Top 10 Financial Metaphors Loved by Economists & Reporters
A quick reading of any financial report reveals a pattern intricately woven by financial reporters. In the wake of the Covid-19 pandemic derailing the entire economy (note the word derailing), there are talks about economic breakdown (quite like the breakdown of a machine) and doubts about slow economic recovery (quite like the recovery of a patient).
New York Times cites how in the wake of pandemic, tourism has nearly evaporated (couldn’t have been said better) and bankruptcies are starting to pop up among hotels and restaurants. All financial experts agree lockdown was needed but fear it might put the economy on ventilator! One can even hear shouts of financial Armageddon!
It’s not Coronavirus that is responsible for financial analysts to employ such strong metaphors for describing economic conditions. Strangely, economists have always had a Shakespearean disposition. These number lovers also have a love for literary devices known as analogies, in particular metaphors (figure of speech that make implied comparison between two unrelated things).
Revisit some articles on finance and you will be pleasantly surprised how almost every line is decorated with metaphors. But are these mere decorations? No, metaphors have the power to enrich any communication by making it simpler to understand, visualize and digest. A system teeming with trillions of interactions is easier to understand when metaphorically compared to a living organism or a machine.
Let’s talk about some advanced financial metaphors some other day. Let’s first be on the same page regarding the most basic metaphors that define the day-to-day financial discussions, meetings, and writings.
10 Most Commonly Used Metaphors in Finance & Economics
Metaphor #1- Cash Flows
All financial experts have compared money to a liquid. So, you will hear a lot about liquidity, cash flow, wage freeze and so on. Like the flowing of a river, cash or cash-equivalent comes into the company and goes out. This is called cash flow and positive cash flows (adding money to cash reserves) indicates the company is capable of paying out to shareholders, expanding business operations and settling any future debts.
To analyze this flowing in and out, all companies prepare cash-flow statements which comprises of three parts -
Operating cash flow — includes cash generated by company’s day-to-day business activities
Investing cash flow — includes investments for expanding company assets
Financing cash flow- includes all cash inflows from investors and outflows to shareholders as dividends.
Metaphor #2- Drying Up of Cash Flow/ Investment
Another offshoot of the liquid metaphor is found in the oft-repeated phrase of drying up. A news report from Reuters goes as “Bank lending could dry up in crypto-currency economy.” As sales drop in time of crisis, the cash river dries up. Hard hit by the coronavirus pandemic, several industries are facing a liquidity crisis. This metaphor is apt to describe the depleting reserves of cash-flow.
Accountants religiously maintain a liquidity balance sheet to assess the company’s financial position to pay off current debt with its current assets.
Metaphor #3- Floating (Loans & Interest Rate)
A very popular metaphorical idiom used in financial matters is floating a loan meaning to raise a loan of money. Again, since money is needed to tide over difficult situations, floating a loan helps a business stay afloat and keep its head above the water.
Another similar expression is floating interest rate as opposed to fixed interest rate. A floating interest rate fluctuates or adjusts or revises every quarter.
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Metaphor #4- Wage Freeze
One thing that no employee ever wants to hear, besides layover, is wage freeze. This is when a company facing financial constraints refuses to increase the salary of its employees for a certain period of time. With money treated as a liquid commodity, such phrases have become part of financial jargon.
Likewise, assets are also frozen by government or court order. Frozen assets cannot be sold or used in any way until debts are paid.
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Metaphor #5- Breakdown and Recovery
The coronavirus crisis has reminded economic pundits of the global financial crisis of 2008 that sent all major economies tumbling down. The words economic collapse and economic breakdown send panic signals as fears of bankruptcy, stock market crash, and job insecurity loom large. To prevent any social breakdown, governments quickly step in along with the biggest bank institutions with a stimulus package to revive the economy and prevent recession.
Such metaphorical expressions make economic matters understandable to even a layman. One can instantly visualize a patient being tended to and revived by the caretakers. Economy is no less than a lifeline for any nation.
Even in the wake of an economic crisis, there is always a silver lining. Digital economy, for instance, promises to continue to grow, in fact become even more relevant. The lessening of in-store activity is pushing growth in e-commerce activity. Also, with consumers spending more time on digital devices, more and more businesses are taking the digital route.
