What the heck is the G7?

I address some additional terms you may have heard in the news over the past week

Credit Default Swap (CDS): Thinks of these like insurance premiums for Mortgage Backed Securities. If you have a mortgage then it's more than likely that somewhere there is someone betting that you will default on your loan (a CDS buyer), there is a counterparty (CDS seller) betting you won’t. The buyer pays the seller the “premium” and if you default then the seller pays the buyer, if you don’t the seller keeps the premium.

Borrow Short-Lend Long: This is how all banks and financial institutions make their bread; they borrow your money for the short term and lend it out to other people for the long term. Again, the best example is in the context of mortgages. A bank sells you a 3, 6 or 9 month certificates of deposits (essentially borrowing your money short term) and then loans it to me for my 30 year mortgage (lending long). They make their money by taking advantage of the spread, which is the difference in the rates they pay you for your money (3.0%) and charge me to use it (6.5%).

Hedge Fund: A pooled investment fund that only really rich people can participate in. Often the limit to belong to this exclusive club is 1M USD, and you have to demonstrate that losing as much is inconsequential. Almost everyone of us is tied to a mutual fund through a 401k, in which an investment manager pools our retirement savings and invests them as a whole. A hedge fund is the same concept as a mutual fund except there are fewer regulations and much more money on the table. The risks and return are greater with hedge funds than with traditional mutual funds.

G7: A group of 7 industrialized countries lead finance officials. We refer to our lead finance official as the Treasury Secretary; most countries refer to them as the Minister of Finance or some derivative. The countries involved include Canada, UK, US, Italy, Germany, France, Japan. These guys meet at least once a year to discuss global finance initiatives and the state of regional and global economics.

Libor: London Interbanking Offer Rate, essentially the rate at which banks in the UK lend funds to each other. Hibor is a similar rate used in Asia, namely Hong Kong.

On another note, this financial crisis sure spiraled out of control globally really really fast didn't it? Although I knew the US was still the centerpiece of the world economy, all I have heard for the last 3 years from clients is how BRIC, emerging markets and to a lesser extent the EU were no longer as dependent on the US for economic health as they had been prior to 2000. I guess this disproves those overstated claims of insularity. And I'm calling bullocks now on those reports of how India, unlike China won't feel much effect of the recession. India's growth and economy is WHOLLY dependent on the technical services they provide to the west. They may be expanding into other services offerings and manufacturing internally, but their 'bread is still buttered' in the IT west.