Independence and Exclusivity

Mutually exclusive and independent events are where my train gets stuck. So this is the definitive attempt at establishing the difference. The crux is that independence comes into effect if there are more than one events as part of the experiment! If there is just one event, then its just a question of exclusivity.

What is the probability of getting a head after tossing a coin OR picking out an ace from a deck of 52 standard playing cards?

Ans: These two events are INDEPENDENT! Hence the question doesn't make sense. The answer is EITHER the probability of the first event or the probability of the second event. Each experiment is separate and the outcomes are separate.

What is the probability of picking an ace OR picking a king from a deck of cards?

Ans: These two probabilities are part of the same event! Moreover, they are exclusive. Each card in a deck for that matter has its neat little space which does not interfere with the other's space. Hence we can add the probability of each and get the answer.

A country within a country

We are a country of a billion people and more.

As I make my return journey to Delhi (with my heart, I believe that it is my adopted home, I always return to it), I start to remember how easy it was to get a train ticket in France. Not only did you have the liberty of buying it on the spot, but in case you postponed your journey, you could use the same ticket to make a journey later. All thanks to a low population compared to ours. Will we ever get to that stage? I don’t think so. We will never be able to decrease our population or increase the size of our country. Hence I will never enjoy that luxury.

This makes me think about our population and its rate of growth. I think the growth is unequally divided. Men and women of my generation don’t think of having more than two kids. The urban centers and the educated are getting wiser and seem to know better now. The bulk of the growth rate can be attributed to, in my opinion, the uneducated and the poor. This is a premise. But suppose this premise is true, there are some things that come to my mind. First, if we can concentrate on the urban middle class of our generation, we might see a country within a country. This concept is not novel. When we talk of India shining, this is the country than we refer to. This country has a high average income and excludes the poor and the uneducated from the villages and the cities (slum dwellers). The population of this country will stabilize. As people get more and more ‘western’, living together and not having any kids might even become a possibility and the population might even decrease (oh I wish!). Though the overall population of the country will increase, the other half will be sidelined and become invisible as they seem to be currently are. Second, the competition that we went through for a career and jobs, and our worries for the impossible condition of our children might come to pass. This is again based on an opinion that people from one half of the poor and uneducated country, whose population is the one that is increasing, will rarely transit and become competition for the other half – the educated and the privileged. They will compete amongst themselves for land, labor-jobs, auto-driver and security guard positions. They will not know of the McKinseys, the Goldman Sachs and the Sequoias…

The second world war

History, when read voluntarily, is fascinating. Be it the history of finance or of human civilization.

I am currently going through a marvelous National Geographic feature on the Second World War. Though I have come across several dates and several broken accounts of the war, this one seems to promise the most. The series is appropriately named - Apocalypse, The second world war.

The account is quite simply put. Hitler comes to power in 1933 and slowly gains the confidence of the masses. Around the beginning of 1939, he annexes Austria, alarming the British and the French. However, they don't react. Then, he moves towards Chezkoslovakia. Tired by the first world war, Britain and France accept his move demanding that he stop there. However, Hilter had other plans. During the 1st World War, Germany had been split into two, to allow Poland to gain access to the sea. Hilter joins the two parts together, by conquering that part of Poland in September 1939. He assumed that Britain and France would not mind it too much. His mistake! France and Britain declare war on Poland a few days after. This is when the cat gets out of the bag pretty much.

Another theory on obesity and heart disease

I read something pretty amazing on the Economist's science section recently. A new theory by two scientists in the University of Texas challenge the entire interpretation of obesity and its linkage with heart disease, diabetes and liver failure.

The normal notion is - you get fat and since you are fat, you get a host of other problems. Not so!

The real troublemaker is still the excess fat that we consume. When we do intake extra fat, the body starts to accumulate it as blubber (using fat here makes the description confusing, so I use blubber). This kicks into action two hormones - Leptin and Adinopectin. The latter diverts excess fat inside the body to be stored as blubber. The production of this hormone decreases as the amount of blubber stored increases. The other hormone, Leptin, is however at the heart of the obesity saga. Its job is to consume the fats. Its production 'increases' with an increase in blubber storage.

So how does all hell break loose? Well, when Leptin production is hampered by some reason, the trouble begins. First, cells start seeing a lot of fat in the bloodstream and react by becoming resistant to Insulin. This happens because insulin makes cells absorb glucose from the bloodstream and make even more fat! Why make more fat when there is so much around anyway, say the cells. Secondly, all of this fat goes ahead and damages pancreatic and heart cells causing another further trouble. The key to this theory is that Leptin production/no-production causes all the complications.

