Hard
currency
Money you can trust. A hard currency is expected to
retain its value, or even benefit from appreciation, against softer currencies.
This makes it a popular choice for people involved in international
transactions. The dollar, d-mark, sterling and the swiss franc each became a hard
currency, if only some of the time, during the 20th century.
Hawala
An ancient system of moving money based on trust. It
predates western bank practices. Although it is now more associated with the
middle east, a version of hawala existed in china in the second half of the
tang dynasty (618-907), known as fei qian, or flying money. In hawala, no money
moves physically between locations; nowadays it is transferred by means of a
telephone call or fax between dealers in different countries. No legal
contracts are involved, and recipients are given only a code number or simple
token, such as a low-value banknote torn in half, to prove that money is due.
Over time, transactions in opposite directions cancel each other out, so
physical movement is minimised. Trust is the only capital that the dealers
have. With it, the users of hawala have a worldwide money-transmission service
that is cheap, fast and free of bureaucracy.
From a government's point of view, however, informal
money networks are threatening, since they lie outside official channels that
are regulated and taxed. They fear they are used by criminals, including
terrorists. Although this is probably true, by far the main users of hawala
networks are overseas workers, who do not trust official money transfer methods
or cannot afford them, remitting earnings to their families.
Hedge
Reducing your risks. Hedging involves deliberately
taking on a new risk that offsets an existing one, such as your exposure to an
adverse change in an exchange rate, interest rate or commodity price. Imagine,
for example, that you are british and you are to be paid $1m in three months'
time. You are worried that the dollar may have fallen in value by then, thus
reducing the number of pounds you will be able to convert the $1m into. You can
hedge away that currency risk by buying $1m of pounds at the current exchange
rate (in effect) in the futures market. Hedging is most often done by commodity
producers and traders, financial institutions and, increasingly, by
non-financial firms.
It used to be fashionable for firms to hedge by
following a policy of diversification. More recently, firms have hedged using
financial instruments and derivatives. Another popular strategy is to use
'natural' hedges wherever possible. For example, if a company is setting up a
factory in a particular country, it might finance it by borrowing in the
currency of that country. An extension of this idea is operational hedging, for
example, relocating production facilities to get a better match of costs in a
given currency to revenue.
Hedging sounds prudent, but some economists reckon
that firms should not do it because it reduces their value to shareholders. In
the 1950s, two economists, merton miller (1923-2000) and franco modigliani,
argued that firms make money only if they make good investments, the kind that
increase their operating cashflow. Whether these investments are financed
through debt, equity or retained earnings is irrelevant. Different methods of
financing simply determine how a firm's value is divided between its various
sorts of investors (for example, shareholders or bondholders), not the value
itself. This surprising insight helped win each of them a nobel prize. If they
are right, there are big implications for hedging. If methods of financing and
the character of financial risks do not matter, managing them is pointless. It
cannot add to the firm's value; on the contrary, as hedging does not come free,
doing it might actually lower that value. Moreover, argued messrs miller and
modigliani, if investors want to avoid the financial risks attached to holding shares
in a firm, they can diversify their portfolio of shareholdings. Firms need not
manage their financial risks; investors can do it for themselves.
Hedge
funds
These bogey-men of the financial markets are often
blamed, usually unfairly, when things go wrong. There is no simple definition
of a hedge fund (few of them actually hedge). But they all aim to maximise
their absolute returns rather than relative ones; that is, they concentrate on
making as much money as possible, not (like many mutual funds) simply on
outperforming an index. Although they are often accused of disrupting financial
markets by their speculation, their willingness to bet against the herd of
other investors may push security prices closer to their true fundamental
values, not away.
Herfindahl-hirschman
index
A warning signal of possible monopoly. Antitrust
economists often gauge the competitiveness of an industry by measuring the
extent to which its output is concentrated among a few firms. One such measure
is a herfindahl-hirschman index. To calculate it, take the market share of each
firm in the industry, square it, then add them all up. If there are 100
equal-sized firms (a market with close to perfect competition) the index is
100. If there are four equal-sized firms (possible oligopoly) it will be 2,500.
The higher the herfindahl number, the more concentrated is market power.
The main virtue of the herfindahl is its simplicity.
But it has two unfortunate shortcomings. It relies on defining correctly the
industry or market for which the degree of competitiveness is open to question.
This is rarely simple and can be a matter of fierce debate. Even when the scope
of the market is clear, the relation between the her findahl and market power
is not. When there is a contestable market, even a firm with a herfindahl of
10,000 (the classic definition of a monopoly) may behave as if it was in a
perfectly competitive market.
Horizontal
equity
One way to keep taxation fair. Horizontal equity
means that people with a similar ability to pay taxes should pay the same
amount.
Horizontal
integration
Merging with another firm just like yours, for
example, two biscuit makers becoming one. Contrast with vertical integration,
which is merging with a firm at a different stage in the supply chain.
Horizontal integration often raises antitrust concerns, as the combined firm
will have a larger market share than either firm did before merging.
Hot
money
Money that is held in one currency but is liable to
switch to another currency at a moment’s notice in search of the highest
available returns, thereby causing the first currency’s exchange rate to
plummet. It is often used to describe the money invested in currency markets by
speculators.
