Archive for the ‘Economy’ Category

Why some energy firms going bust in UK?

2021/09/22

In 2021, some small energy firms went bust in UK. Why did it happen?

These firms were re-sellers meaning they didn’t produce any gas or electric of their own. They bought wholesale gas/electricity from large producers and sold it to customers.

When customers signed up with them, these firms promised a price say £x. They used to buy energy at wholesale rate of £w (where x – w = their profit).

Since wholesale energy price went up suddenly, these firms had to buy energy at a rate W which is more than x, i.e. what customers paying them.

They can’t simply ask customers to pay more because they had contract with customers where customer would pay fixed price £x as previously agreed.

So these energy firms can no longer afford to purchase energy at cost W and in return get only x from their customers. So their business is no longer sustainable and hence they went bust.

Is happiness linked with money?

2021/03/12

In spite of all progress in science and living standards in last 100 years, mankind is still elusive of the answer of what is happiness!

Numerous research has taken place in this subject over long periods of time. While these researches did not invent any universal formula for happiness, they did debunk few myths.

One common myth is that more you earn, more happy you become. Well, it is true up to a certain point. Extreme poverty does make people very unhappy but once the basic necessities (and even few luxuries) are met, further income no longer improves happiness level. This is illustrated by following diagram.

Happiness against monetary earning

There have been studies of at what income level optimum happiness occurs. A study by Princeton University in 2010 pegs the number as $75,000 for USA. If you adjust this number of inflation and geographies, you can calculate this for anywhere in the world. Effectively, it states up to this earning level you happiness will grow almost linearly but after you attain this level of earning, your happiness will rarely grow at same pace. In fact after a certain amount of high earning, you happiness level may even fall. This is because with increased earning people start spending money on luxury items (i.e. depreciating assets), indulges in show offs, make new rich friends and they start to measure themselves against new benchmarks etc.

Very rich individuals (e.g. industrialists, film stars, politicians etc.) have different level of problem like threat of attacks, lawsuits, not being able to lead a life away from public scrutiny, fear of losing (game, election, industry etc.) – which leads to unhappiness.

Can we delink happiness completely from money? Well, why not? Happiness is a state of mind. Money can buy utilities which can buy comfort but happiness is not entirely guaranteed with comfort.

Having a loving family, friends, spare time for hobbies etc. – all contribute to happiness even though these are not something money can always buy.

I have come up with a simple formula for happiness – uses only one parameter – the time!

Happiness index = number of hours you do things you like / number of hours you do things you have to do

So if you spend 2 hours in your hobby which you enjoy but to do that you need to spend 8 hours at work (assuming you don’t enjoy that) and 4 hours at household chores, then your happiness index is = 2 / (8+4) = 0.17

You can discard your sleeping time for a consistent approach. More sleeping reduces denominator value which increases happiness. This matches with our real life observation, unhappy people usually can’t sleep well.

Wish you all the happiness you deserve.

What if people like the new normal?

2020/07/03

There is now a push everywhere to end the lock down arguing “lets get back to normal“.

But nobody is asking the question whether old normal is the best normal.

So what is the “normal”? Was commuting in packed trains a normal thing? Or getting stuck in rush hour traffic is normal? Rushing to school every morning is the normal?

There is no denying the fact that overall creativity of the population has flourished. I observed this empirically based on how many in friends and family circle started writing poems, stories, paintings, drama and much more.

I myself wrote an app for the masses (download link in the right hand side) of this blog.

All these could have been very difficult, if not impossible, during “old normal” way of working. By no means people are working less productively. In fact, productivity of people have increased because people are wasting less time in office (well they can’t as they are not travelling to offices).

Not all work can be done from home. True but there are plenty of works which can be done remotely.

Those who are advocating loss of productivity when working remotely, are actually fearful of few things:

  • Office based politics – often the perception of hard work is more important than actual metrics of the output. In a physical office, it is much easier to show off your input. This gives an extra advantage for extroverts. Whereas in lock down, introverts are in slightly better position as they can flourish their creativity (both work and personal life) without interruptions.
  • Lack of team building / socialisation with colleagues – yes, this is missing while WFH. But why the assumption is most people actually enjoyed it? After work socialisation is often enjoyed by younger crowed in large towns (e.g. London). There are plenty of online socialisation meetings happening. Though I admit not everyone enjoys online socialization.

Now we must tackle the big issue – the loss of jobs. Corona virus pandemic has led to unprecedented job losses around the world and worst is yet to come.  Some industry segments (like hospitality, travel etc.) are affected more than others.

When a big change happens, there are usually 2 ways to counter it – either adapt or resist. Most people are in resist mode and argue everything should go back to old normal mode.  But the winners would be who are ready to adapt and embed new normal culture.

