Welcome to
Tenant Ideas

Acceleration clause

A paragraph in a loan agreement giving the lender the right to demand full payment of the remaining loan balance if the borrower misses a payment.

Acceptance

A statement approving of another party's offer, thus consummating an agreement. An acceptance of an offer to buy or sell a piece of real property must be in writing.

Acre

An area of land that is roughly 208 feet by 208 feet.

Act of God

An unexpected natural disaster that makes it impossible to perform as required in a contract; for example, an earthquake, hurricane, tornado, or volcano eruption. Many insurance policies will exempt an insurance company from paying for damage caused by an act of god. On the other hand, some insurance companies may insure against losses incurred by an Act of God.

Addendum

An addition to a contract that is added to the original agreement and included at the time of the signing of the original agreement.

Adjustable-Rate Mortgage (ARM)

A loan secured by real property with an interest rate that is altered periodically to reflect the current interest rate trend. A three year ARM is adjusted every three (3) years according to the formula outlined in the mortgage documents. If the market interest rate is higher at the time of adjustment, the mortgage rate of interest will be increased with commensurate higher monthly payments.

Agent

One who acts on behalf of another person, the principal. Real estate agents can work either for the buyer or the seller and usually earn a commission as a percentage of the sales price of the property purchased.

Amendment

An amendment is an addition or change to a document or contract that occurs at a later time from the original document/contract. Furthermore, it usually doesn't alter the original agreement substantially. An exception to this notion could be the Constitution of the United States, which has been amended 27 times. Rental agreement amendments must generally be in writing.

Amortization

To provide for the gradual extinguishment of something by contributions on a periodic basis. For example, a mortgage is amortized over a period of time with monthly payments of principal and interest. For tax purposes, some intangibles may be written off over time. This is similar to depreciation.

Appraisal

An opinion by an appraiser as to the value of a property. Banks rely heavily on appraisals when determining how much money to lend the purchaser of the property.

Appreciation

How much the value of a piece of property increases over time. Appreciation could occur due to increased demand for the property (more people moving into the area), or price inflation.

Arbitrage

The purchase of an asset while simultaneously selling an asset in a different location to profit from unequal prices. The two transactions may take place in different locations, between two different assets, at different times, or between the cash and futures markets.

Arbitration

A process for resolving disputes. An agreement may require parties to submit to the arbitration process where an independent party (arbiter) listens to both parties and then decides how the dispute shall be settled. The decision is usually binding on both parties.

Assessed value

The value assigned to a property for tax purposes by a taxing authority. Taxes are set based on the assessed value of a property.

Asset

Property owned by or owed to an individual or business. On a balance sheet, this includes: cash, accounts receivable, inventory, plant and equipment, loans receivable, deposits, pre-paid expenses, investments, and goodwill, to name a few. Some people think of an asset as anything that puts money into one’s pocket.

Assumable mortgage

A mortgage with a clause allowing a new buyer to step into the shoes of the seller and take over the payments to the existing lender.

Attorney's fees

The cost of hiring an attorney either to draft a document or take a matter before a court. Some agreements prescribe who will pay attorney's fees and court costs under certain conditions; e.g., in the event of a breach of contract. Check your rental agreement to see who pays the attorney's fees and court costs if you default on the terms of your rental agreement.

Balance of Payments

Recording of a country's economic transactions with the rest of the world during a particular time period. It is divided into two accounts – current and capital. The current account covers imports and exports of goods and services; the capital account covers movements of investments. A balance-of-payment deficit usually refers to a current-account excess of imports of goods and services over exports and a deficit in the capital account. It may signal weakness of a currency.

Balance of Trade

The difference between the volume of a country’s exports and its imports during a certain time period. If the imports are larger than the exports, a trade deficit exists. If the exports are larger than the imports, a trade surplus exists.

Bank

A bank is a financial entity that accepts money from depositors and establishes demand deposits (checking accounts) so the depositors can remove their money on demand. It also generally makes loans in return for receiving interest, plus principal. It may lend its depositors money to individuals, businesses, or through the money market. Most banks are regulated by governments so that they can seize your money when there’s an emergency.

Bank reserves

Consist of cash in the vault and monies deposited with the central bank. Minimum required bank reserves are set by the central bank. Excess reserves may be lent to other banks that fall short of their required bank reserves.

Bank run

When a bank’s customers lose confidence in the bank’s ability to pay out the customers’ deposits, they simultaneously demand “their” money from the bank. This act ultimately ends in the bank’s bankruptcy when the banks are operating under a fractional reserve banking system and they don’t have enough funds on hand to meet their customers’ demands for cash.

Bankruptcy

A legally recognized status for a debtor who is unable to pay his/her debts. There may be different procedures to follow depending on the severity of the debtor’s debt to equity ratio and earning’s power.

Basis points

1/100th of one percent, or .00001, or .01 percent. Interest rates are denominated in basis points. For example, an interest rate that has risen from 5% to 5 1/4% has risen by 25 basis points.

Black Swan

An event or occurrence that is very rare and not foreseen by most people due to their reliance on historical data that does not include the possibility of such an event because it has never occurred before. The consequences of this event are cataclysmic, having a huge impact out of all proportion with normal events.

Bond

An intangible asset designating debt. The debtor issues the bond and receives cash (or other assets) in return for the bond. The bond purchaser (or bondholder) is entitled to repayment of the loaned funds, plus interest (as payment for the use of the capital over time).

Breaker box (circuit)

A circuit breaker box takes the electricity from the utilities company and distributes it throughout your house or apartment. There is generally a main switch that shuts off all the electricity coming into your dwelling and a number of smaller breakers that control the flow of electricity to various rooms or appliances within your house or apartment. To learn more about breaker boxes, click here.

Bretton Woods Agreement

Agreement reached by an international conference at Bretton Woods, New Hampshire, in 1944, for the establishment of an International Bank for Reconstruction and Development and an International Monetary Fund. The American position at the conference was prepared by Harry Dexter White. The British proposal was in large part the work of John Maynard Keynes.

Bubble

See Economic Bubble

Bullion Coins

Coins that are minted in large quantities and carry only a slight premium above the spot price of the bullion from which they are minted. Because bullion coins derive most of their value from the metal out of which they are minted, grading their quality is generally not necessary.

Bureaucratic Management

Bureaucratic management is the type of management used by governments; i.e., where rules and regulations are promulgated from a superior body for bureaucrats to follow. Furthermore, the objectives of such management are not measured in terms of money (profit).
See Bureaucracy for more information.

Business cycle

Periods of expansion and contraction in economic activity due to central bank manipulation of money. Without a central bank’s intervention, the market rate of interest would guide investment decisions. On the other hand, if central banks set their interest rates below the market rate of interest, borrowers are encouraged to borrow more than if the market rate of interest prevailed. Conversely, if the central banks set their interest rates above the market rate of interest less money will be available than would be were there a market interest rate in effect.

In the long run, the central bank’s intervention misallocates capital which results in booms (when interest rates are held below the market rate for extended periods) and busts (when interest rates are then raised above the market rates). Recessions then are the market’s attempt to correct for the misallocation of capital during the expansionary periods. Unprofitable investments are liquidated with a renewed emphasis placed on meeting market priorities (unless central banks continue to intervene in the markets).

Business Plan

A statement of goals and a list of steps to be taken to accomplish the goals. Most business plans include a description of products or services to be offered, marketing strategies, production methods, human resource requirements, and financial projections of future earnings and expenses.

Capital

Capital is both “productive” assets that help to produce either more productive assets or consumer goods, and money that can be used to purchase “productive” goods. In either case, the asset employed earns enough of a return to “pay back” the owners (entrepreneurs and businessmen) and form a self-sustaining activity. To the extent that an activity does not earn a profit, it is consumptive in nature, rather than productive. Thus, an automobile in the hands of a profit-making traveling salesman is capital, while a student’s car used to go out for lunch is not. Cash, too, can be capital or not, depending on what it is used to purchase—a productive asset or a consumer good. Thus, by definition, capital increases productivity and, ultimately, standards of living. Some people simply use the term capital to mean money.

