalism and social democracy* (1986)
by Abu Yahya March 03, 2009
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Great Depression

*noun*; global economic collapse; in the USA, this began in 1929 and persisted to 1939; most other industrialized countries emerged from the Depression earlier.

During the Great Depression, unemployment reached over 25% in the USA, and those who had jobs suffered severe wage cuts. The index of industrial output fell over 53% from its high in July '29, while trade and capital markets plummeted to mere fractions of their former levels.

*What Happened*
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Many people imagine that the Stock Market Crash (Oct '29) and the Great Depression are the same thing. However, it took another three years for employment, bank failures, and declining industrial output to run its course.

In 1929 the USA had 25,000 banks. By 1933, 10,000 had either failed or been merged with another to avoid failure. At this time there was no FDIC, so depositors mostly lost their money.

Another phenomenon was plunging prices: the consumer price index fell 25% during the first four years. For businesses, this was a disaster, and forced them to lay off millions.


The Great Depression made farms in much of the Southwest unviable; ruined farmers fled to California or Washington, and their abandoned farms succumbed to the Dust Bowl. This was the single largest ecological disaster in recorded history.


*How It Happened*
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There are basically three main explanations for the Great Depression.
1. During the 1920's, there was a huge and growing disparity between rich and poor. The incomes of the great majority rose much more slowly than productivity, but this was masked by increased borrowing. People were able to borrow because the market value of their assets was larger than what they owed; but when a rash of defaults occurred, then the market value of assets plummeted, and people owed more than their assets were worth. Businesses had to lay off workers, which further reduced aggregate demand.

2. The Great Depression began as another minor downturn, but was made much worse by the failure of the Federal Reserve to respond adequately (see Milton Friedman & Anna Schwartz). While the Fed reduced interest rates, prices fell even faster, so real interest rates soared. This made a quick recovery impossible.

3. The financial markets (combined with Fed supervision) distributed capital badly; for example, speculative ventures in growing wheat in the Great American Desert, real estate in Florida, and so on. When this arrangement of productive resources failed, it constituted an extremely large technology shock. Subsequent policy intervention tended to withhold capital and labor from the most productive enterprises, making the depression deeper.

(Explanation 3 is the New Classical economics explanation; see Harold Cole & Lee Ohanian.)


*Roosevelt Administration*
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Franklin D. Roosevelt was elected by a landslide in 1932, and inaugurated 4 March 1933. The White House immediately used emergency powers to close, restructure, and re-open the nation's banks. During the first 100 days of the FDR administration, Congress passed the New Deal which greatly eased the impact of the Depression on the hardest hit.

The New Deal did not significantly hasten the end of the Great Depression, because it was too small to provide a meaningful fiscal stimulus. However, it did introduce many important programs to help those affected by poverty. The Depression had ended in most of the world by 1937; the US was mostly recovered by 1939, when World War 2 broke out.
The NBER business cycle chronology dates the start of the Great Depression in August 1929. For this reason many have said that the Depression started on Main Street and not Wall Street. Be that as it may, the stock market plummeted in October of 1929. The bursting of the speculative bubble had been achieved and the economy was now headed in an ominous direction.

Randall Parker, "An Overview of the Great Depression" (2002)
by Abu Yahya March 06, 2009
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Aérospatiale

(AEROSPACE) French company created in 1970 from a massive consolidation of the French aerospace industry. Inherited and completed the French component of the Concorde SST, a supersonic jet transport. Aérospatiale was a partner in Airbus from the beginning.

Later, all of the partners in Airbus (except British Aerospace, which sold its stake in the consortium to the others) merged into a new, super-sized company called EADS. EADS is the parent company of Airbus, Eurocopter, and Arianespace.
Aérospatiale was one of the most technically brilliant companies of the late 20th century. It's all part of EADS now.
by Abu Yahya September 01, 2010
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in the money

(FINANCE) when a financial derivative has intrinsic value to the person who holds it. There are two examples:

* when the strike price of a call option is less than the spot price of the underlying stock, it is worthwhile to exercise it;

* when the strike price of a put option is more than the spot price of the underlying stock, it is worthwhile to exercise it.

Please remember that an option being "in the money" does not mean it was a good investment. You might have bought the option when the difference between the strike price and the spot price was MORE than it is now. If it's expiring, you might as well exercise it because to not do so is just throwing money away. But it still could have been a loss for the investor.
PHIL: Sweet! My call options are back in the money. Now I'd better exercise them.

MIGUEL: You must be rolling in the cash, Holmes!

PHIL: Not even close. The forex rate for the UK pound nosedived and I got hosed pretty bad. It's not where it was when I bought these rat droppings, but I need to get out before they expire.

MIGUEL: You know, when you first told me about options they sounded like a sweet deal, but...

PHIL: Yeah... the guy who wrote the option always seems to know what's going down better than us dilettantes.
by Abu Yahya April 15, 2010
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LLP

(US BUSINESS LAW) limited liability partnership; a type of business organization which is a cross between a partnership and a corporation. In a private partnership, all of the partners own all the assets in common and have unlimited liability; in a corporation, the firm assets are owned by a legal "person," and shareholders are liable only for the value of their stake (equity) in the firm.

Partnerships have higher risk for members, but their management can disclose a lot less and the taxes are lower. Limited/limited liability partnerships represent a compromise.

In a limited partnership, one or more of the partners has unlimited liability ("general partners") and the others have liability limited to their equity stake in the firm ("limited partners"). A limited partnership is indicated by the initials "LP" after the name, e.g. Apollo Management, LP.

In a limited liability partnership, all members have limited liability; specifically, the other partners of the LLP are shielded from torts for malpractice against the other partners, BUT they are legally responsible for financial claims against the whole organization. LLP liability varies somewhat by state law (several US states do not permit LLP's at all), and somewhat by the terms of the LLP agreement for that particular partnership.

Apologies to Urban Dictionary for an error in the definition of private equity fund and hedge fund: both types of fund are almost never LLP's; they are often limited partnerships (LP's).
At the first meeting of the law partners, it was decided to adopt an LLP form of business.
by Abu Yahya September 02, 2010
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hutment

a type of shantytown whose buildings are made with mud brick, mortar, or found materials.

Prior to the 1950's, a "hutment" could mean any sort of temporary barracks.
These hutment colonies consist of hovels made of a variety of hard and soft materials like pieces of wood, rags, tin sheets, mud, bricks and any such thing that comes in handy.

Pushpa Agnihotri, *Poverty amidst prosperity: survey of slums* (1994), p.44
by Abu Yahya April 10, 2010
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