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Economics 101: a glossary

Allocated gold: Allocated gold is assigned entirely to its owner but kept elsewhere, usually in a vault. The benefits of...

30 April 2021

Gary Mead

  • Allocated gold: Allocated gold is assigned entirely to its owner but kept elsewhere, usually in a vault. The benefits of holding allocated gold is that it cannot be lent out to anyone else. Having allocated gold in a vault solely with your name on it means you can redeem it entirely. Glint’s gold is allocated. Unnallocated gold allows banks to sell more gold than they physically have in their vaults. The legal title to the gold may sit with the provider rather than the person who has bought the unallocated gold. Unallocated gold exposes you to the same risks as having your cash in the bank.
  • Assay: An assay is a test and sign of proof of the gold’s quality. The UK has assay offices in London, Sheffield, Birmingham and Edinburgh – each assay office marks its gold with a different sign, a Hallmark.
  • Asset-backed securities: securities linked to the value of an underlying asset such as a portfolio of mortgages or credit-card receivables
  • Bad bank: when a bank is rescued and/or restructured its unwanted assets are placed in a ‘bad’ bank to be run off or otherwise disposed of.
  • Bail-out: the rescue of a failing bank, usually requiring government money
  • Banking union: the proposed centralisation of ultimate responsibility for oversight of private or commercial banks regarded as systemically important  in the European Union
  • Bank run: A run on a bank occurs when a large number of customers try to withdraw their deposits in unison, due to concerns about a bank’s ability to meet its long term financial obligations. A good example in the UK is that of Northern Rock, which in 2007 became the first British bank in 150 years to fail due to a bank run; it was nationalised in 2008 by the British Labour government. In May 2019 the UK bank Metro Bank was subjected to a false claim on social media that it was about to collapse and a ‘silent’ run – depositors remotely their withdrawing cash started. In the US the Office of Thrift Supervision was forced to shut down Washington Mutual , the country’s largest savings-and-loan institution, on 25 September 2008, due to a massive run which had seen depositors withdraw $16.7 billion in the ten previous days.
  • Basel Committee on Banking Supervision: an international committee of bank supervisors from 28 member countries which regularly meets to develop recommendations on bank supervision. This has created increasingly complex sets of rules (Basel 1 in 1988, Basel 2 in 1998) the latest of which, Basel 3, was agreed in 2019 but will take effect from January 2023.
  • Bullion: Bullion is an amount of precious metal that is not minted as a coin but has a pre-designated weight, e.g. one kilo.
  • Central bank: A central bank – for example the Bank of England or in the US the Federal Reserve – is the sovereign bank of a state. Its role varies but essentially it decides monetary policy, how much fiat currency to issue, and what the interest should be. The US Federal Reserve has a dual mandate of maintaining stable prices and maximum employment. Central banks also set targets for inflation, which was generally around 2% in pre-Covid days but has become looser in the US and elsewhere.
  • Debasement: This originally referred to the deliberate issuing coins of inferior metal value at the same face value. Under Henry VIII and his son Edward VI, a sovereign fell in weight between from 12.96g to 10.98g, and from 23 carats to 22 carats.
  • Gresham’s Law: Sir Thomas Gresham wrote to Queen Elizabeth I in 1558 that “good and bad coin cannot circulate together”. He was referring to her father, Henry VIII’s, habit of minting coins with the addition of base metals, thus lowering the coin’s value. People preferred using in transactions the thus debased coins, holding back the coins which they knew had greater gold and silver content and which therefore had more inherent value. Thus Gresham’s Law has descended until today it’s usually summarised as ‘bad money drives out good’.
  • Seigniorage: Seigniorage is the difference between how much it costs to make physical money and how much value that money is given by the issuer. For example, if it costs just 5p to make a £10 note the seigniorage would be £9.95. Seigniorage typically operates at a profit for the state.
  • Shrinkflation: a form of inflation whereby instead of a product increasing in price its size decreases. Shrinkflation is a way of for manufacturers to pass on rising costs of production to customers. While the size of a product decreases, the price stays the same or even rises.
  • Systemic risk: this is a risk within a system that has the potential to bring down the entire system. In financial terms it is used to imply that there is an inherent risk in a system that if unchecked could stop the entire functionality of that system. In the 2007-09 financial crisis the crash stemmed from a series of failures that harboured systemic risk. The failure of banks such as Northern Rock and Lehman Brothers implied systemic risk because it affected the entire global economy. That measure of risk compelled governments to act, intervening in the economy; namely to save banks that were considered ‘too big to fail’ such as RBS with bailouts funded by the taxpayer.

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