Capital goods

Produced factors of production, such as tools, buildings, transportation facilities, etc. that make human labor more productive.

Capitalism

A social system in which the means of production are owned privately. Supply and demand is met by entrepreneurs seeking to earn profits by supplying goods efficiently.

Cash Flow

Money coming in and money going out. If more money comes in than goes out, there is a positive cash flow. If more money goes out than comes in, there is a negative cash flow.

Central Bank

A country's bank that alone can legally issue currency and holds the reserves of other banks. It administers monetary policy and engages in transactions designed to influence the economy. In the United States the Federal Reserve Bank is the central bank.

Central Bank Credits

Funds available to be borrowed by member banks from a central bank and secured by securities or repurchase agreements. By increasing available funds (credits) more money is available to be loaned out by banks.

Cheap Money

Funds borrowed at a low interest rate.

Civil law

1. In the United States, civil law generally refers to laws that govern the relationship between private entities/individuals with regard to contracts, torts, real property, trusts, and family law; i.e., rights and obligations stemming from contracts, etc.
2. Civil law may also refer to the type of law that is common in most of the world outside the United States and Great Britain (where Roman law was adopted) which is based on statutes and codes. This type of civil law is also found in Louisiana, the only U.S. state to use civil law. Louisiana was named after Louis XIV, king of France and was settled by the French who use civil law.

Clearing house

An agency established by banks or brokers to reduce the labor of paying and receiving funds due one another. Each member's net credit or debit to another member is settled by transfers of net balances to or from established accounts.

Closing

The final step taken a acquire a property. It's where the buyer and seller transfer title and payment. If a loan is used to purchase the property, loan documents will be signed at closing, as well.

Coercion

The use of force against another person. This force can be either physical or psychological, and includes threats.

Collateral

Assets used to assure the payment of a debt. In the event of a default on the debt/loan, the lender may sell the collateral to pay off the loan.

Command System

A command system is an economic system in which the factors of production are managed by central planners, i.e., government agents. A command system is also known as socialism and is an inefficient method for allocating scarce resources.

Commercial bank

A bank which accepts deposits subject to withdrawal on demand.

Commission

The fee paid to a real estate agent/broker for services rendered to buy/sell a property. It's usually a percentage of the sales/purchase price of the property.

Commodity

A tangible economic good or item of trade or commerce; for example, corn, gold, or hogs, as distinguished from intangibles and services.

Commodity money

A commodity, such as gold or silver, which is used as money.

Common law

The body of unwritten law developed primarily in England by judicial decisions based upon Scripture and custom, constituting the historical basis of the English and United States legal system.

Communism

See Socialism

Comparables

Properties that are similar (as much as possible) within a given geographical area to the one being purchased or sold. Comparables are used by real estate agents and appraisers to determine or assign a market price for a property for the buyer, seller, and/or bank.

Comparative advantage

The theory that all countries (or individuals) benefit from a division of labor when it (he/she) specializes in producing that which it (he/she) produces relatively more efficiently than others do, even if it (he/she) can produce many things somewhat more efficiently than others.

Comparative shopping

The practice of comparing prices and quality of various goods/services before purchasing something. Comparative shoppers are looking for the best quality at the lowest possible price.

Compound interest

Interest can be paid periodically with the period differing in length. For example, if the interest is paid monthly, and your put $100 into a savings account paying 5% interest, at the first of the month, at the end of the first month you will receive $.42 in interest ($100 x 5% x 1/12 = $.42). During the second month, the interest to be paid will be on the principal of $100 plus the $.42 of interest earned in the previous month. In other words, the interest is paid on a cumulative balance; i.e., it compounds on itself.

Consideration

Something of value given to a seller to encourage him/her to enter into a contract for the sale of property. While this is usually cash, it could also be the assumption of a debt or some other obligation owed by the seller and performed by the buyer.

Conspicuous consumption

The practice of buying expensive consumables to impress people. People can use current income, savings and inheritances, or debt to satisfy this ego need.

Constitutional law

The body of law that developed from commentaries upon and judicial decisions made pursuant to the United States Constitution. Unlike common law, constitutional law is written, though not codified.

Consumer's good

A good used directly in satisfying a human want.

Consumption

Using up economic and/or free goods.

Contingency

A condition that must be fulfilled for a contract to become binding. For example, a buyer may make his/her offer contingent upon the sale of his/her house, or upon obtaining financing. The problem is that if the contingency isn't fulfilled, the deal can fall through.

Contract

An agreement between or among two or more parties who are legally old enough and competent enough to enter into a contract. Such a agreement is binding on all parties and enforceable in a court of law. Contracts involving real estate must be in writing to be enforceable in most places. Contracts for real property can (and usually are) very detailed and may contain many different clauses covering everything from price, to place, to timing, etc.

Contract law

The division of law that concerns the interpretation, application, and enforcement of contracts among contracting persons.

Contracyclical policies

Interventionist policies that are intended to counteract the undesired but inevitable effects of previous credit expansion.

Corruption

The lack of integrity, honor, and/or righteousness. Usually used with regard to government officials who use their political powers for personal gains rather than the betterment of the commonweal.

Cost

The value of the price paid to buy, produce, or achieve anything. For the businessman, cost refers to the money paid to purchase the factors of production.

Cost of Capital

A weighted average of the expense associated with borrowing money (an interest rate) and the expense associated with the use of equity capital (dividends paid). The weight accorded to borrowed funds and capital depends on the percentage of each used.

Counteroffer

In response to an offer, the seller might reject part or all of the offer, and propose, instead, different terms. For example, I offer $100,000 for a house and the seller rejects my offer and proposes, instead, that I pay him $110,000 and that he would accept such an offer.

Credit

1. The extension of time between receipt of goods or services rendered, and payment. 2. Access to money; e.g., a line of credit. 3. The amount of money a lender will lend to a buyer. This amount depends on the creditworthiness of the buyer/borrower.

Credit crunch

A time when it is difficult to borrow money. This can apply to individuals, corporations, banks, and/or governments. A crunch usually occurs suddenly.

Credit history

A record of a person's past payments with prior creditors. Major credit bureaus keep track of individuals' credit history and make it available to lenders for determining creditworthiness and thus the amount of interest to charge a borrower.

Credit Score

A ranking of an individual's ability to pay a debt based on certain criteria, as determined by a credit agency. In the United States, there are three major credit agencies. They are Experian, TransUnion, and Equifax. These offer detailed credit histories. Another credit ranking is done by FICO, which uses an algorithm to condense an individual's credit-worthiness into a number (FICO Score) between 300 and 850.

Credit union

A credit union is a financial organization that is similar to a bank in that it offers checking and savings accounts, and makes loans; however, it differs from a bank in that it is not-for-profit. That means that it is owned by members, not shareholders. If a credit union earns a profit, its profits are distributed among its members through lower loan rates, lower fees, higher interest payments, or dividends. Generally, credit union members have something in common with one another. It may be their employer, the area in which they live, school, labor union, or church, for example.

Creditor

A person or company to whom a debt is owed. Payments are usually made over a period of time. Examples include a bank to whom house payments are made, a utilities company, an insurance company, or a landlord.

Crime

A crime is an act that is prohibited by a law, as established by a government.

Criminal

A person who has committed a crime.

Criminal law

Laws relating to crimes committed against the public, as established by the government (what are the crimes). It also governs how criminals are to be investigated, charged, tried, and sentenced; i.e., procedures to be followed. Purpose: to assure public safety and order.

Currency

Generally, money or other valuables currently in use as a medium of exchange. Some people use the term to refer exclusively to paper "money," and reserve the term "money" to refer to gold and/or silver.

Currency Reform

Issuing new money at various ratios to the old currency. A currency reform often occurs after the depreciation of a currency through hyper-inflation.

Debasement

Originally, a currency unit such as a dollar, mark, pound sterling was stated as a specific amount of gold or silver. Eventually, the government revalued the currency to be a lesser quantity of gold or silver, but continued to call it a dollar, mark, pound sterling, etc. The difference between the old weight and the new weight was pocketed by the government, thus reducing the value of the monetary unit. The act of reducing the metal content of the monetary unit became known as “debasement.”