If this theory survives the test of time, it will mean a radical shift in treatment strategies. Liposuction will be a strict no-no since it will decrease Leptin production even more. Insulin injection for diabetes supposedly 'caused' by obesity will also be a bad idea since we really don't want cells to make more fat. What will remain a time-tested strategy is a healthy life-style with little fat and a lot of exercise.

Tentative steps

I am not an old blogger. I started primarily because writing is a skill that needs to be honed. But now that I do write publicly once in a while, I am trying to branch out as much as I can ...

I have been proactive enough to join the ISB 2011 blog, but the challenge is to write something productive and interesting on it. My blog is fine. Its my diary and I can post whatever suits my fancy. However, when you are writing on a portal which people actually follow, I think you are laden with a little more responsibility. For example, ramblings like these would hardly be considered appropriate. Hence the picture on the side.

The comments and the breadth of knowledge of my peer group seems impressive. However it is going to be yet another big blood-bath come placements next year. Here is to sleepless in Hyderabad :)

Public Debt

The Indian budget was unveiled recently. Amongst other things, it talks about reducing the budget deficit from 6.9 percent of the GDP to 5.5 percent of the GDP.

This is heartening. The budget deficit essentially refers to the balance between spending and earning by a country in a fiscal year. So the less the deficit, the better it is. However, another parameter called the public debt is another matter altogether.

The public debt, also expressed as a percentage of the GDP, is the overall debt the country is in. The figure on the left indicates the public debt of the world. I have little respect for the fiscal policies of the US and the UK. Which is why, their public debt of close to 60% doesn't surprise me. However, what worries me is the stark difference between India and China. Our public debt is close to 40 percent whereas China is sitting comfortably at 10-20 percent.

The good thing about percentages is that they hide the reality a little. In absolute money terms, with a GDP 3 times as that of India, a ten percent deficit of China is almost similar to a 40 percent deficit of India. However, that shouldn't be a reason for joy.

I also noticed the grey colors in the map. Either they have non-existent GDP, no public debt or the data is not available. Considering that the countries seem to be West African ones or Mongolia, it seems to be a valid question :)

One-tenth of the real money

Banks issue much more money than they have in reserve. However, the central banks play a central role in developing the illusion that all is well.

Money used to be the overall sum of goods and services put together, remember. How does more and more money come to represent the same amount of goods and services then? Well, because at the heart of the problem is the allowance of fractional-lending, where banks can lend much more than what they have in reserve. This reserve is not the reserve in their own bank but the reserve they maintain in the Central Bank of the land they operate in.

Banks are required to make an initial deposit to the central bank when they start operations. Lets say $1000. By the allowance of fractional-lending, the bank can now loan a maximum of $10000 to someone (the maximum ratio being 10:1). Lets say Adam gets that loan. Adam buys a car from Ann for $10,000 and Ann goes off and deposits this in another bank. Yes, the new bank has $10,000 now. But (and thankfully) the new bank cannot apply fractional-lending on this sum. It cannot give a loan of $100,000 based on this $10,000. In fact, the deposit of $10,000 is 'divided' by the fractional-lending ratio and reduced to two parts - $909 and $9090 (the sum coming to $10,000). The balance-sheet for the new bank will show the complete $10,000, but it can loan money only over the $909 dollars now. The next maximum loan is, hence $9090. This is an important step. To take a step back, in the first loan, $1000 was inflated to $10,000 but as soon as it was deposited, it was deflated back to $909 for the purposes of providing loans. In-spite of this 'deflation', each bank will earn interests on each successive loan, even if it is of a slightly lesser amount (first $10,000, then $9090 and so on). If this series keeps going on, and we add the maximum successive loans, they add up to $100,000!

There are two take-aways. The first is that fractional lending allows banks overall to earn interests on loans of money that is 100 times that is deposited in the central reserve. Also, that the money in circulation is 10 times what is deposited with the central reserve.

Hence, go open a bank. And remember that a new car is really worth just 1/10th.

