Boom & Bust: Reason or Panic? Tuesday, Oct 28 2008

Its been a fantastically long time since I last updated anything, but that is not for lack of things to write as much as because of lack of time and effort to put thoughts onto computer!

Well, no Management/Economics type blog can ignore the current economic Superhit show that is playing on all Business News Channels today, and mine is no exception. People are blaming the current mess on US Housing Market bubbles or irresponsible lending or greedy managers, but is that the REAL reason for boom and bust?

I am sure these are reasons for the current mess, but why not try to see if there is a deeper underlying principle here? And this morning, I finally think I have found one.

First the Assumptions:

1. People Consume all they produce

2. Productivity is something that is consistent and measurable.

3. Inflation does not exist (I know…silly one that, but will relax it later)

The Logic

Economic Growth is something that makes peoples lives better. Quantitively, economic growth means that people have more ability to purchase goods and services. This is easiest measured by money. If you have more money in your pocket, you are doing better than you were. The same is true for countries as it is for people. The more “Money” a country has at its disposal, the better it is doing.

So, how does the money that a country have increase? Well, its simple really if you think about it. There are 3 basic ways.

First of course, is if the people in the country work more. Lets say they all had 5 day weeks. Now they suddenly decide to work 6 days a week. Suddenly they would therefore produce more goods and thus would have more “money” (assuming all the increased goods are sold at the same price)

Second is if more people were to start working. This is 2 components. First, all those new young people joining the working population. Second would be if the retirement age of the country went up, thereby increasing the workforse. (This is assuming that all those who reach working age get a job…not all that easy!)

Third is if those who are working suddenly become more productive. Thus if a worker were given a new thingummijig that could increase his production rate, then more goods would be produced in less time with the same amount of workers, increasing the workers wealth. (Of Course, assuming that all that increased production is sold for a good price.

So this is my economic theory. ” The maximum long term growth rate of any country’s economy is the product of the growth in working population, productivity and hours of work.”

This seems very simple indeed. And the Boom and Bust that we see in today’s stock exchanges seems to me to be comeuppance for the rise that the Indian markets saw post 2001.

If the stock exchange rises by 50% while the constituents of the exchange grow by 20%, then the assumption is that the stock exchange has priced in an increase in one of the three parameters that I had laid down. But how much can productivity and workforce increase so that you can maintain the increasingly dizzying valuations that were used for companies?

So, now the Indian market begins to make sense. It may look irrational, but that is only because we lack the timeframe needed to judge things. Ideally, the stock market should have stagnated until its companies reached the size that justified their valuation. However, like a governer hunting for the position of stable equilibrium, the market had overshot the fair valuation and bumped the value too high. Now, in trying to find the fair value, the market has actually beaten down (certain) companies to values that are well below their actual capabilities.

Of course, the problem with spikes and troughs is that they tend to make the fundamental premise of economics fail, which is one where we believe that the market has rational decision makers. Todays markets are ruled by fear, and have little of the rational among them.

So what started out as reason is now culminating in panic. And I am now finally buying stocks…after 2 years of looking at the markets as a mere speculative gambling table, it looks like there are quite a few valuable gems lying there getting ready to be picked up. So like Warren Buffet says (or should have said)… a panic selloff is the time for the rational investor to buy.

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The War of the Currents Wednesday, Apr 16 2008

Ok…its been aeons since I have done a history post…and even longer since a physics post, so why not do 2 in 1 and do both together! Its time to do a history of power transmission!

The Main Characters Involved

Once upon a time, there lived a magician. Almost deaf and self educated, he played a major part in the history of Industry. He was known for perseverance, and for a factory that burnt down as well. His name: Thomas Alva Edison, more colourfully known as”The Wizard of Menlo Park”

The second chap in this was  rather less colourful. He was known for an obsession with Railway safety and his major contribution prior to his adventures with electricity were his amazing invention of brakes for railways. Even today, the air brakes that are used today are a product of George Westinghouse, who shall be called “Moneybags“

The third chap here is as much of a character as Mr. Edison. Rather than Gandalf, it was he who was first called “Wizard of the West”. A mathematician and an inventor, he was a former employee of the Menlo Park wizard. After some harsh words were said on both sides, he quit to fight his battle for efficiency and superior science. His name: Nicola Tesla.

