What do you mean?

Many times people use a word when they are really talking about something else. Even the media does this when it comes to financial terms.

Deficit vs Debt. Recession vs Bear Market. Deflation vs recession. When I say vs. I mean either word has been improperly substituted for the other within the context of the conversation.

So here is a guide so you can keep the lingo straight in your own mind:

Deficit – means a shortage … a difference between expenses and revenues. Deficit and debt are sometimes used interchangeably, however deficits lead to debt because borrowing fills the spending shortfall gap (deficits always are a result of overspending … and debt is always a result of deficit spending). They are not the same. A surplus is the opposite of a deficit … it always takes a surplus to pay down debt.

Debt – Government – Federal, State, County and Municipalities … Debt is a result of spending more than income (revenue). People also have debt and student education debt has also been in the news. This issue when debt gets too big is how does current income pay down the debt? Especially if current income is already less than expenses to begin with?

Recession – when the size of the economy measured by spending shrinks. If the spending was fueled by overspending funded by borrowing then leveraging has occurred and de-leveraging means that the prior level of spending has decreased, arguably to a more sustainable level (unless spending is cut back even more, usually meaning more savings or debt payments are made instead of new spending).

Expansion is the opposite of recession. It may be fueled by credit expansion and/or by more fundamental economic activity such as improved productivity or demographic growth. Expansion and recession are opposites of each other in the economy.

Deflation is the decrease in general price levels of goods and services. Inflation is the opposite. These terms refer to prices, not the economy or markets.

Bull and Bear refer to market trends, not the economy (those terms for the economy are recession and expansion).

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Hopefully these few terms and their definitions will help you understand how they should be used and spot when they are improperly used.

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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