Correction and War

I am no expert in predicting future. However, few thoughts about future which don't let me sleep well at night....

I am writing this blog when worldover equity markets are stabalising or even moved up by 10 - 50% from the lows. Economy in most of the regions is picking up. Although everything looks to be good around, I have fair amount of doubt that the real situation could be worse than what it seems.

In 1930's we have witnessed a great depression. Most of the experts say it was not as bad as this correction. Economy came out of that one only after the second world war.

Experts say that this correction is near over and now things will be good going forward. However I have resons to belive otherwise. If governments infuse trillions of dollers in the economy, at some point in time, it will start showing signs of return to normalcy. But is it really tending to be normal in longer term? Sooner or later the governments will have to get back the money that they have invested in economy. Governments earn by way of taxes or by way of privetising government owned entities, or by creating wealth by government owned entities. If governments are not able to raise enough funds they will have to print new money. Let me look at each on of these with respect to what is happening in the economy.

Taxes - When economy is growing, everyone is earning more and more, economy has faster rotation of money. And for every interchange, government gets taxes. For everyone getting salary or for every soap sold, government gets small % of money as taxes. But with the economy in correction, the speed of rotation of money is reduced substantially. People are loosing jobs, their salaries are getting reduced. Companies are making losses. In such case where are the people and companies who would pay taxes to the governments?

In terms of privatisation, most of the govenments around the globe have already privatised most of the businesses that they used to control including banking, electricity generation and distribution etc. However, there is a small little scope of privatisation, where are the people interested in purchasing those?

Lastly, about generating money from government owned businesses. The most profit making business for governments at this time, is only defence materials (warheads, warcrafts, Nuclear technologies for war etc.) Which does extreamly good during the time of war.

Now let me get to the way people think. People come into groups (country, locality, society) because they get benefitted by being in groups. And all the groups want to make most for the people they represent. And that is where fights, wars between the groups happen.... In todays scenario, we already have governments making statements like providing jobs only to their nationals and forcing reduce outsourcing. We already have governments fighting over natural resources like Oil....

In my opinion, in medium term, things are going to be more and more difficult for the economy which is going to lead to a large scale war (if not world war). And only then economies worldwide are going to come back to normal....
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All the information used here is from general information from newspapers and different articles and I have no insider information nor connections to any government politics. The information available with me may not be correct or misguiding, reader discretion is requested.

Correction and Insurance

We all know that in this recession most of the large insurance companies had to be bailed out by government. I am trying to find reasons of they going so bad and government who is acting so strict with other industries being nice to insurance companies....

Why do we all buy insurance? To safeguard ourselves from the risks. If I die tomorrow, i want my kids to be taken care of. If I have an accident, I want to be taken care of. If I loose my house in storm, I want money buy a new one and so on and so forth...

How do insurance companies make money? Since all the people buying insurance do not have tragedies at the same time, Insurance company can pay off the people in problem by money taken from others. They of course do need to make profits to pay salaries of the agents and managers...

Now, the premium is calculated based on perceived risks. Risks are based on Past information and data. Now before this correction, we did not have any information or data to calculate premiums effectively for all the insurances that these companies had provided.

Secondly, all these insurance companies were insuring banks and other businesses for unnecessary risks that they were taking. In a booming market, more the risks you take more the rewards. And all your risks are hedged by paying small premium to insurance companies and when you are faced with negative consequences, you go back to Insurance companies.

Thirdly, and more importantly, Insurance companies pay agents based on number of policies sold. So more the risk agents makes you take, more money you pay them and in a booming economy where quarterly results are of utmost importance, you end up taking more and more risks at premiums which may not be justified. And still you take risks just to please your investors...

Now, with the snowball effect in real estate which entered other markets swiftly, insurance companies were forced to pay too much which made them unsustainable. And if the government would not have bailed these insurance companies, there would have been catastrophic disaster in financial sector...

Everyone who would have taken risks on insurance would have immediately sold of everything to reduce the risks and whole economy would have been shattered...

Even those with health insurance would have been denied basic healthcare and by law of land, basic health is responsibility of the government and then, the treasury would not have been able to meet even most basic healthcare requirements...