The Gini coefficient

The Gini coefficient is an interesting number. It ranges from 0 to 1 and shows how equitably the GDP of a nation is distributed amongst its citizens. 0 is the most equitable and 1 is the least. The index is not very clear but some examples are : Purple is around 0.5, Cyan is 0.35, Red is greater than 0.6, light green is 0.35 and pink is about 0.55

The map on the left shows how different countries fare on this scale. The capitalist mecca is purple, where you would expect a big difference between the rich and the poor, a hallmark of capitalism. However, Canada and Australia are light green, which might come as a surprise. It shouldn't actually since even though these countries are developed and progressive, the salaries are only a fraction of what high ranked executives get in the US. The poor probably earn about the same as they do in the US. Hence the ratio lowers. South Africa is bright red, which correlates to a very rich white population and a majority of poor blacks. It is interesting to see that China is also purple like the US. That should be an eye-opener. In spite of a communistic regime, China has opened its gates to privatization and capitalistic forces in several sectors. That clearly has colored it purple. India is light blue, like Japan. However the reasons couldn't be far from different. Japan has a very strong social security net that covers most of its citizens in times of unemployment and disabilities. The salaries of top executives are not outlandish like the US either. Hence, a reasonably equitable distribution. However, in India, it is light blue not because of a social net (it does not exist) or welfare programs. It is because 70% of India's population works in agriculture and manufacturing and earns modest wages. The light blue exists since most of the people are collectively poor rather than collectively rich.

Taxation vs austerity

The more you read about world economics, the more you are surprised by the mess politicians make of a social-science called economics.

Europe is reeling under the pressure of massive debt that these countries have taken over their GDP and potential earnings. The way I understand it, countries don't have the luxury of investing the stock market as individual investors do. They primarily operate through the bond markets. This poses a large restriction on their earnings. Greece, is currently running a budget deficit of 12.5%. It is trying to finance its deficit through further bond issues (seemingly the only was of sourcing external money) but the world isn't buying. So what can it do then? Well, introduce 'austerity measures'! These austerity measures are nothing but asking the consumers of public-sector revenues to cut back. The people in focus would be pensioners, public sector employees and public-infrastructure projects and services. But guess what, the public isn't amused. They point to another way the government can get money - taxation. Interestingly, taxation raises money from the richest and austerity from the poorest. Ideologically, you would want to support the former that the latter. But according to economic principles (which I am not too clear about), austerity is the better way to go : (http://www.economist.com/displayStory.cfm?story_id=15606221)

House ownership across Britain and the US

Property ownership was a British concept to begin with. Not that people didn't own property other than the British but the association of strength and power with ownership of property was something of very British origin. In the 1700s, the power to vote resided with the wealthy land-owning aristocrats, the people who came to occupy the House of Lords in the parliamentary system later.

But as with any financial tale, this one did not have a very happy ending. These men-to-the-manor-born borrowed heavily to pay for their extravagant lifestyles, with their land and the agricultural revenues as collateral. However, come mid-1800s, as the prices of agricultural produce went down, so did the backing for these loans. As these aristocrats put their heads together to sort out finances, most of them realized that their borrowings were way more that the worth of their estates and their agricultural revenues put together. Most of the houses were acquired by the lenders and several of the rich elite had to move into rented houses, a big step down considering the opinions of those times.

That was Britain. Now the US.

Owning a house makes sense. It gives you security and ownership. However, before the great depression, only two-fifths of the US population owned their own homes. As the great depression struck, the few home owners there were, were also forced out of their homes for lack of mortgage payments. So how did this miserable situation turn around? The New Deal! Mr. Roosevelt took several steps to encourage people to invest money in house ownership. The government ensured that the money invested by the public to a bank as part of mortgage payments would be ensured by the government even if the bank went bust. A federal housing administration was setup to offer longer, larger and lower interest loans (20 to 30 years). And it also setup the 'Federal National Mortgage Association' which goes by the famous nickname - Fannie Mae - to stimulate the mortgage market.

Well all of that seems about right. What went wrong then? Well, the way it began was that these mortgages were not given out to any tom, dick and harry. They were only given to 'prime' candidates. The rest you probably know ....

Bonds and the American civil war

Then came the bonds. Bonds are not the most popular of financial instruments. The returns are low and there is always the risk of inflation catching up or overtaking their rate of return.

However, bonds are no small time contenders. The bond market is many times the world's stock markets put together. Moreover, they have been an instrumental tool for governments in times of economic strife. Cotton backed bonds were the main source of money for the Confederates, the southern US government, to get money to finance the war against the North. These bonds promised interest like any other bond. However, they went a step further. In case the interest could not be paid by the government, these bonds were exchangeable for cotton! Cotton, a rich cash-crop was an excellent backing to these bonds. Several people became interested and bought the bonds.

With money sourced from these bonds, the war dragged further. Finally, the North, understanding the importance of this crop in the scheme of things, played a master-stroke. Devoting a large section of their military strength to it, the North secured the port of New Orleans. New Orleans was the main exit point for all the cotton the south exported. With the port under northern control, the promise of cotton in exchange for the southern bonds to the bond-holders went down the drain. Their value plummeted and so did the source of money for the South contributing greatly to their defeat in the end.