And that is why we are in trouble....

Linda is the proprietor of a bar in Cork . In order to increase sales, she decides to allow her loyal customers –most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets
around and as a result increasing numbers of customers flood into Linda's bar. Taking advantage of her customers' freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Linda's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS.

These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items. One day, although the prices are still
climbing, a risk manager (subsequently of course fired due to his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Linda's bar. However they cannot pay back the debts.

Linda cannot fulfil her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%. The suppliers of Linda's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government
following dramatic round-the-clock consultations by leaders from the governing political parties (and vested interests). The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Finally an explanation, in the language that we understand...

Spend or Save

In the current economic condition, is it wise to spend or save? While some advocate "save" in times of trouble, others suggest "spend" to get out of the same troubled times.

Here is an interesting case I came across recently.

A company asks its employees to stop using the big courier services and use the cheaper govt run postal service for all its postal needs. This way it hopes to cut cost.

This case leaves me with the following possibilities and questions.

1. If the size of the company is small (in terms of its postal needs), the courier folks haven't lost much, but what if most small companies adopt this cost cutting measure.
2. If the size of the company is big (in terms of its postal needs), the courier folks are looking at some serious loss of business, forcing them to a few cost cutting measures of their own.
3. Is cheap better only during economic crisis? Will the company return to courier services once the situation improves?
   

Senate passes the stimulus bill !!

Updating my blog within minutes of the Stimulus bill being passed in the senate!!

"Not a moment to Spare"

The stimulus package passed in house. Senate next. In Obama's words, "Not a moment to Spare"

Economic Stimulus (Part 1)

We all know what happens as we move on from autumn to winter season. The deciduous trees shed leaves primarily because the high costs involved in their maintenance would outweigh the benefits from photosynthesis during the winter period of low light availability and cold temperatures. And in spring the we see growth, renewal and new life. But can we stimulate spring during winter and expect similar results in terms of growth? I am not an expert in that field but a similar attempt is being made (and has been made in the past too), to stimulate growth back into the economies world wide.

The argument is made that people are suffering from a decline in income, and thus the government should give them money so they can buy more and put others back to work. Sounds good - but where does the government get the money? It must either tax someone else now or borrow more money, which diverts productive saving to current consumption. Either way, it is less than a zero-sum game.

Blogging

The last post was dated Jan 11th. The date on this blog is Jan 12th. Only difference is that the two posts are about a year apart. What kept me away from blogging this long? I am sure there is an economic reason behind it, Or to put it in other words, the reason can be explained in terms of economics. Watch out for details.

Free Market and TATA NANO

Its finally here. The (mental ?) barrier is broken. A car at an astonishingly low price. And we are not talking about a cart with 4 wheels and an engine, Nano is a car in most conventional sense. But it is facing some serious criticism.

• Nano will create congestion on Indian roads
• Pollution levels are going to hit all time high
• Low safety (International) standards

Some blunt assumptions have been made to arrive at the above points. First of all, the critiques believe that Nano is going to be so popular due to its low price that every Tanu, Dinesh and Hari will buy this car. I would say - let the market decide. I am sure the competition is also gearing up to produce low price cars, and India being a free market (sort of), car manufacturers are free to produce cars which they think the consumers are willing to buy. At the same time, the consumers are free to buy whatever car they can afford. Indian economy is booming, the people are getting richer. People will upgrade their standards of living. A family with small car will upgrade to a mid size car. What do the critiques have to say about that?

Second point is that road congestion is not a problem of a car manufacturer. Its the responsibility of the govt to provide better infrastructure. In the absence of mass transit systems, people are forced to arrange for their commute. Also Ratan Tata, the Chairman of TATA group has made a press statement that the TATA's do not have the resources to create the kind of congestion the critiques are taking about. The economic principles are evident here too. The raw materials - steel, plastic, rubber etc - required for a car are limited in terms of the availability. The alternate uses of these materials will determine the net availability of these to the car manufactures.

Lets say that the increased number of Nanos on roads does create a traffic problem. In such a case following outcomes are possible. The govt would be further pressurized to a) create more roads b) build mass transit systems c) develop suburbs. But these things do not happen overnight. What could gradually happen is that the demand for cars such as Nonos would fall. People could follow the western methods like car-pooling.

To conclude, whatever the situation might turn out to be, as long as the govt "does not" intervene to control the car manufacturing, the invisible hand of the free market will lead us to a solution.