Understanding the big game of world economics in 2025

The below link involves a lot of macro economics and helps explain the rationale of the trade war initiated by USA.

https://medium.com/@mcnai002/the-sovereign-wealth-effect-americas-new-tool-for-rebalancing-the-global-trading-system-363176816035

There would be multiple questions for the readers after this article on the hows, whys and the impacts.

It also helps predict the future, but no clear answers on what to do exactly depending on what is your locus standi.

All hail the projections!

Bigger image available here: http://epaper.timesofindia.com/Repository/getimage.dll?path=ETM/2013/09/30/17/Img/Pc0170800.jpg

Today's economic times report has an article titled "How clouded is our financial forecasting?"

The picture above gives the GDP growth prediction according to RBI's survey of professional economists sitting in the same financial year and making a prediction of the GDP growth at the end of the current financial year.

The numbers are shocking! If this group can get it so wrong, how will analysts of equity research and other analysts work on their assumptions, which are further derived in some way or another on this data.

I think it is time to employ monkeys to predict data as they have amply demonstrated their skills in the monkey funds.

http://www.gizmodo.com.au/2013/04/monkeys-make-better-stock-market-traders-than-people-study/

The economic costs of obesity

http://www.businesspundit.com/the-economic-costs-of-obesity/

Economics is Child's play

12 year old Canadian Victoria Grant on Banks and Govt.s are in cahoots to loot the public:

Heightened uncertainty

There was a time, sometime ago, a few years back actually, when things could be predicted "long term". Today, that word if used either tends to show your lack of knowledge on anything, or a surprise that he isnt already perished along with the dinosaurs.

Today, almost nothing can be predicted even for 5 years (or less). Not even govt. bonds. Not sure when a govt will topple and default on all the previous commitments/bonds. The existence of worldwide currencies (e.g:euro) is at stake. Gold, once upon a time long term investment is at peaks and nobody is entirely sure why its rising. Whether it is because it is supposed to be a hedge against inflation (as traditionally "they" say), or against currencies, or against a no growth scenario...?

Oil is also equally uncertain. the volatility in this commodity has been huge despite nowhere near corelation to its demand, which is more or less steady.

During the good olden days, assume maximum fluctuations where near 20% a year, meaning both the crest and the through. Today, just the crest or the through have a minimum movement of 20% a year, irrespective of whether it is currencies, gold or oil (or even interest rates in India).

Are all the companies factoring their worst case scenerios in reality in their business plans? I think not. They should ideally be more conservative and have more cushion for a negative surprise currently, and for the next few years. 

What does this entail for investing in particular? Previously, we used to bet for growth alone assuming all the above mentioned factors as constant or with a little movement. But today, these assumptions cannot be taken for granted. They entail enormous effect on the results and each of these are inter-co-related in many different known and unknown ways and levels. The effect of one can either neutralise the effect of the other or compound the effect of the other and this influence can change day to day. Today you need to better analyse more than one variable to get to the base and expected scenario.

There is some opportunity in all this afterall. The high volatility in everything obviously means there is more money to be made with the highs and the lows as there is to lose money also. The question is are you treating this as a cautious opportunity or as a complete threat?

Its getting worse by the day

The Govt. of India's or rather India's problems are getting worse by the day. One of them being inflation.

If it was not enough that inflation has been high in double digits for so long is not enough and all the economic govt. authorities (Mr.Kaushik Basu, Chief economic adviser; Mr.Rangarajan, head, Prime Minister Economic Advisory Committee; Mr.Subbarao, Governor, RBI; and Mr.Montek, Planning Commission Deputy Chairman) have been shooting arrows in the dark about when the inflation would come even close to the target rate. They have (including Pranab da, Finance Minister) have been directly and indirectly saying that inflation will come down in the next few months for over a year. And yet, they have all been wrong or have been lying.

To make matters worse, they continue to say the same without looking at the ground realities.

1. Everybody says food inflation is due to supply side problems. Yet. there has been no major policy changes to increase production of goods that are needed. In an ironical step, Minimum Support Prices(MSP) have been raised drastically over the last two years which has increased the overall cost of buying all the grains for everyone. Whats very depressing is that some of the policies that have traditionally caused farmers to increase wheat/rice/pulses by having MSPs, have caused more grains to be grown than can be stored in warehouses leading to huge losses of grains. This subsidies/incentives are skewed in such a way that even if there is demand for vegetables/fruits, many farmers will continue to grow certain grains as it is more profitable because of the subsidies/incentives. Why is the govt. sleeping?