Debt

An obligation to pay back borrowed funds. Being in debt is having an obligation to pay back borrowed funds.

Deed

A piece of paper with a legal description of the property and the names of the owner(s) used as evidence of ownership.

Default

Failure to perform as promised.
This can occur when a debtor fails to make a mortgage payment on schedule or a tenant fails to pay the rent on time. It could also be the result of a failure to abide by other clauses in a rental agreement; e.g. adding a pet when the rental agreement forbids having pets. It could also happen to a government when it fails to pay off its debt as promised. When it comes to sovereign debt default, there are two kinds of default, depending on the type of government involved. Governments that do not have control over a currency (i.e., the control to print it) will default when they fail to pay off their debts when they come due.

On the other hand, governments that have control over the quantity of their own currency can default gradually and insidiously by inflating their currency, thus paying off their debts with currency of ever decreasing value. In short, they delay the day of obvious default by paying off debts with currency of lesser value until people ultimately realize that they are providing goods and services to the government in return for pieces of paper that are steadily losing their purchasing power. In the end, they stop accepting the paper and the government must find a way to restore its credibility.

Deficit

An excess of liabilities and debts over income and assets. In finance, an excess of expenditures over budget.

Deflation

A decrease in the supply of money and/or credit. The symptom of deflation is a decline in prices.

Demand deposit

A bank deposit that is withdrawable on less than thirty days' notice.

Demand, Law of

States that when demand increases and supply remains constant, the price of the good tends to rise. Conversely, when demand declines and supply remains constant, the price of the good tends to fall.

Depreciation

Describes the gradual deterioration of a building or other long-term asset. Depreciation is an important concept for tax purposes because owners of income-producing properties are allowed to deduct a certain percentage of the value of the property over the life of the property to compensate them for their loss of value from the deterioration of the property. Land is not depreciable.

Depression

An economic condition characterized by falling prices, rising unemployment, and a general decline in business activity. It is the final phase of a business cycle that begins with inflation and credit expansion.

Derivative

An investment vehicle whose value depends on the value of an underlying asset or index. For example, the price of an option to buy a house depends on the value of the house.

Devaluation

Reduction of the gold or silver content in the monetary unit or, where one currency is quoted in the currency of another country, reduction in the number of foreign units exchangeable for one domestic unit.

Discount

A reduction of the principal amount, or the face value or list price.

Discount rate

Interest rate which the Federal Reserve charges member banks for loans. Now consists of the primary credit rate, secondary credit rate, and the seasonal credit rate. The primary credit rate is commonly referred to as the discount rate.

Division of Labor

The practice of having different parts or individuals perform the tasks for which they are best suited with the goal of obtaining a higher level of productivity.

Down payment

The amount of money a buyer contributes to the purchase of a property. This amount depends on the type of loan and the agreement between the buyer, seller, and bank. The more down payment one contributes, the more favorable the purchase might be and the shorter the duration of the loan could be.

Drain line

The drain lines are pipes that carry waste water from your sinks, toilet, and shower to a main house line that carries your waste water to the septic tank or city sewer system.

Due Diligence

A process for determining the likelihood that you are going to get what you expect in any sort of business transaction. This involves a careful and complete investigation into the circumstances surrounding and parties to the transaction. This is most effective when done prior to entering into the transaction.
 
Unfortunately, there are limitations to this process. Consider, for example, the September 11, 2001 disaster. Most people could not foresee or plan for such an event. Many contracts and business transactions came to an end on that day.
 
Less dramatic examples can occur, such as the bankruptcy of a company like Enron, or REFCO, or the sub-prime problems that cost major brokerage firms and banks billions of dollars.

Duplex

A house with two apartments in it. They could be side-by-side apartments or over-and-under apartments.

Earnest money

The small amount of money a buyer puts down upon offering to buy a property to show that he/she is serious about buying the property. It also acts as consideration for purposes of entering into a binding contract.

Easy Money

When interest rates are set below market rates by a central bank to encourage borrowers to borrow more money, thereby “stimulating” the economy.

Economic Bubble

Bubbles are a dramatic increase in the price level in a particular section of the economy, for example, high-tech stocks, real estate, or precious metals. Bubbles can result from a capital shift in search of a profit, or as a result of a change in government policies/demands.

Economic good

That which is scarce (relative to man’s wants) and useful to mankind.

Economic Maladjustment

A structure of investment and production that is at variance with that of an unhampered economy.

Economic Orders

Economic orders or systems are methods used by a society or country to allocate scarce resources. Examples include socialism, capitalism, communism, mercantilism.

Economics

The science of means, i.e., the means to be used to obtain a specific goal. One of the primary questions confronting economists is the means by which to best allocate the world’s limited resources among the unlimited human wants.

Eminent domain

A process used by a government to seize property from a landowner for "public" use or for the betterment of the community, i.e. it could be turned over to a private developer who builds a structure that will generate more tax revenue, thus creating a "betterment" for the community. Another example would be for a local authority to install water or sewer lines in the community. Payment for the seized property is required by the U.S. Constitution.

Encumbrance

Also known as a cloud on the title. It refers to something that keeps the seller from having a clear title. That could include a lien for work performed on the property but not paid for, back taxes, or even an easement by a land-locked neighbor.

Entrepreneur

A person who sees the need and then acts to perform needed new services or to produce new products.

Equity

Generally, the difference between the fair market value of a property and the amount of money still owed on it. Assuming the market price hasn't dropped since the property was purchased, equity refers to the portion of the principal already paid off by the buyer.

Escrow

A service provided by a disinterested third party to ensure that two (or more) parties to an agreement act according to the terms of their agreement. For example, an escrow company might exchange title for cash upon completion of the sale of a property. Alternately, an escrow company might collect money from the property purchaser to be set aside for payment of taxes and insurance.

ETF

see Exchange-Traded Fund.

European Central Bank – ECB

The central bank of 12 European countries which issues the euro currency since January 1, 2002.

European Economic Community

The official name for the Common Market, which is an economic union established in 1958, originally including Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany.

Eviction

The process used by a landowner to remove a tenant from the rented property. The procedure varies from state to state.

Excessive

"Excessive" carries the connotation of being extreme and improper. Of course, what is excessive or extreme in one case may not be excessive in another. Like the word "fair," it is a subjective term, which can be used by politicians and other inflamatory speakers to incite envy in voters, rioters, strikers, and other groups prone to violence.

Exchange rate

The price of foreign currencies. If it costs $.42 to buy one Swiss Franc, the exchange rate is .4200. As one currency is inflated faster or slower than the other, the exchange rate will change, reflecting the change in relative value. The currency being inflated faster is said to be becoming weaker because more of it must be exchanged for the same amount of the other currency. As a currency becomes weaker, exports are encouraged because others can buy more with their relatively stronger currencies.

Exchange-Traded Fund (ETF)

An Exchange-Traded Fund (ETF) is an open-ended investment company that trades on a stock exchange. By investing in the components of an index or in a commodity, the ETF makes available to small investors the opportunity to invest in the index or commodity. For example, an ounce of gold may cost $900.00, but a share in a gold ETF may cost $90.00, making it a more viable investment for many more people.

Factors of Production

Economists usually distinguish three factors of production — land, labor, and capital. "Land" includes all the natural elements, including water; "labor" is both physical and mental; and "capital" is that personal wealth that has been produced by the intelligent application of labor and land and will be used to produce more goods.

Fair

Equal treatment (under the law). Without bias. An honest weighing of the pros and cons.

Fannie Mae

See Federal National Mortgage Association (FNMA).

Fascism

Originally, an Italian form of totalitarianism in which the state has total control over the economy. Some people distinguish fascism from other "isms" by saying that it merely wants to tightly regulate business, it doesn't want to replace it with state ownership of the means of production. Nevertheless, it uses force to achieve its goal of control over a society, making it a variation of socialism.

Fed

See Federal Reserve System

Fed funds

Monies deposited at the Federal Reserve Bank by commercial banks. These deposits, along with the cash in the commercial banks’ vaults comprise the bank’s “reserves.”

