Do you hate the use of the term “semantics” as much as I do? I doubt it, but it should bother you as it relates to finance and economics because it’s a sign of extreme confusion over important details. This is generally done in the context of someone trying to be literal about something leading to the response: “Oh, that’s just semantics”. Semantics, in case we’re confused, is the study of meaning. And in the case of finance and economics meaning is extremely important. So, when we’re discussing semantics we’re really opening up the discussion to the meaning of certain ideas and words. We are, in essence, trying to establish a clear line of communication so we can better understand things.
As a market practitioner I tend to approach the world of economics and finance from an operational perspective. That is, I don’t generally care about politics or protecting some ideology. I care about how the world works so I can understand its immediate impact so I can decipher probabilities for future outcomes. Understanding the world for what it is requires very specific meanings. For a field that is so broadly studied it is actually stunning how so many words in finance and economics have multiple meanings.
For instance, the word “investment” means totally different things to different people. In some circles it means spending for future production. In other circles it means the act of buying securities to generate a future profit. These are very different actions though. In fact, most securities are issued to finance investment. But we’ve come to use the word so that people who purchase securities are investors and so are companies that spend for future production.
The strange thing is that there are a whole slew of words that mean different things to different people in finance and economics:
Money – Gold, deposits, high powered money?
Risk – Standard deviation, volatility, loss?
Investing – Spending for future production, purchasing securities to generate a future profit?
Inflation – An increase in the money supply, a rise in the price level?
Speculating – Trading, putting money at risk?
This just scratches the surface here and we’re talking about some pretty important words that appear to have many different meanings depending on who is answering. It’s no wonder we all seem to be so confused about the field of finance and economics. None of us seems to agree on what these different terms even mean in the first place. And that’s a pretty scary thing because if the experts don’t understand what these words all mean then it’s not surprising that the average person often appears to be reading some sort of foreign language when they try to work out their finances.
* I even have my own glossary to try to provide clarity here. Check it out so you can become even more confused when discussing these matters with other people.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.