With all the crazy stock market fluctuations and wondering if American Idol can return to its former glory, the average American has been trying to make sense of the system. If only there were a simple answer to these pesky questions we’d feel a little better about how badly the dollar is doing against the Euro, if only we knew what that meant.
In a survey 40% said the Euro was a tiny tinny car from some small nation whose name they couldn’t pronounce, 30% said ‘What?’ and the rest said ‘None of the above’.
If only we could understand the language they use to describe the economic system, we still wouldn’t have a handle on it, but we’d at least know that ‘compound interest’ is not a simonizing franchise. If we’d paid better attention in economics class instead of passing notes to Sallie Mae maybe we’d know that Fannie May and Ginny Mae were not cousins of Ellie Mae from the classic TV series Beverly Hillbillies.
Let’s learn…..The Fed Funds rate, the shortest of short-term rates — is the overnight interest rate which banks charge each other; literally, an overnight loan. Vinny Mae is the name of the bagman who collects these overnight debts and will add points for lateness, except on the weekends when he shaves points for profit.
Points are single digit percentages you have to pay Vinny. A digit is what you may lose if you don’t.
Some credit cards are “fixed rate” but even the APR (or Annual Pain Rate) on a “fixed rate” credit card can change over time. The credit card company must tell you before increasing the fixed APR. They do this with a strategy known as ‘sending you what looks like junk mail’. You look at the envelope which says, “End credit worries now”, or “dated material, reply today” and if you’re like me, you rip it up with a vengeance. They then raise the rate and you don’t notice for 2 years because the rules are written by the same person who makes up the confusing verbiage for extra charges on your phone bill.
A looming credit card bubble will be caused by historically lax lending standards enabling your pet chinchilla to qualify for a platinum card. Your personal credit bubble is the smallest part of a full scale drooling effect from the mouth which occurs when you finally realize the minimum payment will never in your lifetime draw down the principal.
A debt instrument is not in the banker’s band. A ‘float’ does not include ice cream and a balloon payment is not necessarily for your child’s party. So will a raise in interest rates provide the impetus the leading indicators will need spur the economy? Only if you use it to buy more stuff. And remember, no interest for 3 years!