House
prices
When they go through the roof it is usually a
warning sign that an economy is overheating. House prices often rise after
interest rate reductions, which lower mortgage payments and thus give buyers
the ability to fund a larger amount of borrowing and so offer a higher price
for their new home. Strangely, people often regard house-price inflation as
good news, even though it creates as many losers as gainers. They argue that
rising house prices help to boost consumer confidence, and are part of the
wealth effect: as house prices rise, people feel wealthier and so spend more.
However, against this must be set a negative wealth effect. An increase in
house prices makes many people worse off, such as first-time buyers and anyone
planning to trade up to a better property.
As long as people think that their house is a
vehicle for speculation, rather than merely accommodation, it seems inevitable
that prices will be volatile, prone to a boom-bust cycle. As house prices rise,
profits are made, tempting more speculative buyers into the market; eventually,
they start to pay too much, interest rates rise, demand falls and prices
plunge. People have also invested in housing as a hedge against inflation:
house prices generally rise when other prices rise, whereas the real value of
mortgage debt is eroded by inflation. However, when mortgage interest rates are
variable (as they generally are in the uk) rather than fixed (as in the united
states), they may rise painfully during times of high inflation as a result of
macroeconomic policy efforts to slow the pace of economic growth.
One of the reasons why the united states has
long-term fixed mortgage rates is the financing provided by
government-sponsored agencies such as the federal national mortgage association
and the federal home loan mortgage corporation, nicknamed, respectively, fannie
mae and freddie mac. Economists increasingly debate their role, especially as
they have grown into some of the world's largest lenders. Supporters claim
that, as well as reducing macroeconomic volatility, they make housing more
affordable, particularly for poorer people, and that other governments should
play a similar role in the mortgage market. Critics say they have become a huge
potential risk in the global financial system by creating a moral hazard
through the controversial but widespread belief that if they were to get into
difficulties the government would bail them out and, thus, their financial
counterparties.
Human
capital
Human capital
can be increased by investing in education, training and health care.
Economists increasingly argue that the accumulation of human as well as
physical capital (plant and machinery) is a crucial ingredient of economic
growth, particularly in the new economy. Even so, this conclusion is largely a
matter of theory and faith, rather than the result of detailed empirical
analysis. Economists have made little progress in solving the tricky problem of
how to measure human capital, even within the same country over time, let alone
for comparisons between countries. Levels of spending on, say, education are
not necessarily a good indicator of how much human capital an education system
is creating; indeed, some economists argue that higher education spending may
be a consequence of a country becoming wealthy rather than a cause. Never the
less, even modest estimates of the stock of human capital in most countries
suggests that it would pay to greatly increase investment in medical
technologies that would extend the working lives of most people. The
non-economic benefits would be worth having, too.
Human
development index
Calculated
since 1990 by the united nations development programme, the human development
index quantifies a country's development in terms of such things as education,
length of life and clean water, as well as income. Since the mid-1970s, the
quality of life for humans throughout the world has improved enormously
overall. America's human development index rose by around one-tenth between
1975 and 2001, for example. More spectacularly, during the same period, china's
rose by around 40% and indonesia's by nearly 50%. Even so, in 2001, some 54
countries were poorer than in 1990, and in 34, mostly in africa and the former
soviet union, life expectancy had fallen, reversing an impressive long-term
trend, largely because of the hiv/aids epidemic and crime. Some 21 countries
had a lower overall human development index in 2003 than in 1990.
Hyper-inflation
Although
people debate when, precisely, very rapid inflation turns into hyper-inflation
(a 100% or more increase in prices a year, perhaps?) Nobody questions that it
wreaks huge economic damage. After the first world war, german prices at one
point were rising at a rate of 23,000% a year before the country’s economic
system collapsed, creating a political opportunity grasped by the nazis. In
former yugoslavia in 1993, prices rose by around 20% a day. Typically,
hyper-inflation quickly leads to a complete loss of confidence in a country’s
currency, and causes people to search for other forms of money that are a
better store of value. These may include physical assets, gold and foreign
currency. Hyper-inflation might be easier to live with if it was stable, as
people could plan on the basis that prices would rise at a fast but predictable
rate. However, there are no examples of stable hyper-inflation, precisely
because it occurs only when there is a crisis of confidence across the economy,
with all the behavioural unpredictability this implies.
Hypothecation
It may be a
clever way to get around public hostility to paying more in taxation. If people
are told that a specific share of their income tax will go to some popular
cause, say education or health, they may be more willing to cough up. At the
very least they may be forced to make more informed decisions about the
trade-offs between taxes and public services. There is a downside, however.
Hypothecated taxes may tie the hands of a government at times when the
hypothecated revenue could be spent to better effect elsewhere in the public
sector. Conversely, and perhaps more likely, hypothecated taxes may prove to be
less hypothecated than the public is led to believe. Civil servants, doubtless
under pressure from their political bosses, can usually find ways to fudge the
definition of the specific purpose for which a tax is hypothecated, letting
government regain control over how the money is spent.
Hysteresis
Traditionally, economists believed that high
unemployment was a cyclical phenomenon. Eventually, unemployment would cause
people to lower their wage demands, and so new job opportunities would arise
and unemployment would fall. More recently, however, economists have suggested
that some unemployed people, especially the long-term jobless, can display
hysteresis. They find it hard, perhaps impossible, to return to work, even when
jobs become available. For instance, unemployed workers may gradually lose the
motivation, self-confidence or the self-discipline, needed to get to the
workplace and fulfil job requirements. Or their skills may become outdated and
redundant. State benefits for the jobless may contribute to this hysteresis by
making it easier from them to stay out of work.
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