The Technology:Sneak Peek

So what did these chaps fight about. It was no less than the way the new magic of the century, electricity would be transmitted. It was a battle between Alternating Current and Direct Current. The battle between AC/DC.

On the DC camp stood the reigning champion, and knight of the American derring do spirit, T A Edison.

On the side of  AC, the challengers were an embittered Nicola Tesla and Westinghouse.

The Rivalry Begins:

Nicola Tesla was originally a humble scientist, working under the heel of an acknowledged genius in Edison. But Tesla was also a super mathematician type dude, while the more prosaic Edison was merely a brute force experimenter. Tesla was a huge fan of the newfangled Alternating Current that promised revolutionary change.

Edison though was not entirely for things that used imaginary numbers and wave equations. In his opinion, if you had to use things like root of -1, you were off your rocker a wee bit. But being a fairly loud-mouthed guy, he proclaimed to Tesla that if he ever got an AC motor working, he would get a bonus of $50,000 (no mean sum at the time).

Tesla of course was truly fascinated by that grand sum. He spent days working, and nights calculating under the patented light bulb of Edison and Swan’s GE. Finally, after months and years of toil, he came up with an awesome AC generator that works. He goes smiling proudly to Edison, and shows it to him.

Unfortunately for him, Edison was a bit deaf. He claimed that he never heard himself say such a ridiculous thing in his life, and laughed at Tesla. It might have also been exacerbated by the fact that Edison never really understood the principles by which AC power was generated and transmitted as well.

Tesla decided that this would not do, and ran away in a huff, threatening to do Edison in someday. Thus a magnificent rivalry was born.

Enter Westinghouse

George Westinghouse was no mean inventor himself. With patents pouring in for railway safety brakes, and a machinist par excellence, he was an inventor in the mould of an Edison. Unlike Edison though, he was also a big believer in the utility of calculation and mathematics in invention. Spotting Tesla out of work, and digging ditches in New York, he realized that he had an ideal employee on his hands.

Back to Technology– The Numbers

Edison’s DC current is comparatively easy to understand, and is based on middle school physics. Power transmitted is given by VI, where V= Voltage and I= current. However, power loss is given by current squared multiplied by resistance of the wire. At low voltages, the power loss is rather large, unless the diameter of the copper wire is made terribly large. However, high voltages were deemed to be unsafe, and Edison was using DC voltages of about 110 Volts.

As a result, power losses made it impractical for Edison to transport electricity across large distances. The resistance would have killed him. Edison was nothing if not a canny businessman though. He started making tonnes of generators that generated electricity locally, and started selling them. This ensured regular sales of GE generators, because the effective radius of even the largest DC generators at 110 watts was a couple of miles.

Now, AC is a whole different ball game. The power loss is practically the same at a given voltage (we won’t go into the formula. Like Edison, I am not a formula guy!). However, AC has the huge advantage that it can be “stepped up” and “stepped down”

Enter the Transformer

The transformer was the device that made AC a great option. A transformer is a very simple device that converts electric voltage up or down. By winding more wires one way or another, you could generate power at one voltage, then transform the voltage up. From basic electricity we can say this:  V1I1=V2I2. When Voltage goes up, the current carried by the wire goes down. Power loss is calculated as I*I*R. Now, when Voltage goes up to 22000 or 40000 Volts, the current drops dramatically. Now, I*I it becomes very small, and power loss is lessened dramatically. Near the end consumer a transformer is used  again to drop the voltage to a usable level.

Of course, the catch was that a transformer could only be used in AC. It could not be used (for various reasons)  in DC format. The various reasons include esoteric terms such as inductance and flux, but this is not a post about physics, but history.

Return to the Battle: Publicity time

Westinghouse and Nikola Tesla  began to make an AC Generator that would unshackle the world from Edison’s DC generators. But it was hard toil. Firstly, AC current keeps cycling up and down, which in lightbulbs would mean a flickering of light bulbs as current cycled between two extreme values.