Metaphor #6- Liquidity & Solvency
Liquidity is a very common term used in accounting. So is solvency. Liquidity refers to the ability of a company to pay its liabilities on time and meet its short-term goals. It also refers to how easily an asset can be converted to cash on short notice.
Solvency, on the other hand, refers to the ability of a company to meet its long-term obligations and debts. Economists have, as you already guessed, borrowed this metaphor from chemistry to show that a solvent company can dissolve or meet its financial obligations and still keep operating.
Metaphor #7- Economic Growth & Decay
The development of an economy is most frequently compared to growth of a plant. The word “growth” itself is borrowed from biology referring to the growth of a living organism. Economic growth and decay are metaphorical expressions showing the rise and fall of an economy.
The fall in GDP of a country, income inequalities, and bank failures are the signs of a decaying economy. A frequently used term in economic circles is “Capital Decay” referring to the money that is lost owing to old business models or practices and outdated technology. Look how Investopedia describes capital decay and employs beautiful metaphorical expressions while doing it, “Companies that fail to innovate or at least keep up with the latest developments risk losing market share, being stripped of their revenue, and being effectively pushed aside by their hungrier rivals.”
Metaphor #8- Sinking Economy
Economy is often compared to a ship and that is why we speak of turbulent waters, rocking the boat, and sinking economy. Type the word sinking economy and you will hear financial analysts express their concerns over the sinking economy in Japan, India, Pakistan, and many other countries. Coronavirus has hit many countries hard but even before it arrived on the scene, the world economy was not booming.
Metaphorical expressions make financial matters easier to visualize for a common man. One can imagine coronavirus as the iceberg hitting the Titanic world economy and taking it down to the depths of the ocean. But since such a comparison is quite dark and presents no hope for the world economy, fortunately we have not heard any financial reporter making such a reference.
Proper financial planning can help you keep your boat from hitting any iceberg and sail smoothly to reach its destination.
Metaphor #9- Stock Market Crash / Collapse
Since ages, economic institutions have been compared to buildings or objects. This is understandable by reading phrases such as stock market crash or collapse referring to the sudden downfall of a building. We also talk about economic restructuring comparing it to the structure of a building.
The coronavirus impact sent stock markets around the world crashing to a new low. The dreaded D word- Depression- is beginning to make rounds. Economists meanwhile are clarifying the difference between recession and a depression. Recession, as they explain, is a period of six months or more of economic slowdown. With many industries coming to a complete stand still such as tourism and bars and restaurants, recession is staring at our face. Depression, on the other hand, lasts several years. Economists point out we have had only one depression — the Great Depression of 1929 which was triggered by the Black Thursday stock market collapse.
All economists are hoping governments will act fast to prevent any economic disaster. The market direction exerts a powerful influence on your investment portfolio. There is little chance your stocks will go higher if the market goes south. Here’s a complete presentation on Portfolio Management to create your investment plan effectively:
Metaphor #10- Bull & Bear Market
We have compared economic institutions to a plant, machine, man, boat, etc. Now, it’s the time to compare it to animals! The most commonly used expressions — bull and bear stock market are metaphors to describe the rise and fall of this financial institution. Bull market is a stock market that is rising while a bear market is a stock market that is falling. The figure of 20% is the dividing line that separates the two. A drop of 20% or more puts the bull market into the bear market territory.
Investopedia describes why these are so called, “A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.”
The coronavirus has ended the longest running bull market history, 11 years to be precise (2009–2020). On March 11, 2020, Dow Jones officially entered the bear market when it closed down by 1,465 points breaching the closing down of more than 20% from its all-time closing high. Covid-19 has disrupted the supply chains, halted major businesses, brought a slump in consumer confidence and sent the stock market crashing like a house of cards.
The list of finance on money is practically endless.
‘Circulation of money’ compares exchange of money to circulation of blood
‘Investment is the fuel of economy’ compares economy to a vehicle and fuel running it as investment.
‘Japan’s economy braces for a tremendous blow’ makes us visualize a boxer giving a blow to the opponent.
The country is slowly gaining its economic rhythm’ compares economic rise and fall to musical notes.
We will take a break here and leave the ball in your court now. Share with us some metaphors that you have come across or love to use by typing it down in the comments below.
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