Plenty of businesses have adapted very well. Most desk based jobs are already happening remotely. Many schools have started teaching remotely. While the experience is slightly different, there is no proof that it is worse than old normal.

If in real life people work from home, why not make it mandatory for schools to also teach remote at least 1-2 days per week after life goes back to old normal?

Why people who started to like the new normal should be forced to go back to old normal?

One big issue of accepting new normal is the way we measure well beings. It is roughly on money also known as GDP. But GDP is detached from human wellbeings. One can earn a lot and still be miserable. Many of the high earners actually discovered how they enjoyed being out of rat-race.

I appreciate this is a sensitive and somewhat controversial issue but Darwin said it is not the most intelligent who survives but the most adaptable create survives on the cycle of evolution.

So let us be realistic and assume that life will not fully go back to old normal and better not to force people to go back to old normal. Let us focus on rebuilding our economies and well beings be embracing the new normal.

Everyone should be given a choice of whether they want to go back to old normal or enjoy new normal (or even best of both worlds by mixing old and new normal).

All the best to humanity.

 

 

 

Why A380 failed?

2020/06/15

In spite of being an engineering marvel, the mighty Airbus A380 was a commercial failure.

This is because A380 was designed for hub-and-spoke aviation model. In this scenario, it was envisaged that passengers from smaller airports (= spoke) would fly to larger (= hub) airports and from there they would fly on A380.

But this operating model is no longer popular. Passengers now prefer to fly from point to point directly. Comparatively smaller aircrafts like Boeing B787 or Airbus A350 are suitable for this model.

In fact, the operating cost of A380 is more than two B787 combined operating cost! This makes B787 lot more sensible to run compared to A380.

The aircrafts like B787 has very long range too. This makes long distance point to point flying model commercially profitable.

How life changes pre and post pandemic

2020/04/14

How the world is changing post Corona virus pandemic?

The table below and the attached PDF presentation explains the life before and after the Covid19 pandemic.

View this document on Scribd

Post Pandemic World

Parameter Pre pandemic Post pandemic
Way of working Work from office Work from home
Learning, teaching From school, university etc. Online learning
Meetings Face to face Online
Seeing medics Doctor examines patient physically Doctor examines patient over video conference for basic diagnosis and prescription
Shopping Physically in store (especially for grocery) Online grocery shopping
Commuting Car, public transport – more fuel use Not necessary due to home working – less fuel use
Social visits More Less
Events – concert, sports, movies Mostly physical visits Less physical visits or watch online only
Perception of prestigious professions Celebrities, politicians, high paid jobs Key workers e.g. medics, delivery drivers, supermarket workers etc.
Healthcare Less focus on national healthcare More focus on national healthcare
Healthcare – personal Gym Gym at home, walking, running, cycling
Political beliefs Predominantly capitalistic Shifting towards socialism
Personal freedom More Less – movements could be legally tracked

This blog was written during lock down period and reflected what happened during the lock down period, but some of the trends mentioned below likely to continue once lock down is lifted.

 

Post pandemic economic recovery

2020/03/26

1. The Problem – micro view

1.1. Theory

Let us explain very basic economic theory first. Below is Cost Volume Profit graph.

Pandemic1

Figure 1

Every business has cost, with 2 main components – fixed cost and variable cost. Fixed cost includes things like cost of machinery, premises, staff salary etc. Crucially, it also includes interest payment on loan – assuming all businesses have some debt which is loan taken from bank and/or investors to raise the capital. The variable cost is often proportional to revenue or sales.

Here we shall use the term sales and revenue interchangeably, to denote earning of the business.

If a business procures more number of product units, higher quantity raw material needs to be purchased – so this is how it linked with revenue. So this is the variable part of the cost.

The earning is shown by blue line. The expense is shown by red line the above graph.

We know the simple formula, Profit = Revenue – Cost

If profit is negative, then it becomes loss. This is same as saying, Savings = Income – Expense.

A business needs to pay tax on profit – so tax is also a cost. But for simplicity, we leave tax out of our discussion.

The point, where revenue becomes more than cost, is known as breakeven point. Until the business reaches this point, it is loss making. Once business is way past breakeven point on the right, it is profitable. In fact, all business tries to move as much right as possible for sustained growth and profit.

A business can borrow more (cost goes up as interest payment) to increase revenue (more sales), resulting in more profit. Now, how much a business needs to borrow in order to increase profit is a complex calculation which depends on type of industry, business strategy, market condition and many other factors.

At normal time, all businesses operate in an equilibrium. Business pays interest to bank, buys the raw materials from suppliers, manufacturers product in factory, pays salary to employees and sells products to customers who pay the price and so on. For a service based business, the theory is still the same. Here, instead of producing items in factory, the company sells intellectual expertise of their employees.

