This post is in continuation to the last post named “Fear and Corrections” but reading the previous post is not mandatory.
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In today’s scenario, central banks with support from the government are the ones who are busiest entities across the globe. More and more creative stuff is coming out from governments in form of newer packages and changes to the existing packages. In macro economy, the most difficult thing is to predict outcome of the action. Humans are very unpredictable and they may react to the stimulus differently. And it takes long time to get the results of the packages. There are more than 100 different leading and lagging indicators of economy, and no two economists would agree on methodology or on their view of the economy.
The complexity increases with global integrated economy where action by one government impacts other government. The only good thing is that these governments are forced and also willing to work together.
I have chosen haircut to compare, as impact of correction is seen in service industry the least. And services like haircut seldom see any correction. However bad the correction, everyone needs to have a haircut and haircut being a mundane task, also attracts no price hikes when economy is doing good.
Wait a sec, if haircut is an essential service, why do 5 star hotels charge 10-20 times more for a haircut? This could be explained by way of perceived value creation. I have been to many hair saloons where people visit only to get information about local politics even gossips on what is happening in their neighbours homes!!! Or if one brands himself as a lifestyle quotient, people with money tend to pay more for all these. But in difficult times, these are the people who get out of job the first.
In current scenario though, the situation is more grim. Even the small time saloons are talking about risk of loosing business as middle class people have started doing the job themselves to save these seemingly small amounts.
And that I believe is the measure of the depth of correction much more realistic on the ground data than any of those economic indicators who take 6-12 months to formally declare a recession (I still call it correction)
Right now, in Davos, industry leaders are working out together ways in which they can bring the economy back on track. But majority of them are not comfortable of governments hand as they believe, governments dont understand business as well as them and they are wary about time by which governments will give back control to them.
But as far as I am concerned, there is no industry or industrialist who is knowledgeable or experienced enough nor have enough resources to take us back on path of growth.
Friday, January 30, 2009
Thursday, January 29, 2009
Fear and Correction
A lot of people talk about greed and recession. So this topic must sound as a lot debated and talked about by everyone. However I wish to provide bit different point of view.
Fear is what we all are born with. Biggest fear being fear of ultimate truth – the death. We know that for us nothing exist after death. But we still talk about planning of all sorts after death. My children, my wife, my parents should be able to live happily even after my death. But does it really matter to me as I myself will not exist after my death?
Another fear is fear of dejection or fear of un-acceptance from peers. If I don’t have enough money, would my wife treat me the same, would my banker still have faith in me?
I don’t consider fear of loosing your wealth as a fear as it is actually a reason or input to fear of dejection. To me fear is only which is related to either personal existence or societal existence of human.
I don’t understand recession. To me you only can have corrections. Some are at higher depth, some are longer and so on and so forth. But there are no recessions.
Greed is not lack of fear but only a solution – the best solution that we find to work around my fear. For example. I know that I may loose m job in 6 months, I want my money to give me max possible return on investment. In a longer timeframe also, as I am always running against time, I want to get maximum RoI and that is what people call greed.
Once economy is going through correction, different kind of fear comes into play. Now I am fearful of loosing my capital against highest possible RoI. And when everyone is fearful, snow ball effect increase the correction. Till the time, more intelligent who also don’t have to worry about erosion of capital start worrying about RoI, they start doing investments which take economy out of correction.
There of course is a role of government in all this, and I will try to cover it in my next post.
Fear is what we all are born with. Biggest fear being fear of ultimate truth – the death. We know that for us nothing exist after death. But we still talk about planning of all sorts after death. My children, my wife, my parents should be able to live happily even after my death. But does it really matter to me as I myself will not exist after my death?
Another fear is fear of dejection or fear of un-acceptance from peers. If I don’t have enough money, would my wife treat me the same, would my banker still have faith in me?
I don’t consider fear of loosing your wealth as a fear as it is actually a reason or input to fear of dejection. To me fear is only which is related to either personal existence or societal existence of human.
I don’t understand recession. To me you only can have corrections. Some are at higher depth, some are longer and so on and so forth. But there are no recessions.
Greed is not lack of fear but only a solution – the best solution that we find to work around my fear. For example. I know that I may loose m job in 6 months, I want my money to give me max possible return on investment. In a longer timeframe also, as I am always running against time, I want to get maximum RoI and that is what people call greed.
Once economy is going through correction, different kind of fear comes into play. Now I am fearful of loosing my capital against highest possible RoI. And when everyone is fearful, snow ball effect increase the correction. Till the time, more intelligent who also don’t have to worry about erosion of capital start worrying about RoI, they start doing investments which take economy out of correction.
There of course is a role of government in all this, and I will try to cover it in my next post.
Tuesday, January 27, 2009
Rich People and Hard (Smart) work
Note: This post is follow up to my earlier post. You dont need to read the earlier post, but reading will help get you the thread better...