Then there was another problem. Cyclic voltage tends to do something nasty. The shifting voltages cause the heart to change to an irregular rhythm, which tends to lead to a quick trip to a nearby graveyard. Low Voltage DC does not cause any such problems. And Edison knew exactly how to exploit this unfortunate “feature”

Edison launched a campaign which attempted to prove how dangerous AC was. Initially, he started by electrocuting cats and rats. Soon, he progressed to man’s best friend.  Size of course matters…he continued by going after horses and then cattle. In a fit of extravagance, he completed this with a finale where he finished off an elephant with AC.

But this was not enough. The AC Camp led by Westinghouse was still winning. Now Edison was getting desperate. First he tried to replace the term electrocute with the phrase “to Westinghouse someone”. That did not work out too well though. It never did catch on. Although Edison was against the death penalty, his business interests now dictated he needed to do something radical. Size did not seem to matter in the war. Now it was time to change tack. He began a secret product called the “electric chair”. Soon an instrument of death was ready, and an unfortunate convict was ready as a test subject.

As a deterrent to crime, it was a staggering success. The dashed thing failed on the first attempt, merely leaving the guy with severe injuries rather than killing him. After several tries, he was finally put out of his misery, and it was described by one appalled journalist as, “It would have been kinder to kill him with an axe!”

Unfortunately, as a proof of concept, the electric chair was not quite an unqualified success. The tide was beginning to turn in the favour of the Westinghouse camp. Soon, the death knell for Edison’s generators was about to sound.

Niagara Falls

The Niagara falls were the holy grail for power guys. Here was a mountain of water falling a few hundred feet, which had the potential to generate enough power for the whole of the North-east USA (at the time). The catch? It was just too far away. Any chap who generated power in the Edison way could not actually transmit the damned thing without losses that crippled it to unusability. Westinghouse lobbied long and hard, and finally got the permission to generate power in AC so that it could be transmitted easily. And since Edison’s GE was too powerful to be ignored, it got the contract to transmit this electricity. With this, Edison ended his opposition to AC power, and the war of the Currents was won by Westinghouse and Nicola Tesla.

Epilogue

Tesla was known as the wizard of the west. There is little doubt that he was at least partly responsible for the way the 20th century became the century of electricity. However, his rivalry with Edison was not tempered with time, and it is curious that neither Edison nor Tesla ever won the coveted Nobel prize. Rumours still abound that it was jointly offered to the two of them, but Tesla refused to ever accept a prize alongside Edison. Later in life, he began to make futuristic predictions about wireless electricity, but these were never considered practical, so he was slowly shunted away from mainstream science. But he forever gloated about his joy at defeating Edison.

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Trust in Banking and Business Wednesday, Jan 30 2008

Today, I got into a bit of a spat with one of my professors. He and I had a rather fundamental difference of opinion on the role of trust in business transactions, especially microfinance.

My argument is that in a peer pressure situation, when collateral is not available, use the peer pressure and trust the borrower to pay you back…else the whole group that acts as a guarantor gets penalised. My dear professor of course begged to disagree, and said that only an “NGO like Grameen Bank can do this”.

That had to be a rather strange argument. As long as the institution is making money…who cares what its called? Grameen Bank is profitable, and makes money based on this business model. Sure, it has its own set of issues, and repeating this business model is a challenge. But this does not imply that trusting your borrower is bad!

And this is a point that can be made in business. Trusting business partners and suppliers makes hard nosed business sense. Trusting your supplier ensures that you do not have to duplicate processes to check defects. Trusting your customers means that you spend less on fraud detection. Trusting your employees means HR is seen less as a gatekeeper, and more as an enabler.

Of course, trust is not a one way street. And the cost of betrayal of trust should be measured as well. But trust is not just one of those feel good words that business magnates use to sound nice. Trusting people can be a huge component that increases your efficiency, and the effectiveness of the organization itself.