2. There is also a case that the MGNERA has given a lot of money to the villagers and this is increasing demand for goods which previously did not exist. A report I read says that there have been hardly any  productivity changes due to the scheme. Meaning, that most work is namesake and no real useful work has been accomplished with so much money being given.

3. Petrol prices are going up continuously and there are indications that even diesel prices may rise. If diesel price rise, the whole of India will undergo another level of price rise as most things in India are transported by trucks. A multiplier effect will increase inflation more.

4. Many coal power plants are running on 4 to 7 day stock of coal (norm:21 days) and are lacking coal. Many power plants in India were designed and viability studies assumed that they would import Indonesia's coal which used to sell it at a discount to international market at large. The recent law in Indonesia to sell its coal at an international rates has made the power plants unviable and the companies are asking the govt. to increase the rate at which they sell the power to the govts. 

5. The state electricity boards(SEBs) have run up losses of Rs.80,000 crore (and counting) as they have been inefficient and many have not increased electricity prices for years together. With the power ministry proposing to ask the state govts. to write off all the losses and start the SEBs with a clean slate, where are the state govts. to get so much money? Also, even after this is done, unless the SEBs increase the rates of electricity substantially (many times over in some states), the SEBs will again start going into losses.

6. There is a proposal of a food subsidy bill to be introduced. Where is the money for it? Unless the govt. starts saying things like 2 grains of rice per person per day is enough to fill hunger (like the Rs.32 a day is the Below Poverty Line), where is the money?

7. With the downgrade of the State Bank of India by Moody's, the govt. has shown some hurry to infuse ~8,000 crore into SBI with an overall of ~14,000 crore into all public sector banks, within this year. (Increased from the budgeted 6,000 Cr)

8. Oil prices are still high and any number of reports in the global arena do not predict oil prices to fall to any meaningful lower level in a permanent way. This means India's import bill is only going to rise in the coming years. And the govt. will need more money to buy the imports.

9. Some specific national liabilities like the Air India are contingent liabilities which will need more money in the future from the govt.

All the above imply only two things directly: Prices are going to stay up/rise and govt. is in need for a lot of unplanned money. If the govt. starts borrowing more, rates are further going to go up and would make further investments in new projects unviable (which are supposed to increase supply). The second would only reinforce the price inflation permanently.

Oh, and there is one more thing. Inflation measures prices year-on-year and even if the govt. claims victory over inflation once it reaches a target rate of say 5%, inflation has remained high for so long that these rates are year-on-year. Meaning that the price rises have become permanently embedded. Unless there is a price deflation, things are bad and permanently.

You don't need to be an economist of calibre to predict (wrongly again and again) that inflation is going down. The truth is prices are going to remain high and may further rise, irrespective of whatever the above  economists mentioned say/lie. In effect, the Govt. is screwing all its citizens very well.
P.S: The high impact of inflation is given here: http://www.firstpost.com/investing/govt-is-ruining-your-savings-and-the-rbi-shouldnt-let-it-124932.html

A solution to the Govt.'s Agency problem

Almost all govts. in the world are not working in the most efficient way they possibly can. One of the major reasons is the internal looting of the govt by way of corruption (lobbyists influencing policies in a way that the govt and its people suffer), internal fighting among many others. All govt jobs have fixed pay and perks. The motivation to not harm the organisation they are working for is not much (excepting Patriotism and Morality). 

One of the possible solutions for solving the agency problem of the govt officials can be possibly found in the concept of capital markets. (Related post disecting the problem: http://ajitjagan.blogspot.com/2011/04/aligning-interest-of-govt-and-its.html) Capital Markets are inherently more efficient and way faster in doing things.

One solution I am proposing is to have the concept of stock markets with the very govt. itself being treated as a company. Lets take the one market which is most open to accepting free market concept - USA. So USA could be a stock which is freely traded by the citizens in the country just like its sovereign treasury securities.

Source of capital:

Now, lets assume 5 or 10% of all the govt officials salaries are given in the form of the employee stock options with the stock of USA.

Concept of Returns:

As a stock price indicates the problems of the entity and the future potential of the entity, investors will make money if they work in such a way that the country's future is better. They would like to see higher prices of all their 5-10% of their salaries in pensions to not greatly affected. This has the potential to stop the govt. official to work harder, not do things that will harm the country. Similar to how a employee stock option feels for an employee. A sense of ownership is created. These people will be willing to work harder and make better policies as they now have a stake. Once a critical mass is attained in any organisation, the peer pressure will make the others also work more efficiently and effectively.