Fed funds rate

The interest rate charged by one commercial bank to another commercial bank for funds borrowed and held by the U.S. Federal Reserve Bank or "the Fed" (usually for short periods of time). While the Fed Funds Rate is negotiated between the borrowing bank and the lending bank, the Fed influences this rate through open market operations; i.e., by manipulating the supply of money in the economy.

Federal Home Loan Mortgage Corporation (FHLMC)

A quasi-governmental stockholder-owned corporation that makes loans and loan guarantees. It is quasi-governmental because it is regulated by the Federal Housing Finance Agency (FHFA) and because the U.S. Treasury Department will step in to bail it out if necessary. It is commonly known as Freddie Mac. As of September 7, 2008, it is under the conservatorship of the FHFA.

Federal National Mortgage Association (FNMA)

A quasi-governmental stockholder-owned corporation that makes loans and loan guarantees. It is quasi-governmental because it is regulated by the Federal Housing Finance Agency (FHFA) and because the U.S. Treasury Department will step in to bail it out if necessary. It is commonly known as Fannie Mae. As of September 7, 2008, it is under the conservatorship of the FHFA.

Federal Reserve System

Also known as the "Fed," it is the U.S. central banking system. It consists of a Board of Govenors (7 members appointed to 14 year terms by the President and approved by the U.S. Senate), 12 Federal Reserve Banks and member banks (both state and national). The system was established in 1913.


Not only does the Federal Reserve System act as a clearinghouse for most U.S. bank transactions, but it also sets the reserve requirements for its member banks. The Fed also buys and sells government securities, i.e., T-Bills, T-Notes and T-Bonds and issues the U.S. currency.


The U.S. dollar inflation rate since 1914 has been 1,915%, according to www.inflationdata.com. While some people contend that the Fed is independent of the U.S. government, what do you think would happen to its "independence" if it stopped purchasing U.S. government debt? In fact, the Fed is by far the largest holder of U.S. T-Bonds. It also owns more than $1 trillion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Fee simple

The highest level of ownership in a piece of real property. Property that not subject to any encumbrances; i.e. owned "free and clear." Of course, such ownership right is still subject to zoning laws, tax laws, and eminent domain.

Fiat Money

1. A government issued currency that is not backed by anything tangible, such as gold or silver. They are usually paper, although there is a movement afoot to make them digital in the future. Finally, they are usually required to be used (by legal tender laws) by the citizens of the country that issues them. In the U.S., the dollar is backed by the full faith and credit of the U.S. government, which spends its money on wars, welfare, and interest on its debts.
2. A coin or piece of paper of insignificant commodity value that government has declared to be money and to which it has given "legal tender" quality. Latin translation: "Let it be done."

Fiduciary Money

Money-substitutes, such as bank or treasury notes and demand deposits, that exceed the cash reserves immediately available for their conversion into proper money.

Financial Crisis

This could refer to any number of different things. It could refer to a stock market crash, bank runs, numerous business failures and individual bankruptcies, significant nationalizations and bailouts, loss of faith in a currency or, as in 2008, all of the above.

Fixed-rate loans/mortgages

Loans having an interest rate that does not change throughout the life of the loan.

Fixture

Property that is attached or affixed to real property. Examples include: light fixtures, hot water heaters, toilets, furnaces, and even the kitchen sink.

Flexible Exchange Rate

A monetary system with a monetary unit whose rate of exchange is subject to instant change by order of a government agency or because of fluctuations in the international money markets.

Foreclosure

The legal process used by a lender to acquire ownership rights to a property for which the lender loaned money to a buyer who failed to make payments on the loan. This happens more frequently after real estate prices drop because borrowers decide not to continue to make payments on a house that isn't worth what they paid for it.

Foreign trade

The purchase and sale of goods and services by businesses and individuals in two or more countries.

Fractional reserve banking

A banking system in which commercial banks are required by the central bank to maintain a small percentage of their deposits on hand as cash reserves. Both vault cash and deposits kept with the central bank qualify as reserves.

Freddie Mac

See Federal Home Loan Mortgage Corporation (FHLMC).

Free Economy

An economy free of government intervention. An economy where people are free to choose their professions, jobs, investments and consumer goods (all economic decisions) without government regulation.

Free Market

An economy in which entities/individuals are not prohibited from entering into competition with other entities/individuals to supply goods and/or services.

Fully amortized mortgage

A mortgage that is fully paid off at the end of the loan period. Please note that it is possible to have a 15 year mortgage, for example, that is amortized over 20 years (with payments to be paid as if it were to be paid off in 20 years). At the end of the 15 years, the remaining balance will be due as a balloon payment.

Gamble

To take a chance on a man-made risk. Gambling does not have any socially redeeming qualities.

Gambler

People who seek out man-made risks; e.g., the roll of dice, spin of a roulette wheel, outcome of a race, sporting event, or card game. They actually create risk that never existed before they placed the bet. Man-made risks fall under the category of "fun" or "entertainment." They are contrived events not based on economic goods. Gambling does not benefit society as a whole--only a small class of winners. Compare with speculator.

Globalization

Activity involving the entire world. Extension of division of labor to other parts of the world.

Gold Standard

That monetary system in which gold is money. All types of money substitutes are freely convertible into gold at a specified rate.

Government

The supreme authority/force in a state that establishes laws, rules, and regulations by which its residents/citizens must abide. It is also the entity that applies/enforces its laws, rules, and regulations.

Governmentalism

The belief that government activity should be expanded; the inclination to expand the role of government.

Great Depression

Most people, including the Fed, think of the Great Depression as a deflationary event caused by a shortage of spending and money, which could have been avoided if the Fed had created more money (inflated the money supply). In reality, it was a government-induced economic stagnation of the 1930s in the United States.

Gresham's Law

The principle that "bad money drives out good money if government decrees them to be equal in value," first expounded by English financier Sir Thomas Gresham in 1560.

Gross National Product

The market value of goods and services produced in a country. Figures of GNP or GDP (Gross Domestic Product) are released by the Commerce Department on a quarterly basis.

Hard Asset

A tangible economic good such as gold, silver, or platinum coins or bars.

Hedge fund

A private investment partnership or an investment corporation for non-U.S. or tax-exempt investors in which the general partner has made a substantial personal investment and which uses leverage and derivatives and invests in many markets.

Hoard

To hide away something of value for the sake of building a reserve; assets held in abeyance rather than productively or consumptively utilized. Note: this is different from
saving.

Holism

A concept of epistemology according to which economic knowledge can be gained from totals or aggregates rather than the actions of individuals.

Hyperinflation

Quite simply defined, hyperinflation is excessive or extreme inflation, however, some authors have tried to define hyperinflation as an inflation rate of 20 to 50% per month. While hyperinflation often leads to a currency reform, this is not always the case.

Income

Income is the amount of wealth which can be consumed within a certain time frame without reducing the capital invested in that venture.

Index

A specialized average. Stock indexes may be calculated by establishing a base against which the current value of the stocks, commodities, bonds, etc., will change; for example, the S&P 500 index uses the 1941 – 1943 market value of the 500 stocks as a base of 10.

Individual retirement account (IRA)

Individual retirement accounts are retirement savings accounts (long-term) with special tax treatment advantages. There are a number of different types or IRAs; for example, there are traditional IRAs, Roth IRAs, Simplified Employee Pension IRAs (SEP), Savings Incentive Match Plan for Employees IRAs (SIMPLE). For more information about IRAs, click here.

Inflation

An increase in available currency and credit resulting in a decline in their purchasing power. Such an increase results in higher prices for goods and services.

Inflation factor

A multiplier used to estimate future prices, assuming a specific rate of inflation. For example, if we estimate an annual inflation rate of 5%, something that currently costs $100.00, in ten years will cost $162.89. Assuming an annual inflation rate of 15%, our $100.00 item will cost $404.56 in ten years.

Inflationary Spiral

Initially, inflation is caused by an expansion of the money supply, but eventually people begin to anticipate future declines in their currency’s purchasing power, and the currency’s price (relative to goods) begins to drop faster than the supply expansion would suggest. Thus, an ever-expanding money supply is needed to effect the same purchasing power and/or stimulate the economy. In short, as existing money buys less, more money is needed to buy the same quantity of goods. More money is then printed to meet the ever-expanding anticipatory “need”/demand for it, reducing the currency’s price and pushing goods’ prices higher still. This spiral often ends with hyper-inflation and a monetary reform.