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On Consumer Goods and Durables, and prepaid cards Friday, Dec 21 2007

A few days ago, over tea and pakodas, conversation turned to things managerial. I was sitting with 2 marketing chaps, and we were debating Consumer Goods and Consumer Durables, and how the wise men of marketing classify them.

Firstly we were thinking, “Maybe its about cost. Consumer Durables are usually expensive electronic equipment, and Consumer Goods are comparatively cheap things like toothpaste. And for a time, all was well. But soon people started picking holes into that fine theory. After all, price is a relative thing. An iPod  is incredibly expensive to me…but to Steve Jobs its a very small part of his monthly consumption. But he does not call iPod a consumer good!

So we spent some time researching this topic. Finally, I have an answer that I liked. So here it is!

A consumer good is one which has a finite (And measurable) number of uses. A consumer durable is one that can be used any number of times (or not easily measurable).

For example, toothpaste is a consumer good. Why? Simple! It is because it can only be used for 20 brushings. (25 if you use a small toothbrush). It does not matter if you do not use it for 1 year. After all, its now been rated in number of uses rather than time of use, or of price you paid for it!

We then realized that prepaid Cellphone cards are a perfect example of a consumer good. After all, they have a limited life, and their utility is perfectly subdivided….you can use it for x no. of minutes of talktime.

Now, this brings all sorts of analogies. Today, the cost of a Lux soap is not its manufacturing cost, but is its advertising cost. In the same way, we can expect the Telecom companies to become more brand agents than communication service providers. When is it going to happen? Or is it already happening? I guess we will have to wait and see!

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Gay Rights…and lefts. Getting a Grip on the Issue Tuesday, Oct 16 2007

My blog consultant Ms. Potnis has insinuated that too much management and Japanese history can be rather debilitating for a blog’s health.

Topical issues are all the rage these days, and she said…what about Gay rights, boyo? Surely there must be a tonne of things that should be said about that poor discriminated minority. I am known to be chivalrous to a fault, and hence dropped everything else to help this poor persecuted minority. Of course, I got sidetracked into gay personalities, and here is the result.

We look at a historical character first. George Micheal, famous for shaking his behind in the video for Faith, was made rather more famous when he jumped out of a hiding place (left nameless) requesting some “Satisfaction”. Unfortunately for the daring formerly young boyband member, his request was denied with extreme prejudice.

Elton John had a rather better time of it. Early on, he decided that if could not have Marilyn, then he would not go out with any member of the female gender, and started wearing purple sunglasses and white suits.  Of course, the lucky boy did find true love, and is now happily married…err civil unioned with Davide “Dave” Furnish, who also did their apartment.

This brings us to the whole problem of Gay rights. After all, its rather inconvenient to say “Oh, Dave and I were Civil Unionned just last month”. You would picture grim faced surgeons performing a Civil Union rather than happy bridesmaids dodging flower bouquets. But then, the critics of Gay Marriage say, “well…what would you call them, Mr. And Mr. John?” To them, I have this retort…does anyone remember Mr. Margeret Thatcher? (his poor man’s name was Dennis, by the way)

But lets abandon Mr. John, and Dave to their collective fate together. What about Famous Indians who are gay. First comes Karan Johar surely is what I thought (after hearing various remarks made about the chap). But try as I might, not a single quote could I find where the chap jumps out of the closet (or anything else for that matter). Sure, he wears pink shirts…but then, so does Slayman…err Salman Khan, and no one says that he is gay! Ok…so he waves his hands effeminately (but then, so does everyone). So the rumours about his gayness remain just that. Rumours!

So there must be someone who is a famous Indian Gay man. I began to look in earnest. The closest I could come to a famous dude is a Mr. Wendell Rodericks, who is a fashion designer. He therefore satisfies ALL the typical stereotypes of the average gay man. He is in the fashion industry, wears and loves the colour white, and makes comments such as “I want to live like a common man”. He also gay unioned his french boyfriend at Goa, which is rather more well known for its beaches than the marriages being conducted in the French Consulate.