1.2. Recession

Let us see what happens in a recession. The pandemic has led to people being fearful and cities have been locked down to encourage social distancing. As a consequence, all sales have gone down (except very few like supermarket shopping where people are stockpiling for the Armageddon).

Due to very low (or nothing at all) sales, the revenue curve will flat out. However, the fixed cost component will remain mostly the same. This means, for a long time, the business will not make any profit.

Pandemic2

Figure 2

This is shown in above figure. Note that we are now showing time on horizontal axis.

While cost of the business also falls due to less sales, the revenue falls rapidly as people are scared away from purchasing. This will drive down the businesses into further loss.

How quickly a business comes to grinding halt, again depends on industry, geography, mitigation factors etc. For example, airline industry, which has a high fixed cost (as the cost of flying a plane with one passenger vs 300 passengers almost the same) are already near bankruptcy.

For a person, disaster does not strike as soon as he or she loses job (i.e. salary stops coming). This is because the person can still sail thru troubled times using own savings. Here savings is the money in bank saved during good time.

However, a person becomes bankrupt when his/her savings become zero and cannot pay for anything anymore.

Similarly, a business does not go bust just because it is making loss. A lot of businesses, especially those like start-ups, make losses during initial years. However, they carry on as long as investors pump out money to them. This is cash flow.

A business goes bust only when it runs out of cash.

In normal time, a business can increase their cash reserve by adding the profit to their cash reserve.  Every business has a finite amount of cash reserve. The amount again depends on industry, strategy, demand etc.

Also as the demand falls during recession, the supplies must also go down as more competitors now try to get a slice of same shrinking market. This further drives many businesses into downward spiral of lower sales thus more losses.

As businesses go into losses, they start laying off employees, which collectively reduces further demand on the market, leading to panic and mayhem.

2. The cause – macro view

2.1. Pre-pandemic

Here we shall take a step back and discuss how the world economy (mostly capitalism or market driven economic model) works.

Our economy is underpinned by the banks and the government. The depositors (i.e. common people) deposit money in the bank. Let us say a bank collected £1000 from depositors. The bank will pay a tiny interest to the savers. Bank will earn money by lending money to borrowers (for starting business, buying house etc.) at a higher interest. The different between interest earned and interest paid (from bank’s point of view) is the profit for the bank.

But the twist is fractional reserve. This is adopted almost universally worldwide. Under this model, if a bank has only £1000 deposit it can create more money out of thin air, while lending. So basically the banks are allowed to lend more than the actual money they have. In our example, a bank can lend £10000 to borrowers! This means, the bank has created 9 times more money (1000 + 9000) than the real deposit amount. This fictitious money is then lent to people and businesses. This fictitious money is the debt.

Our economy is debt driven economy.

In olden days, when gold was used as currency, fictitious money was not possible. Once the banks introduced fiat currency, by abandoning gold standard, banks got the freedom of create fictional money and debt.

The fiat currency is what our bank notes are. These have no intrinsic value (unlike gold etc.) but people use it as if it has purchasing power purely driven by trust as guaranteed by the government.

Creating this fictional money is not necessarily evil per se. Had the bank not created fictional money, it could have lent only £1000 (in our example) to people who wanted to buy houses or start businesses. However, by creating fictional money of £9000 more, bank is able to lend to more people, enabling more people to buy their dream houses or fund their own businesses. In theory, it actually elevates more people into better life. When we say better life, this is by more consumption of goods and services. With more transactions, nation’s GDP goes up.

As long as continuous growth is happening, everyone is happy in this model. This is why all politicians and big businesses love growth. It makes everyone feel good.

Thus, in a debt driven economy, more money is analogous to having better life.

2.2. Post pandemic

Things become dramatically different during and after pandemic!

As everyone borrows more and more, the debt burden increases. Remember, all debts are to be paid off someday! In normal time, people do not think much for paying of debt. The house price mostly goes up. So even if house owners default on mortgage, the bank can repossess the house and can sell at a higher value than outstanding mortgage amount. So even if individual business or people are bankrupt, the country level economy (known as macro economy) pulls thru as usual.

During pandemic time, the revenue of most businesses fall so low, that most business cannot make profit at all. The business will also default on their loan payments and soon become bankrupt. With millions of people becoming jobless it will be a national calamity.

The government, as in any recession, usually intervenes. This is done by financial stimulus like printing money (known as Quantitative Easing) and reduces interest rate to encourage business to borrow money and sail thru the cash flow issue.

The important part is, government will give further loans to businesses. These loans are meant to be paid back when situation improves.

This will lead to a situation depicted in the next graph.

Pandemic3Figure 3

The key message here is that with even more debt (on top of existing debt) most businesses will not be able to see profit for a very long time. So they are going to see cash flow problem again after some time, requiring another bail out. This will lead to even more debt – which will increase the fixed cost even more as interest payment will also go up and this cycle will continue for foreseeable future.