Valuation of Stock:

This is the most tricky part. Unlike companies where future earnings is the most important parameter to be considered (if today's company abides by rules and destroys the environment, so be it. The investors dont care). But, in case of the country as a whole, there are many subjective parameters to be considered. National Security, Environment,  Sustainability of natural resources, mortality rate, quality of the govt officials making decisions, etc

Maybe an earnings index can be calculated based on the other indices. Take for example the Transparency Index the topic it relates to which is corruption and ease of doing business. Say, Corruption is given a weightage in the earnings as 10% and Ease of doing business as 5%. Next, if the country comes in the top 5 countries where corruption is least, it is given a full score of 10 points= full weightage; Top 10, 9 points; top 20, 7 points; so on and so forth.

So this will enable the country to come to a number based on the current ratings of Indices. As valuation is always subjective and depends on the uncertain future, different investors will predict different ratings and better/worse situation of the country on various parameters. This will make the people govt understand what is it that people want. If they dont do as per the wants of all their citizens, they get a lesser share of their pay/pension. If they manage to reduce crime, increase efficiency, etc, people will be happier and the govt officials will get more money. This also prevents petty politics in the country, which is nothing but a drain on national resources.

Foreign entities as investors:

Once foreign entities buys these stocks, there is an opportunity for the country to get someone who is interested in the well being of the country and get more favourable responses to various initiatives.

Concept of Holding company:

Since USA is made of various states and states resources/financials actually have a major role to play in the countries well being, state govts. should also give their employees the shares of their states.

Today, the govt. officials can play petty politics and get all their money in cash in priority. If the people can have a indirect say in what they think about the decision everyday instead of once in 5/6 years, I am sure better wiser decisions will be made by the govt. officials.

5 reasons why US is going to go downhill

Frequent International Interferences

The frequency with which US is involved in fighting other countries since 2001 is very high. Iraq, Afganistan, Pakistan and now Libya. The costs are huge, but the benefits in terms of oil is greater for USA. But the skepticism of the world on its activities is increasing all the while. The conspiracy theory on the attack on the pentagon, the non-provability of Weapons of Mass Destruction in Iraq, Contradicting claims of the US and North Korea on the torpedo that sunk the South Korean ship, Doubts if Osama Bin Laden was actually killed by a US raid,etc are helping build the skepticism on what US says.

Spill Out of Crises

The European debt crises in Ireland, Greece and expected crises in Portugal and Spain have brought the attention of the economists to the debt amounts of the countries and see a realistic picture of US debt. They have started questioning the assumptions and no longer see it as rational in blindly justifying US debt as something godly and always safe. The US crisis itself has forced the US economists to relook at the US debt and justify themselves being called rational. S&P's negative outlook on US sovereign debt is just the beginning of being rational. Faith of and on the dollar has diminished and is expected to further diminish. No one has yet able to think a perfect currency/thing which can be used to measure against all other currencies. The only possible solution that seems close to come to place in a few years time maybe the equivalent of the SDR(Special Drawing Right) of the IMF. It is equivalent to the basket of freely convertible currrencies. But in the coming scenario, Yuan may be added to this basket sometime in the current decade when China allows complete convertibility. The complete faith on the US Dollar is going to come down. The draw down of the US Dollar forex reserves is also going to play a major role in the downhill of US.

Internet

More internet availability and accessibility in the world in helping others know of the torture faced by US victims in Guatemala and the killing of two unarmed Pakistanis by a CIA contractor. Not to mention, the widespread news of wikileaks and videos of violent human rights violations by US soldiers in Iraq is there for all to see. Add to this, the ease and fastness with which conspiracy theories  are spread.

Weapons Technology

One of the main strengths of US has been its military muscle. The world's dependency on that is reducing. China is growing rapidly in weapons technology with the development of the anti-satellite missile, the anti-aircraft carrier ballistic missile, the stealth aircraft and of course, their own aircraft carriers. Japan has initiated developing its own fighter aircrafts and it is expected to reach the market in the coming years. India is planning on ICBMs(Intercontinental Ballistic Missiles) and the Brahmos is world's leading cruise missile. The FGFA program with the Russians for the development of the fifth generation fighter aircraft is also supposed to be leading edge. With money always acting as a crunch to all the countries, most of these countries will be willing to sell the products to 'their' allies. The market share of US is going to go down. Compared to the other countries, US cannot fight on price too.

Rising Developing Countries

The rise of the BRICS countries and their collective power to say 'No' to US to bulldoze its way in trade agreements and climate change conferences at the cost of others shows reduced US ability to force others. The recent mention of British PM David Cameroon wanting the next IMF head to be from Asia also shows the way things are going in the world.

Aligning the interest of govt. and its people

There is a serious lack of alignment in the interests of the government and the collective of the people ruled. How else can anyone explain the future government's intention to liquidate the state/country in the name of helping the poor people.