Inflationomics™

1. A body of economic thought that favors inflationary policies.


2. In popular terminology, indicates the sway of inflation thought in education and the affairs of government.

Inspection

A thorough examination of a property by an independent home inspector. The inspector will supply a report detailing any things that are not according to code or simply aren't working properly. As with everything else, the quality of inspectors varies. Buyers beware!

Installment sale

The purchase of a property, with monthly payments made over the course of years. Such sales agreements often allow the property to revert to the seller if a payment is missed with the buyer forfeiting his/her rights in the property...buyers beware! Please note that the IRS may require the title to the property to be transferred up front (upon closing) to qualify as an installment sale for tax purposes.

Institutional Unemployment

As distinguished from frictional unemployment, institutional unemployment is caused by government interference in the economy: minimum wage laws, legal privileges for labor unions, unemployment compensation, shutting down businesses because of a pandemic, etc.

Insulation

A material used to prevent the transfer of heat, water, noise, electricity, etc., from one place to another. With regard to heat, buildings may be insulated with fiberglass, foam, cellulose, and more. Click here for various types of insulation. The thermal performance, or R-value of insulation varies depending on the type and installation of the insulation.

Insurance

A service offered by an insurance company to protect someone from a loss. There are many different kinds of insurance. There's property insurance in case of damage to property, liability insurance to protect against a loss sustained by a third party. There's even insurance to protect against the loss of rental income. Please contact your insurance agent/expert to see if they offer insurance protection for the kind of loss you may suffer.

Interest

Interest is comprised of three components:

1. Time value of money or the originary rate. Anyone who chooses to invest his/her money to receive interest payments is forgoing current consumption for later gratification. Money spent now provides instant gratification; the buyer knows exactly what he is getting for the value of his dollar. Money saved presents the element of uncertainty. The future is hard to predict when it comes to finances, and the value of a dollar tomorrow might be radically different from today. In addition, what might be available to be purchased today may not be available tomorrow. In short, the originary rate is the ratio of currently desired goods relative to future-desired goods, or the rate of interest that must be paid to someone to induce him/her to forgo the use of his/her money today (become a saver). Some people think of interest as a time premium paid for the use of money. Under free market conditions, this rate has traditionally been around 2-3% per year.


2. Debtor's risk premium. Debtor's risk premium is the portion of interest paid by the debtor due to the possibility that the borrowed money might not be readily forthcoming when due. In other words, what are the chances of the debtor’s being unwilling or unable to repay the original sum or the interest payments? What if the debtor dies or declares bankruptcy? Economic crises in the past have destroyed thousands of seemingly-secure banks. Today, record numbers of individuals are declaring bankruptcy, and 96% of all businesses started in the U.S. fail in their first five years. Debtor's risk premium is an important component of interest and is determined on a case-by-case basis.


3. Inflation premium, the third component of interest, results when there is price inflation; i.e., when enough new money is created (or anticipated to be created) to reduce the price of the currency (relative to goods prices) during the term of the loan. The borrower must be charged enough interest to compensate for the loss the lender will incur because he will receive cheaper dollars (dollars with a lesser purchasing power) when the debt is repaid.

Interest Arbitrage

The transacting of business in loan markets in order to profit from interest rate differences among different loan markets.

Interest Rate

Rate of interest charged for the use of money and present economic goods, usually expressed at an annual rate.

Internal Revenue Service

see IRS

Interventionism

A politico-economic system in which governments interfere with the smooth workings of a capitalistic system through various means, including taxation, price and wage controls, regulations, and government spending. Interventionism is the type of system all free world countries have today. In most cases it leads to socialism.

Invest

To employ an asset with the purpose of receiving a return.

IRS (Internal Revenue Service)

A U.S. government agency charged with the responsibility of enforcing the U.S. Treasury Department’s tax code. The IRS conducts audits, promulgates rulings, collects and assesses taxes, and prosecutes suspected tax offenders.

Jawboning

A technique used by governments to influence various other entities into acting in ways that the government wants. Governments can do this by threatening an undesirable course of action if the other party fails to act in accordance with the government's wishes. Governments might use this technique to "persuade" labor not to strike, businesses not to raise prices, businesses not to lower wages, countries to increase oil production, or other central banks to inflate their currencies to bolster their own currency.

Joint liability

When there are two or more parties who sign a rental agreement or a home loan agreement, they are both responsible (liable) for the entire amount of rent or debt. If one of the parties fails to pay his/her share, the other party(ies) is/are still liable for the whole payment.

Judgment

A decision rendered by a court. Such a decision could be for money, or possession of a property, among other things.

Justice

1. An impartial or equal treatment under the law. For a law to be just, it must require equal treatment and application. 2. An equal weighing of the merits and demerits when determining a punishment/reward. 3. Without bias.

Knob-and-tube wiring

This is the original type of wiring used in the United States from the 1880s to the 1930s. It uses a single strand of wire that makes a complete circuit with extensions traveling to receptacles and lights. No ground wire is used. Over the years, many people may have spliced into this type of wiring making it potentially dangerous. Some realtors will not list a house that has visible knob-and-tube wiring. Many older homes still have such wiring in them.

Labor Income

Remuneration for an employee’s or a professional’s mental or physical effort. Often refers to a salary or wage which is limited by the number of hours available.

Laissez-faire Philosophy

The doctrine that economic production functions best when there is no government interference. It is based on the knowledge that a natural economic order tends to secure maximum well-being for the individual and therefore for the country as a whole.

Land contract

An agreement between a buyer and seller for the purchase/sale of real property in which the seller receives payments over time. The terms of the agreement are negotiated between the buyer and seller and can thus vary significantly; e.g., interest only with lump sum payment, interest plus principal for x number of years, etc. The title of the property remains in the seller’s name until the property is completely paid for and the buyer takes possession. Frequently, if the buyer fails to make a payment, he/she will forfeit his interest in the property, thus losing all the money paid to date, and the seller keeps both the money received to date and the property.

Lead paint

Prior to 1978, paint may have contained lead, which is toxic if consumed. Some pipes were also made of lead. Landlords are required to inform their tenants about the possible presence of lead in houses that were built prior to 1978.

Lease

An agreement for the use of someone else's property, usually for one year or more. The lessor owns the property, while the lessee uses the property. The lessee usually pays the lessor on a monthly basis, however, he/she could pay in a lump sum in most cases, depending on the terms of the lease. Please note that a rental agreement could be used on a month-to-month basis instead of a yearly basis. Compare with rental agreement.

Lease option

Also known as a lease with an option to buy. A lease option gives a tenant the right to buy the property he/she is currently renting. The option terms will be negotiated as to the time frame the option can be exercised, the purchase price of the property, the payment method, and how much of the rent is attributed toward the purchase price. If there is an additional premium to be paid for the option, this too must be negotiated and drafted with the written option agreement.

Legal Tender

Any kind of money which by law must be accepted when offered in payment of a debt. Legal tender laws were enacted when contract law was rejected. They are designed to tell citizens what medium of exchange to use, rather than to allow the citizens mutually to agree upon medium of exchange in a contract. Governments made their fiat money legal tender and denied the status to gold and silver coin in order to force the people to use fiat money, which could be created at will.

Lender

Anyone who transfers money to another person with the expectation of being repaid, usually with interest. Examples could include a rich relative, an employer, a bank, credit union, insurance company, or investor.

Leverage

The control of a larger sum of money with a smaller amount. For example, by accepting the liability to purchase or deliver the total value of a futures contract, a smaller sum (margin) may be used as earnest money to guarantee performance. If prices move favorably, a large return on the margin can be earned from the leverage. Conversely, a loss can also be large, relative to the margin, due to the leverage.