But that was dreadful. It was so bad that I actually had to wiki the man just to find out what on earth he was famous for. Which leads me to ask, “Are all gay men in India hiding behind convenient rocks?” But then I found Vikram Seth!

Now Mr. Seth is more well known for writing 1000 page books written wittily in poetry, and for all sorts of rhyming stuff. But he is less well known for being gay…and unlike George “Jumping Jack” Micheal, has been a bit less public about it. As he says…or would have “My sexual preference is none of your business, neighbour.” But he recently sidled out of the closet in support of the 50 Million people lurking in the sidewalks of India.

A rather less enlightening example comes from someone on the other side of the pond. This genius from Idaho, Senator Larry Craig was entrapped by an enterprising cop in a public toilet for making a commonly known gesture asking for certain inappropriate favours. Senator Craig apparently plead  guilty just to escape the advances of this policeman, and has since learned that a lifetime of being an anti-gay rights demagogue gave him no protection. The poor lad had to quit because his bosses started claiming that he was not toeing the party line. Poor chap, if he had not tip-toed around in public toilets so much, he would still be making ads and be wooed by presidential hopefuls.

But the most recent example has been of a Catholic Cardinal who “anonymously” provided an interview to a local gay radio channel. (or a radio channel that was doing a gay related programme). Unfortunately, for the poor man, nobody was fooled by his imitation of Deep Throat, and everyone from his chauffer to Pope Ratzinger…err Benedict the whatever, got his name without even 3 guesses. The poor man was hurriedly stripped off his red spiffy robes and been demoted to think about the benefits of keeping his big mouth shut.

All in all, if you are gay, here is a word of advice. DO NOT hang around public toilets unless you want to get arrested. Also, disguising your voice is not ONLY about speaking through a handkerchief.  And of course, pink shirts are only an expression of colour blindness. Not anything else!

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Social Functions Thursday, Sep 13 2007

Yesterday, I attended my first marriage in some time where I did not really know any of the major participants (i.e: Bride or groom). And most of the participants and audience were also candidates whom I did not know very well. It was especially odd to be asked by chap my age…”do you remember me?” Of course I did not, which then made it even more uncomfortable. Thankfully they only think that I am a forgetful studious type rather than an unmannered and arrogant boor.

But there are a lot of things I learnt about marriages. This one was a sort of eye opener, with crackers, an open top ride on the crowded (and hot) streets of Chennai for the groom and tonnes of food, served all through the day for anyone who considered themselves in need of nourishment.

Though I think what will stay with me is the Nadaswaram player. First a brief intro about the nadaswaram. Its a south Indian wind instrument. Think of a clarinet, and then make it about 3 feet longer. That is a nadaswaram. Fiendishly difficult to play, most players sound like they are on the verge of a seizure, and you would wish they would just keel over and be done with this. But the two players I heard were in a different league altogether. Very talented they were, and most of the ceremony time was devoted by me listening to those virtuosos plying their trade.

In between, as a lighter moment, they decided to play a dance number on the nadaswaram. And blow me down, it sounded exactly like waltz music for a western audience. Sure, the instrument tune and the pitch were different, but the rhythm and the beat were perfect, and the combination of Indian instruments and style and western rhythm was sheer magic. I later found out that the piece was written by a chap named Madurai Mani Iyer (MMI) as one of the preliminary examples of fusion music. Now, I have listened to a bit of the guy (his pure Carnatic stuff), and I stood in awe of his voice and training. Now I have to stand up and applaud all over again for his composing skills. One of the pieces of music that goes into my favourite list (once I find the name of the actual piece!).

So well, after meeting more relatives than I believed could be possible, I am now sitting in my room listening to music, and wondering about this whole jamboree…in all of the fireworks and backslapping of relatives, what was the actual attention paid to the stars of the show…the bride and the groom. From me…not much. I think I could recognize them in the next week…but I would not place a bet on it, whatever odds you gave me!

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Ratatouille, Chennai Cops, and Penniless too Monday, Sep 3 2007

The Sunday was spent quite well. First off, watched Remy the mouse cook up a story in Ratatouille at Sathyam. The more I see of the theatre, the more I like the place.