Take the example of Tamilnadu. The DMK government came to power promising a television for each household (along with )if they win the election. They won the elections and this time upped the ante. Now, they want to give grinder or mixie to all the women. Plus, a laptop to all the students studying in govt. and govt aided colleges. The opposition party, AIADMK, is desperate to win and is playing the DMK's card even better. If they win the election, they promise to give grinder, mixie & a fan to all the women. Students of govt, govt aided and private colleges will get a laptop each and even class 11 and 12 students.

One question that begs to be asked here is: at whose cost? Is it at the  leader's personal cost? Of course not. It is with OPM. Other People's Money. In this case, the very people they will rule.

This problem is occuring and re-occuring due to two different reasons. One, the politicians and the government say that the ultimate test is people's vote and thats all that counts. Easy for them to say. After all, they have no stake or interest in the common people and it is the people who are going to suffer in the medium to long term.

They are no KPI (Key performance Indicators) that their bosses(the common people) or an independent arm of the government have setup or are monitoring. And there is no reward/punishment for the government and its officials based on these KPIs. The KPIs are usually used as a passive parameter to compare the policy initiatives with the effect on the ground by statistical organisations and is used more for academics and deciding policy directives. They are not currently being used as a strict performance measure of the government based on which its rewards are based.

Two, the government is able to exploit the differences between the poor and the others (working middle class and rich). The non-poor have televisions, fan, can afford spending on gold in marriage, etc. The poor on the other hand cant think of months or years ahead when they are focussed on earning their next meal to survive another day. This difference in interests gives the government ample leverage to play the pro-poor populists game while ignoring the long term impact of the decisions. This is equivalent to selling the family silver to get some income to dispose off immediately. I am not against poor, but providing televisions to all of them doesnt serve the purpose of taking them out of poverty. Where will they keep the television? Whats the use of the TV if the government doesnt have enough money to setup power plants and hence doesnt provide electricity to run the TV.

This problem of differed interests in similar that of secured and unsecured lenders in case of a distressed company. While the secured lenders would like a restructuring to happen and turn around the company, the unsecured lenders would like to see the company liquidated. The secured lenders have nothing much to lose as they have security cover over what whatever amounts have been lent. On the other hand, the unsecured lenders have some amount of money to get out of liquidation and if the restructuring doesnt turn the company around, they lose everything. One of the solutions used to align the interests of the secured and unsecured creditors is the concept of strips. Here, all the debt(secured and unsecured) is pooled up and stripped into equivalent pieces. So now, each creditor has both secured and unsecured portions in his 'strip'. Once, these strips are there, all the lenders can come to the best effective way to solve the problem (restructuring or liquidation) based on the business risks involved. 

A similar approach needs to be planned and used to align the interests of the poor and the non-poor so that the government doesn't play the divide and rule game with its people. I am yet to figure out how to make the 'strips'.

Darwin, a free-market economy enthusiast?

By saying "Survival of the fittest", did Darwin just talk about free-market economy? In the real world, no one can forcibly control most of the environment and evolution as a response for it. Hence free-market environment reigns supreme in the long term nature of the world.

The case of Perpetual Growth

Most of the problems of mankind today can be reduced to the simple economic concept of 'supply & demand'. Unlike other things in this world, where prices rise in case of excess demand and prices fall in case of excess supply, people excesses can neither be reduced in a short period of time nor can be raised fastly. The concept of continuous growth at all times puzzles me. Yes, to continuously improve the quality of life of the people, there needs to be growth. At some point in time in earlier decades when human population was less, there was a need for more people as most work was manual. But as of now, things have changed. I believe we have excess people in this world, far more than that required to improve mankind as machines help do the same tasks efficiently and faster. This excess has now caused a deterioration in the lives of humankind. The concept of growth has unfortunately moved from qualitative growth to quantitative growth.

There is only one country that has truly understood the effects of excesses of human population and that country is China. Over the last few decades, the one child norm has reduced the population of the country and it will continue to. China has realised that excess population is a drag on the economy. It also realises that in the globalised world, any work it wants can be done by outsourcing it. 

A bloody good idea

You would think the world of medicine and finance don't mix... Well, not until now...

The following is an idea I gave to a market development head of an organisation in the business of stock and commodity exchanges. I got selected for this company based on this idea and many others I gave, but I have declined the offer. If this idea is indeed implemented, I would have at least managed one of my ideas to actually take off and see it in the real world.

Problem: Hospitals need a regular supply of “whole blood” and “packed cells” for giving it to patients. Maintaining a constant supply of these of the right blood type at the crucial life/death scenario is difficult.