Liability

An obligation to pay something as the result of a contract. Liabilities could arise from a rental agreement (to pay rent) or from a personal loan or mortgage. Another example is the security deposit received by a landowner from a tenant. On a balance sheet, this includes: accounts payable, short- and long-term loans, accrued taxes, and deferred income (to name a few). Some people think of a liability as anything that takes money out of one’s pocket.

Lien

A claim against a property for services rendered on it. A handyman, for example, replaces a broken hot water heater and isn't paid for his work. He can go to the local courthouse and have a lien placed against the property in which he replaced the hot water heater. Another example...many municipalities provide sewage treatment services and if the homeowner doesn't pay for those services, the municipal government may be able to place a lien on the property for failure to pay the sewer charges.

Limited Resources

Throughout history and up to this time, man's resources have been limited to what is available on planet earth. These resources are often referred to as "supply."

Liquidity

Referring to the quantity of dollars or assets available in a given market. Greater liquidity increases the ease with which a market participant can enter or exit a market.

Loan

A loan is a sum of money borrowed by someone, to be paid back over time or at a certain time, usually with interest. Banks and credit unions are in the business of lending money.

Loan Default

Failing to make consistent and timely payments according to the terms of a loan agreement.

Loan, fully amortizing

A loan in which a portion of the principal and interest are both paid off in each payment so that, by the end of the loan, the entire balance has been paid off. To learn more about fully amortizing loans, click here.

A fund operated by an investment company that raises money from shareholders and invests in stocks, bonds, options, futures, currencies, actual commodities, or money market securities. It charges a management fee, typically between 0.5% and 2% of assets per year. To learn more about mutual funds than you ever wanted to know, visit the Investment Company Institute.

Nationalize

Seizure of private property by the state to be used (consumed) by the state thereafter. Because governments do not have “profit” motives, it is just a matter of time before they consume the assets they have seized.

Negative amortization loans/mortgages

Loans in which the loan payment for any period is less than the interest expense for that period. With such a loan/mortgage, the principal balance increases as time goes by. Such loans/mortgages may also be called deferred interest loans/mortgages or Graduated Payment Loans/Mortgages (GPM). Such loans/mortgages are generally used as an introductory loan/mortgage for a period prior to starting a conventional self-amortizing loan/mortgage.

Negotiation

The process of reaching an agreement to trade. Generally, each party to a trade values what he receives more highly than that which he gives in trade.

Net Present Value

The current value of future cash flows less the cost of the original investment. The current value of future cash flows is calculated by reducing (discounting) the total expected cash receipts by the interest rate paid to borrow the initial investment. If an investment costs $100,000, the expected annual cash flow is $20,000 for 10 years, and the investor’s cost to borrow funds is 10%, the net present value is $22,891.34. The more positive the net present value is, the better the investment is. Comparison of net present values for various alternatives can help an investor decide which investment is best.

Net Worth

Generally, net worth is calculated by subtracting one’s liabilities from one’s assets. During inflationary times, assets are often undervalued because they are usually priced at cost.

Note

A note is a personal promise to pay a debt evidenced by a written agreement. When purchasing a property, banks require buyers to sign both a note and a mortgage. That way, the borrower agrees to pay the debt personally even if the sale of the house (collateral) doesn't cover the debt. Other personally owned assets can also be used to pay off the remaining debt.

Numismatic coins

Coins whose market prices depend on their age, rarity (number of coins printed), quality, aesthetic qualities, popularity, origin, etc. What they are made of is of lesser importance. Because quality is of such importance, grading of numismatic coins becomes an important consideration. Consequently there are several companies that specialize in grading rare coins. See NGC and PCGS.

Objective

Something with a measurable quantity; e.g., degrees of temperature, decibels of loudness, speed in miles or kilometers per hour.

Offer

A statement showing a willingness to buy something. When accepted, the parties have an agreement. Agreements for the purchase of real property must be in writing.

Opportunity Cost

The expected yield on the best alternative investment. It is not a cost in the accounting sense of the word, just a missed alternative.

Options

There are two kinds of options: calls and puts. A call gives the purchaser the right to purchase an underlying asset at a specific price within a certain period of time (before expiration). The call seller (or writer) is obligated to deliver that underlying asset at the specified price (strike price) if the call purchaser exercises his right to buy. A put gives the purchaser the right to sell an underlying asset at a specific price within a certain period of time (before expiration). The put seller (or writer) is obligated to buy the underlying asset at the specified price (strike price) if the put buyer exercises his option (right to sell).

Oral agreement

An agreement or contract that was agreed upon verbally, or by word of mouth, not in writing. Normally such agreements are binding, however, their existence is harder to prove. Furthermore, many states require agreements regarding real property to be in writing to be enforceable in a court of law.

Originary rate

The ratio of currently desired goods relative to future-desired goods, or the rate of interest that must be paid to induce someone to forgo the use of his/her money today (become a saver). Under free market conditions, this rate has traditionally been around 2-3% per year.

Owner financing

An instance where the owner/seller of a property agrees to assume part or all of the mortgage on the sale of his/her property; i.e. act as the bank and receive payments of principal and interest (usually) over time. Title is transferred at closing in this case and the seller must foreclose on the property if the buyer fails to make his/her payments. Alternately, a land contract can be used, in which the seller retains title until the debt is retired. If the buyer fails to make a payment, the property is kept by the seller and the buyer forfeits all the money he/she has already paid for the property.

Paper Assets

Include federal reserve notes, bonds, stocks, dividends, IRAs, Keough plans, ETFs, Social Security claims, Medicare and Medicaid, mortgages, notes, futures contracts, options, warrants, swaps, certificates of deposit, commercial paper, bank accounts, insurance claims, and any other rights, claims, or certificates payable in a currency.

Payback Period

The time needed for an investment to pay for itself with net projected cash flows. The payback period is generally used when estimating the time it will take to recover the original investment amount.

Pension fund

A collection of money set aside by an entity to cover the retirement of an individual or group of individuals. In the United States, there are generally two types of pension funds…those that people pay a set amount into during their working lives and receive however much the fund can afford to pay out upon retirement (defined contribution plan) or one in which the payment upon retirement is set (defined benefit plan). Benefits are usually paid monthly. Pension plans often collect large amounts of money and thus must invest those funds into stocks, bonds, etc., to be able to pay out sums during the beneficiaries' retirement.

Personal property

Any possessions other than land and buildings and fixtures. Examples include: furniture, appliances, paperwork, money, certificates, books; i.e., pretty much everything that is movable.

Points

Points are an up-front fee charged by a lender. Each point is one percent of the loaned amount. Points are effectively prepaid interest. By paying points, the borrower generally receives a lower interest rate over the life of the loan, and thus makes lower payments.

Politics

The use of government to achieve specific goals.

Power of attorney

A document authorizing one person (agent) to act on the first person's (principal) behalf. Such a power to act on behalf of another person establishes a principal/agent relationship (agency arrangement). The agent is required to act in the best interests of the principal. The relationship ends as stated in the agreement that establishes the relationship, or upon the death of either party. Examples include: real estate agents/brokers, attorneys at law, accountants, bankers, and stock brokers, to name a few people.

Price

What one must impart, carry out, or endure to acquire something. Prices are usually expressed in monetary terms. In a free market, prices are set as a result of the interaction of supply and demand in a market; when demand for a product increases and supply remains constant, the price tends to rise; when demand for a product decreases and supply remains constant, the price tends to decline. Conversely, when the supply increases and demand remains constant, the price tends to decline; if supply decreases and demand remains constant, prices tend to rise. Today's markets are not purely competitive; prices are affected by government controls and supports that create artificial supplies and demand, and inhibit free trade, thus making price predictions more difficult.

Price bubble

Price increases caused by an exceptionally large demand for a particular good or service. The cash/credit used to pay for the demanded goods/services is often supplied by central banks causing a mal-adjustment in the economy.

Price controls

Government policy measures that place a ceiling on prices, purportedly to curb inflation. Violators may be prosecuted.

Price Level

A macroeconomic term which implies that all prices rise and fall uniformly. Actually, there are only prices, not price levels. Attempts to measure or determine a price level through such devices as the Consumer Price Index or the Wholesale Price Index are futile, for the very concept of a price level is chimerical.