As for the movie, I liked it. It was also educational to see how far animation has gone, from the old days of Tom and Jerry down to Remy the cooking mouse.

After the Movie, Ratnakar and I went off to see what food and entertainment options we could get. But before that, we were waylaid by a bunch of cops for not wearing a helmet. I have now lost track of how many times the law flip-flops on the use of Helmets. Yes-No-Yes-No-Yes. Anyway, after paying the fine, we realised that the Chennai cops were out in force in Chennai today. We were caught no less than 6 times by the various guardians of the law. But having a receipt with us, we were free from further persecution!

Following this, we went for lunch. And the food was rather good. Phulkas with Aloo Jeera and Palak Paneer (without tomatoes). Only when the bill arrived, did we realise that most of our money was in the cops pockets, and we had frighteningly limited resources. Anyway, we did scrounge up the required amount, but the final sum delivered clinked with disturbingly large amounts of small change. We vanished before the waiters could catch us for the disgustingly low tip we left them!

All in all, an entertaining and eventful day. And a good time was had by me!

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Amazing News Items Tuesday, Aug 14 2007

You can’t call a baby 4Real in New Zealand. So the proud parents called him Superman!

You want to smuggle monkey…you hide him under your cap in an airplane

“Nice Try Toots” : Reply from Porn Film to UK girl who found a pic of hers on its CD cover. Yes. The movie Bombed. And NO. The Girl was NOT AMUSED.

Monday, the 13th of August was Left Handers Day. Commemorative ceremonies were held all over the world.

“I am Moby Dick to Congress’ Ahab” Karl Rowe on resigning.

This was a brief snapshot of news stories that I found. Who says News cant be fun!

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Japanese Money Back Policies Friday, Aug 3 2007

Well, this is not a strictly economic post, but this was so weird that I just had to put it out. Apparently, people in Japan are scrupulously honest when it comes down to cash…and they have lots of rich people with too much of it too.
Some people have been busy putting envelopes of 10000 Yen in public toilets for people to take away. And the dumb jocks have been returning it!
Ditto with money raining down from the sky. Someone rained a 100 banknotes down near a mall….all 100 were returned.
So what does this say about Japan? That they are scrupulously honest? Give me a break…They are only as honest as the next guy is. But they do live in a society with far more surveillance than most others. After all, its a small place, and when every other Tom, Dick, Harry, or Nakamura has a mobile camera along, you really don’t want to look like a fool. Even if the cost of it is money going waste. Besides, they could then be parodied on YouTube, and maybe a manga would be made of them!
You know the worst thing about the money though. If no one claims it (and it is not likely they will), it will go into the public funds. That is why it prompted some Jap Wiseguy to say, “It must have been a foreigner wot threw all that cash away. Which Japanese person would give his money to the government voluntarily. Cause every Japanese person knows about Japanese and money found on the street!”
Find the full story here

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In the midst of exams Sunday, Sep 17 2006

My midsems began three days ago…After two exams…I can’t say that they have been great so far.
The papers have been easy, but my preparation levels have not quite been perfect. And that is a serious understatement!
However, life is bigger than exams (I keep telling myself that), and its time for yet another movie review.
This time we go for Kill Bill–> Volume 2.
I remember watching Kill Bill volume 1 in the theatre in Bangalore…mainly because of the rather off colour jokes we made during the movie. I have to admit it…I really liked the movie. The awesome cartoon part in between, as well as the overblown dramatics was great for my mood at the time.
Now KBV2 was watched after my rather pitiful OR exam…and I have to admit, this movie is nowhere as good as volume 1. It has some interesting moments, but its a bit like H2G2….200 pages of inanity intermixed with 20 pages of genius! No plot giveaways, but I will say this…It is not for the squemish. If you do not have a very high tolerance to blood and gore…you SHOULD NOT watch this movie.
Well, I did promise a Zener diode explanation, but midsems have conspired to ensure that I could not read up on them. However, once the midterms end…I hope to be restarting my physics section.
Until then…ta ta.

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