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We teach our kids to do hard work while at school. We tell them if you study hard, you will get a good graduation degree and so better job hence better salary and better standard of living. But if you study richest of the rich in this world, you will find more than 60% of the rich (also true for successful people in general) did not do very well in school. Were their parents telling them to put in less of hard work? Or were they dumb? or were they focusing on different things? Answer to most of these question is "No". they were also trying equally hard. But just that they could not fair well in their student time.
I would like to take this to another level. If the people in developing countries are not doing as well as their counterparts in developed world, does it mean that they put in less of effort? again answer is "no". And I have explained in my previous post that it is because of unequal advantage the developed world gets, standard of living of developing countries is not as good.
If that is the case, then always people from developing countries should be laggards. In reality we see a fair share of rich people in forbes list of billionaires who are from these developing countries. Am I contradicting myself? Yes, and that is exactly what I wish to talk about....
Let me compare cost and price. (many woud already know it, but this is only for completion sake) Cost of an item is actual cost incurred by the producer. example, if a person takes 8 hours to dig a hole cost of the hole to the digger would be 8 * hourly rate of labour. If there is some raw material involved, you may add cost of te raw material, you may also add cost of renting of the equipment used. But PRICE is what consumer is ready to pay for. If you dig a hole in jungle, price of the hole may be zero. But if you dig a water reservoir in a place with scarecity of water, buyer may be ready to pay thousands based on their need.
After defining cost and price, lets start looking at these two things in play. You buy same artifact in a designer shop for whooping 500% additional cost without even thinking on the cost of the item. It may be becasue of the perceived value you get. Companies spend about 30-70% of the costs on marketing alone and marketing is only for increasing perceived value. We all know it well but keep pray to it again and again...
Let me come back to hard / smart work. You must have wondered as to why a stock trader makes millions withouot generating any value while as the businessman who is actually manufacturing goods get relatively less for all the efforts he put. Or for that matter a sales clerk after working for 10+ hours gets salary worth pea nuts when compared to the profits investor in wal mart. that takes me to my next principle. You get paid for either your effort, your knowledge or your risks. and in the same order. One who puts in effort gets the minimum and one who takes risks gets more. (Of course this is generic statement as more risks does not mean more gain)
This is why parents tell their children to acquire knowledge in early days to improve chances of earning more in future. But I would like to make one important point that to really becoming rich, we need to teach our children to rather take risks than to acquire knowledge.
Taking you back to my previous post, people from developed countries enjoy the benefits as their ancestors have taken much higher risks like travelling to new places without knowing the outcome. And surprisingly now, developing countries are taking far more risks than developed countries. With this economic power is definitely set to shift very soon... Please be warned...
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We teach our kids to do hard work while at school. We tell them if you study hard, you will get a good graduation degree and so better job hence better salary and better standard of living. But if you study richest of the rich in this world, you will find more than 60% of the rich (also true for successful people in general) did not do very well in school. Were their parents telling them to put in less of hard work? Or were they dumb? or were they focusing on different things? Answer to most of these question is "No". they were also trying equally hard. But just that they could not fair well in their student time.
I would like to take this to another level. If the people in developing countries are not doing as well as their counterparts in developed world, does it mean that they put in less of effort? again answer is "no". And I have explained in my previous post that it is because of unequal advantage the developed world gets, standard of living of developing countries is not as good.
If that is the case, then always people from developing countries should be laggards. In reality we see a fair share of rich people in forbes list of billionaires who are from these developing countries. Am I contradicting myself? Yes, and that is exactly what I wish to talk about....
Let me compare cost and price. (many woud already know it, but this is only for completion sake) Cost of an item is actual cost incurred by the producer. example, if a person takes 8 hours to dig a hole cost of the hole to the digger would be 8 * hourly rate of labour. If there is some raw material involved, you may add cost of te raw material, you may also add cost of renting of the equipment used. But PRICE is what consumer is ready to pay for. If you dig a hole in jungle, price of the hole may be zero. But if you dig a water reservoir in a place with scarecity of water, buyer may be ready to pay thousands based on their need.
After defining cost and price, lets start looking at these two things in play. You buy same artifact in a designer shop for whooping 500% additional cost without even thinking on the cost of the item. It may be becasue of the perceived value you get. Companies spend about 30-70% of the costs on marketing alone and marketing is only for increasing perceived value. We all know it well but keep pray to it again and again...