Price Manipulation

See Manipulation

Primary credit rate

An interest rate at which sound depository institutions (banks) can borrow short-term funds at 1% above the targeted fed funds rate. There are no restrictions or questions asked for the use of primary credit.

Prime rate

The lending rate at which a bank’s best corporate customers can borrow money. Many loan rates are stated relative to the prime rate; for example, prime plus 1% or prime plus 2%.

Principal

1. the amount of money borrowed,


2. the remaining unpaid balance of a loan,


3. the original amount of an investment,


4. the primary investor (as opposed to an agent), or


5. the main one in its category (principal residence, principal place of business, etc.)

Producers' Goods

Goods that satisfy human wants indirectly, not being wanted for consumption, but for the sake of creating goods that will satisfy wants directly. They include raw materials, machinery, and factories.

Productive asset

An asset that earns a profit.

Productivity

Productivity is a measure of the output relative to input. The greater the output per input, the greater the productivity. Productivity is usually used to describe capital and labor output.

Profit

The difference between the higher value of the good produced or the service rendered and the lower value of its cost, that is, yield minus cost.

Profit Motive

Having an incentive to earn more than one’s costs in the production of a product or service. Such an incentive is derived from the right to own property privately and use it to produce/sell products/services that consumers are willing to pay for. It also presumes that the producer will have the right to keep enough of the sales proceeds to earn more than what it cost him to produce the product/service.
Notice that private businesses have a profit motive, while governments do not.

Progressive Income Tax System

A scheme of increasing rates of levies against earnings as earnings rise. In the U.S., in 2007, a single individual taxpayer with a taxable income of $7,825.00 paid 10% of his taxable income in taxes, while a single individual taxpayer with a taxable income of $50,000 paid 17.85% of his taxable income in taxes. The higher the tax rate, the more it destroys people’s incentive to earn more and/or to file “honest” tax returns.

Property Rights

A just and legal claim to possess, consume, enjoy, transfer, or gift something as the owner pleases.

Public welfare

When unemployment rises or inflation increases, government is called upon to do something about it, although it may have caused the problem in the first place. The age-old question is, where do the state’s interests in the public’s well-being end and where do individual’s interests take priority?

Purchasing Power

Refers to the value of money in buying economic goods. The exchange value of a unit of currency is its purchasing power.

Quadruplex

A building with four apartments in it. Also sometimes called a four-plex.

Quality of Money

Addresses the question, how well does a particular type of money fulfill its goals as a unit of measure, store of value, and medium of exchange? The better the quality, the better it fulfills these goals. The more poorly it fulfills these goals, the poorer is its quality. At some point, if its quality becomes too poor, it will be substituted by a different money.

Quantitative Easing (QE)

A euphemistic term referring to the expansion of the money supply through the purchase of U.S. government issued Treasury instruments by the Federal Reserve Bank. The modern day equivalent of printing more money—very inflationary.

Racketeering

In broad terms, the act of acquiring money "illegally," especially through fraud or extortion. Because governments generally make their own acts legal (and therefore cannot do anything illegal) they can force their citizens to accept depreciated currency against the citizens' wills by threatening to seize property if the currency is not "freely" accepted. This would be racketeering except that it is legal for governments to do this.

Rate of Return (Return on Assets)

For an investment where you have a one-time gain or loss on the investment, the return is calculated by dividing the gain or loss upon liquidation of the investment by the initial cost of investment. A more complicated formula applies for investments with streams of income over a period of time. For those investments, the rate of return is calculated by taking the annual cash flow for the life of the investment and equating it with the initial cost of the investment. The resulting interest rate is the rate of return. A comparison of rates of return for various competing investments reveals the best investment.

Real Goods

Land, capital goods, gold, silver, precious stones, consumers' goods, all are real goods. They are distinguished from cash holdings of fiat money.

Real property

Includes land and buildings that are attached to the property. It could also include trees, rivers, and mountains. The term real property is commonly used interchangeably with the term real estate.

Real Return

The increase in the value of one’s investment, adjusted for inflation. If your investments increase by 15%, but the inflation rate is 7%, your real return is 8%.

Real Wages

Wages expressed in terms of real goods rather than monetary units.

Realtor

Realtor is a proprietary designation available to members of the National Association of Realtors. They have a code of ethics and require their members to abide by their list of "acceptable practices." Real estate agents/brokers may or may not be members of the National Association of Realtors.

Recession

A moderate and temporary decline in economic activity caused by readjustments precipitated by inflation and credit expansion.

Refinance

To pay off an existing loan with a newly established loan. A person might refinance a loan to take advantage of lower interest rates, or to switch lenders, or to take some cash out of his/her property's equity.

Rental agreement

A rental agreement is a contract between a landlord and a tenant for the use of a property for a short period of time, usually a month. Rental agreements usually automatically renew at the end of the month for another month. Compare with lease.

Reserve Currency

A currency that is held by many central banks and used to make international payments.

Reserve Requirements

The legal requirements imposed on banks in order to force them to keep a certain fraction of their actual deposits on hand to meet cash withdrawals. In order to conduct inflationary policies the Federal Reserve has greatly reduced the reserve requirements. In a sound monetary system it would be in the interest of all banks to maintain a one hundred percent reserve.

Return on Investment

See Rate of Return

Routing number

Starting in 1910, the American Bankers Association has assigned unique nine-digit identifying numbers to each bank and credit union in the United States. These numbers are included on each bank’s or credit union’s checks so that the money is taken from the correct bank or credit union. Your account number is also needed to be sure that your money goes into or comes out of your account. For more information about routing numbers, click here.

Safe haven money

A medium of exchange that provides refuge (relief) from a world of depreciating fiat currencies; i.e., precious metals.

Sales contract

The written agreement signed by both buyer and seller of a property used to convey ownership. This contract not only includes the price of the property, but also any other terms negotiated between the buyer and seller. For example, any personal property to be conveyed, and who will pay for any repairs, etc.

Save

To use one’s income for productive purposes; to invest the excess of production over consumption. Note: saving includes investing! For an in-depth discussion of saving versus hoarding, see www.capitalism.net.

Scarcity

The fundamental economic phenomenon is scarcity. If a good is not scarce (air, for example) it is not an economic good.

Securities

A term that includes stocks, bonds, debentures, and mutual funds.

Seignorage

Refers to the difference between a money’s face value and the cost to produce it; i.e., the profit earned by the issuing entity on the currency it issues.

Selling short

Selling short refers to the practice of selling an item when you don't own it, with the expectation of buying it back at a later date and a lower price. If the price declines between the time the item is sold and re-purchased, a gain can be made by buying the item back at the lower price. Selling short can be done with securities and commodities that are traded on an exchange.

Short

A term used by traders in commodity and currency markets to describe a commitment to deliver at a future date a security or commodity which the seller does not own, but which he hopes to buy later at a lower price.

Shortage

To be distinguished from scarcity, which is a natural phenomenon. A shortage is induced by political interference in the market economy, either through hampering production and distribution or through controlling prices.

Social Security

The U.S. federal benefit system, created in 1935, that provides retirement income and many other benefits such as disability income, Aid to Families with Dependent Children, the Food Stamp program, Unemployment Insurance, Medicare, Medicaid, Public Assistance for the Aged, Blind, and Disabled, and Student Aid.

Socialism

A social system in which the means of production are government owned. It is the opposite of capitalism. Production of goods is determined by government bureaucrats. Also called communism (arising from the word commune—a place where people live together and theoretically share equally among themselves). Communism and socialism are forms of total government control or authoritarianism. To learn more about socialism, see Socialism, by Ludwig von Mises.

Solvency

The ability of an individual or business to pay its payables when they become due.

Sophisticated Investor

An investor who: (i) has a net worth individually or with a spouse of $1,000,000 or more; (ii) is an institutional investor such as a bank, insurance company, registered broker/dealer, or large pension plan; (iii) a tax-exempt organization with total assets in excess of $5,000,000; (iv) a private business development company; (v) a director, officer, or general partner of the issuer; or (vi) any entity owned entirely by sophisticated investors.

Sound Money

A medium of exchange that is not easily inflated; i.e., a commodity of consistent weight and quality. Antonym: fiat money.