Idea/Solution: Trade blood contracts on the exchange.

Buyers: Hospitals

Sellers: Blood banks, NGOs that do Blood donation camps/drives.

Benefits:

·         Helps hospitals get the required quantity and right type of quality tested blood in advance.

·         Helps hospitals save more lives and being more reliable.

Details:

In India, during a medical emergency, the onus is on the patient's relatives to arrange for replacement of blood. India has many blood banks, all functioning in a decentralized fashion. In the current system, there is no tool to find number of blood donors of the required blood group in current time and place, there is no interaction between blood banks, no exchange of blood or its components.

“Whole blood” is the blood available in human beings. Whole blood is extracted from the body during blood donations. The human blood has both solid parts (Red blood cells, White blood cells, Platelets, etc) and liquid parts (called serum). The whole blood can be stored upto a period of 15-21 days at 4°C. Whole blood is given to patients in case of major blood loss as in the case of accidents. The cost of a pint (Indian pint = 350ml) of whole blood is approximately Rs.650. This cost is not for the blood, but for the testing, transporting, storage and personnel cost.

Whole blood can also be separated into components and be stored. Certain components of the blood need to be given to patients in certain cases. Whole blood minus the liquid parts is called “packed cells”. Packed cells are given to patients usually in OBG cases. The cost of a pint (Indian pint = 350ml) of packed cells is approximately Rs.650-700 (slightly higher due to separation/sedimentation charges)

5.1 million units of blood are collected every year in India. The demand of blood is very high and there is a deficiency of 30-40 percent of blood as per WHO norms.

(Src: http://www.alertnet.org/thenews/fromthefield/218536/119745403644.htm)

There is also a supply demand gap in the different states and areas. The main proposal of this idea is to make the commodity exchange as a marketplace for buyers (hospitals) to buy blood from the sellers. The sellers have expertise in procuring fresh blood, testing for diseases, classification based on blood types and storing them. The buyers can buy the required quantities of the right blood type from the sellers. This will enable hospitals to save more lives and become reliable from a patient’s point of view.

                This idea will enable the suppliers (Blood banks and NGOs) to try to increase their sourcing and increase voluntary blood donations in India. The suppliers will try to have captive donors and contact them for regular donations which will boost the blood supply available in India and close the supply demand gap.

Types of instruments (future/option) and contract specifications are to be decided.

Constraints/Challenges: Hospitals need a license to buy and store blood from the MCI (Medical Council of India).

Market size: There are a total of 2609 blood banks in India as of 30^th June 2009 out of which there are 753 private hospitals with blood banks.

(Src: http://cdsco.nic.in/html/BloodList.html

http://bloodbanksdelhi.com/content/LicensedBloodBanks.htm,

http://www.indiabloodbank.com/bloodbanks.php)

Deadly cocktail

http://economictimes.indiatimes.com/articleshow/5024777.cms

Not entirely sure about his projections, but a good one with some data... It atleast gives a view in these unseen and unknown periods like today (US printing record dollars, trade surpluses in China, weak rupee, high priced commodities due to drought leading to high inflation very soon, low buffer of food grains in India, hoarding of stuff, storing of oil in tankers,etc)

A volatile cocktail (more like a Molotov cocktail) of ingredients to handle...

The invisible leg

You must have heard of the famous "invisible hand theory" by Adam Smith, but what about the "wicked invisble leg theory"?

http://septemberthe22nd.blogspot.com/2007/09/invisible-foot-garrett-hardin-vs.html

Economics of love

Girl Your Marginal Benefits... (Featuring Julia Zhang)

Now girl being with you has always been so tough (so tough)

With each passing minute your marginal cost goes up

But my love is inelastic and it all belongs to you (who me?)

I'm the only love producer and my good is for you to consume

Cause girl your marginal benefits far outweigh your marginal costs

Without our equilibrium baby well you know I'd be lost

Trapped inside this market I need you to buy my love

Girl without your complementing goods well I'm just not enough

Now you say that I'm producing below my ATC (so low)

But I'm optimizing quantity baby, why can't you see?

We could share this surplus each and every day If you would just buy my love I'd make my fixed costs go away

Baby I want to keep you for the long run (Oh yeah) (mmmm)

I think our supply and demand will become one

Cause girl your marginal benefits far outweigh your marginal costs

Without our equilibrium baby well you know I'd be lost Long run equilibrium is no place for me

I need the profits of our love to grow exponentially

http://www.purevolume.com/miketoomey

Marc Faber's comments

Marc Faber’s comment on the US economy: September 11, 2008 The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I’ve been doing my part.