Let me come back to hard / smart work. You must have wondered as to why a stock trader makes millions withouot generating any value while as the businessman who is actually manufacturing goods get relatively less for all the efforts he put. Or for that matter a sales clerk after working for 10+ hours gets salary worth pea nuts when compared to the profits investor in wal mart. that takes me to my next principle. You get paid for either your effort, your knowledge or your risks. and in the same order. One who puts in effort gets the minimum and one who takes risks gets more. (Of course this is generic statement as more risks does not mean more gain)
This is why parents tell their children to acquire knowledge in early days to improve chances of earning more in future. But I would like to make one important point that to really becoming rich, we need to teach our children to rather take risks than to acquire knowledge.
Taking you back to my previous post, people from developed countries enjoy the benefits as their ancestors have taken much higher risks like travelling to new places without knowing the outcome. And surprisingly now, developing countries are taking far more risks than developed countries. With this economic power is definitely set to shift very soon... Please be warned...
Population and standard of living
Most of the readers would say, its a no brainer. More the population more the poverty. and it can be proven based on data. Look at India, China. Look at parts of United states where there is huge population, all these areas tell the same story. If this is so obvious, then why am I writing on this topic?
Let us start with understanding the very basic of the economy. Have you ever asked how much do you pay for your fuel, or for food or any item. Fuel is available in earth, what we (supposedly) pay for is cost of the effort. When you pay $2 for bread, you pay for the effort of the farmer, baker, marketing, sales etc. All this payment is only for the effort of humans. Or at least supposed to be for the effort of the humans. If that is true, in the developed world with currencies and commodity trading (which is fairly regulated across the globe) why does poverty is directly proportional to population?
If a country has more population, it has more manpower which is what you pay for while buying any product or service.... With this logic, all the countries with more population should be able to create more wealth hence more progressed hence standard of living of these countries should actually be much higher...
Let me try to help you find the solution through simple psychology and philosophy theories.
Human is a intelligent social selfish animal. At the core, Human is an animal, then a selfish animal and social only because he is selfish. He may not have been interested in being selfish if he was not given a motivation of either financial or emotional. And these motivations are based on the basic traits of an animal. And he developed intelligence to win over other species or fello humans.
In earlier days there used to be different groups of humans living together invading on other groups for land, food or sex. In todays world it is replaced by boundaries of countries. It is desirable for each of the countries to have their population in a good standard of living. So called developed nations are little ahead of the curve to have higher standard of living. And they have been using people from other part of world to create wealth for them (slavery in US, Invasion of England etc.) But again the argument is that - this happened in last century of even earlier. Today most part of the world has free trade and open policies. then why does it still happen?
the answer lies in the efficiency of conversion (from raw material to finished good), available resources (tangible and intangible), experience and knowledge, etc.
If we as human kind really want to help and support each other, we need to provide all the above things to all those who actually need it. Today, the rich countries provide financial benefits to poor countries. There are a lot of fundraisers who raise funds and help people in poor countries. But this is exactly what is making the not so well developed nations dependant on the developed nations.
This post talks at macro economy point of view and does not talk about how it could be handled at an individual level. I will try to cover individualistic point in my later posts...
Let us start with understanding the very basic of the economy. Have you ever asked how much do you pay for your fuel, or for food or any item. Fuel is available in earth, what we (supposedly) pay for is cost of the effort. When you pay $2 for bread, you pay for the effort of the farmer, baker, marketing, sales etc. All this payment is only for the effort of humans. Or at least supposed to be for the effort of the humans. If that is true, in the developed world with currencies and commodity trading (which is fairly regulated across the globe) why does poverty is directly proportional to population?
If a country has more population, it has more manpower which is what you pay for while buying any product or service.... With this logic, all the countries with more population should be able to create more wealth hence more progressed hence standard of living of these countries should actually be much higher...
Let me try to help you find the solution through simple psychology and philosophy theories.
Human is a intelligent social selfish animal. At the core, Human is an animal, then a selfish animal and social only because he is selfish. He may not have been interested in being selfish if he was not given a motivation of either financial or emotional. And these motivations are based on the basic traits of an animal. And he developed intelligence to win over other species or fello humans.
In earlier days there used to be different groups of humans living together invading on other groups for land, food or sex. In todays world it is replaced by boundaries of countries. It is desirable for each of the countries to have their population in a good standard of living. So called developed nations are little ahead of the curve to have higher standard of living. And they have been using people from other part of world to create wealth for them (slavery in US, Invasion of England etc.) But again the argument is that - this happened in last century of even earlier. Today most part of the world has free trade and open policies. then why does it still happen?
the answer lies in the efficiency of conversion (from raw material to finished good), available resources (tangible and intangible), experience and knowledge, etc.
If we as human kind really want to help and support each other, we need to provide all the above things to all those who actually need it. Today, the rich countries provide financial benefits to poor countries. There are a lot of fundraisers who raise funds and help people in poor countries. But this is exactly what is making the not so well developed nations dependant on the developed nations.
This post talks at macro economy point of view and does not talk about how it could be handled at an individual level. I will try to cover individualistic point in my later posts...
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