Sovereign Wealth Fund

An investment fund established by a government as a result of a surplus generated by the sale of a commodity or other trade surplus. These funds are intended to act like a for-profit private equity fund, invested globally in stocks, bonds, real estate, gold, foreign currencies, and more recently, crypto assets. Some well-known sovereign wealth funds are owned by China, Singapore, Norway, United Arab Emirates, and Saudi Arabia. Also called sovereign investment funds.

Speculate

To calculate (or take a chance on) the coming change in prices of economic goods and position oneself to profit from those changes. Note that if speculators correctly anticipate the changes in market conditions, they perform a valuable service to society; e.g., supplying an economic good or service at the best possible price at that moment.

Speculator

One who buys and sells economic goods, risking his capital with the goal of earning a profit from price changes. In contrast to gamblers, speculators understand and evaluate existing market risks on the basis of data and experience, while gamblers are those who seek out man-made risks or "invest" on a roll of the dice.

Stagflation

Slow economic growth combined with inflation.

Standards of Living

The levels of living in a country as judged by income, quality of housing and food, and other amenities.

Statism

The political doctrine that the state is the supreme institution in society and that all other individuals should be subjected to and controlled by it. It includes communism, socialism, fascism, Nazism, and interventionism.

Stocks

An intangible asset designating ownership in a corporation. Stock is divided into shares. Owners of shares are known as shareholders or stockholders. Stockholders own a proportional interest in the corporation’s assets, liabilities, and profits. Voting rights may be associated with share ownership.

Store of Value

Usually refers to an economic good that retains its value over time, relative to other economic goods. Is there such a thing? Traditionally, precious metals have done a relatively good job of retaining their value, but even they can be inflated with new discoveries and improved mining techniques. Of course, the past is not a guarantee for the future.

Sub-prime

A loan or interest rate that is made to a borrower whose credit rating (a FICO score of 660 or lower is often used) is less than the bank’s “prime” corporate customers. Other criteria for sub-prime borrowers may be payment delinquencies, foreclosures, bankruptcies, high debt-to-income levels, and liquidity problems. Such customers pay a higher interest rate for new borrowings due to their poorer credit rating.

Sub-prime debacle

A worldwide banking crisis, which surfaced during 2007, resulting from the Fed-induced easy credit bubble and lax lending practices in the U.S. banking industry.

Subjective

Something varying with the perspective of the viewer; e.g., cold, hot, fair, unfair, too much, not enough, fast, slow.

Subjective Theory of Value

The theory that the value of economic goods is in the minds of individuals and is not quantifiable or objective. Its most consistent exponents are the members of the Austrian School of economic thought.

Sublease

Generally, sublease means to lease under someone else. For example, I rent a three bedroom apartment, and I rent out one of my bedrooms to a friend. The friend will pay me, not my landlord. If I want to move out and have my friend take my place, my landlord will have to accept my friend as my replacement and will probably want a new lease with my friend. Many rental agreements prohibit subleasing.

Supply, Law of

States that when the supply of a good goes up and the demand remains constant, the price of the good tends to go down. Conversely, when the supply goes down and the demand remains constant, the price of the good tends to rise.

Tax

A forced levy by a government to pay for government services. There are many different types of taxes: income, wealth, estate, excise, gift, sales, value-added, occupational privilege, per capita, real estate, school, personal property, intangibles, unemployment, social security, medicare, and use, to name but a few.

Taxpayer

Someone who is classified by a government as owing money to the government for services rendered by that government.

Tenant

A person who pays money to a landowner for the use of the landowner’s land or building. Tenants may have a short-term agreement (month-to-month) or a long-term agreement (lease).

Time Deposit

A bank deposit which is subject to at least thirty days' notice before withdrawal.

Time Value of Money

The concept that cash is worth more today than it will be in the future because of the uncertainties associated with waiting for a period of time. Inflation adds to these uncertainties because you can’t predict an exact rate of inflation.

Title search

A service provided usually be attorneys or title companies to determine who owns the property you want to buy. Is the seller single or divorced? Does his ex-wife have a claim to the property? A title search should also reveal any encumbrances against the property such as mechanic's liens. A title search should also reveal what debts the property is subject to and must be paid off before you can receive clean title upon settlement.

Trade barriers

Restrictive laws and regulations that prevent people from competing in the market. They result in shifting production from most favorable conditions to places in which they are less favorable. They protect less efficient producers from more efficient competitors.

Trade Deficit or Surplus

A mercantilistic term describing an excess of imports over exports (trade deficit) or of exports over imports (trade surplus), resulting in a negative or positive balance of trade.

Transfer tax

Usually assessed by state or local governments when a property is transferred from a seller to a buyer. The tax could be a percentage of the sales price of the property or a flat fee, depending on your state.

Treasury Department

The executive agency responsible for managing the United States government’s finances. They have also taken on the self-appointed responsibility of safeguarding the U.S. and world financial systems. See their web site.

Treasury I.O.U.

U.S. Treasury promise to pay a debt (short for I owe you).

Triplex

A house with three apartments in it.

Trust account

A bank account used by attorney and real estate brokers to hold customer funds until needed to pay a third party. Some landlords may be required to have a trust account to hold tenant security deposits.

Underground Economy

Economic activity involved in secret or illegal activity. Taxes are usually not paid on income earned in the underground economy.

Unit of Measure

Can have two possible meanings: a set relationship between different denominations within the same currency. To the extent that there are always 100 cents in a dollar or Euro, money acts as a unit of measure; however, it cannot act as a (second meaning) constant measure of value relative to other economic goods. This meaning is usually covered by the concept “store of value.”

Utility

Usefulness. The ability of a material good or a service to satisfy human wants.

Vacancy

Not live in or occupied. A vacant lot is a parcel of land without any structures on it.

Value

Value is subjective. Specifically, each individual has his own hierarchy of wants, so the same economic good has a different ranking for different consumers. (It may even have a different ranking at a different time for the same person.) Thus, both parties to a freely negotiated trade can believe that they benefited more from what they received in the trade than from what they gave up.

Variable-rate loans/mortgages

Loans/mortgages with interest rates that change as market interest rates fluctuate throughout the life of the loan/mortgage. The interest rates generally key off of an index rate such as the prime rate. A variable rate loan/mortgage is sometimes known as a floating rate loan/mortgage.

Velocity of Circulation

The average number of times in a year which a given dollar serves as income (the income velocity) or as an expenditure (the transaction velocity).

Wage control

Government policy measure that places a ceiling on wages to purportedly curb inflation. Oft-times starts as voluntary and ends as mandatory.

Waiver

A statement in an agreement stating that you relinquish, or give up a known right. For example, if you know that you have a right to be represented by an attorney in a legal matter, but you choose instead to represent yourself, you can waive your right to counsel. Waivers can also be used by lenders to protect themselves from lawsuits or to require arbitration instead.

Wants

Each person is unique in his list of desires (wants). Most people want at least to survive. From there, the list of desires grows, with some people wanting more than others. As a whole, mankind has unlimited wants. These "wants" are often referred to as "demand."

Water line

With regard to housing, it is the pipe that carries water into a building, toilet, sink, or tub. It is under pressure and therefore when it leaks, there is usually a steady drip or spray. This is important when looking for a water leak because a water line (sometimes referred to as a feed line) leak is usually constant, whereas a drain line leak is usually intermittent (leaking only when it is being used). A water line leak can create an emergency, while a drain line leak is less likely to do so.

Wealth

Wealth consists of man-made material goods and/or land and natural resources put to a gainful use. See Capitalism by George Reisman for an in-depth discussion of wealth. www.capitalism.net

Welfare State

A social system in which legislators and regulators assume primary responsibility for the welfare of citizens.

Will

A document used to transfer one's assets at death.

Yield

To pay interest, make a profit, or pay a return on an investment. Also, the return earned.

Zoning

A plan by local governments to restrict the use of land. This is usually done by classifying different types of property uses, such as, single-family residential, multi-family residential, commercial, and industrial. To use your property for something other than the approved use, requires a variance which must be studied and is subject to public scrutiny.