No business can run in loss forever (only exception is some nationalized public services). Unless the shareholders/investors see some return on their investment, they will not be interested in paying money to the business.

This is a deflationary economy, dreaded by all. Whereas deflation did happen in the past, this time, clubbed with the pandemic (i.e. loss of lives) the blow will be huge.

The philosophy of the capitalism is survival of the fittest. In capitalism, people with more money are considered better off. People with more money can have a better life. But a pandemic, affects rich and poor equally. Hence, if money does not improve people’s lives, people may not be willing to increase their earning more. Thus the fabrics of run after money philosophy fails!

Although, even during pandemic, the rich and powerful in somewhat privileged as they are able to get tested for COVID19 whereas normal people cannot unless they are serious ill and rich people can still buy essentials at an inflated price from black marketeers.

3. The solution

I admit that I do not know what the solution is. If I were that intelligent, I would have received Nobel prize by now. But still, we can make some attempt to find a solution that may work.

One option could be writing all the debt off for everyone. This means everyone can start with a clean slate. This will help majority of the people. But this will not go very well with the banks and the government. Why?

Because in debt driven economy, the control of economy in the hands of privileged few, namely the banks and the government. If debts are written off, their own flow of income will stop. They will also not be able to control the population saying work hard else you will die starving.

From historical times, society has mostly been unequal rather than equal. Even in Ancient Egypt, there were rich and almighty pharaohs and slaves who served the riches. As the folktales say, when Moses tried to free the slaves, the pharaoh refused. Among many other tricks, the God of slaves unleashed a plague which affected pharaohs’ family only and spared the slaves’ families.

The analogy here is illustrating that rich and powerful always controlled the masses – in olden days with fear of death and in modern days’ fear of (lack of) money!

Usually in recession the government often bails out (i.e. provide cash to big businesses as loan) but this seldom goes to employees. Big corporations claim these saves the jobs, but alternatively, government can help everyone by giving them money directly in the form of Universal Basic Income (also known as Unconditional Basic Income i.e. not means tested). The unconditional basic income is claimed to be easier to manage than means tested benefit system. If this scheme is adopted, the big corporations can simply fail if they cannot run their business efficiently.

The other path could be gift economy. It mode of exchange where valuables are not traded or sold, but rather given without an explicit agreement for immediate or future rewards. This is like catching fish to eat but not catching too much to make a big profit. This model already works in Open Source Software where people write software for others for free and users can donate if they wish. Couch Surfing as another such example where people stay in others’ homes during holidays without paying anything.

Designing an alternate economy model is extremely complex and beyond the scope of this article. My aim here is to drive the thought process of everyone so that collectively we may invent something more egalitarian than greed driven economy.

 

What is Keynesian economy?

2017/08/03
Keynesian economy is about the relationship among following 3 parameters
  • Unemployment
  • Growth (economic)
  • Inflation
It argues that you can control 2 parameters which would influence the 3rd parameter.
During  a good economic growth [case 1]
growth is high, causing unemployment is low,  which in turn causes inflation to become high
During an economic downturn [case 2]
growth is low, causing unemployment is high, which in turn causes inflation to become low (or could cause deflation)
In ideal scenario, growth should be high, unemployment should be low and inflation should be low too.
Keynesianism states that Central Bank should do the opposite of what public is doing.
Thus, in case 1 above, government should save money and try to control inflation (because if more money is flowing to economy, the inflation would rise).
Hence, in case 2 above, government should spend money by investing in infrastructure etc. which would drive economical growth leading to low unemployment
Keynesianism always gives priority to low unemployment over low inflation. Thus, it makes poor less poor and rich less rich (a reason why riches often dislike Keynesian economy).

Why rupee always falls against dollar, pound, euro?

2013/06/26
Historically, Indian Rupee always fell against strong currencies like Dollar, Pound or Euro.

 
During mid of 2013, rupee had almost a free fall. It now equals 1 $ = 60 Rs or 1 £ = 93 Rs.
 
So why suddenly rupee fell so low?
 
One reason is better economic outlook in USA. Large scale investors are now expecting better return on their investment from USA. Thus, their funds are going towards USA and less amount is coming to India. For many day to day products, India needs foreign currency (in the form of $, £, € etc.) so less foreign currency coming to India means more demand for $ £ € to buy goods/raw materials from outer world.
 
Incidentally, weakening of rupee should make export much more attractive as same $ will now buy more Rs. However, there is a catch. To produce many of those exportable goods, businesses need to import raw materials from outside India, which requires foreign currency! Since such import is getting more expensive, resulting goods (manufactured in India) is also becoming expensive – thus eroding the benefit of weakening rupee for export.
 
Weakening rupee also sometimes prompt foreign importers (who buy exported goods from India) demanding a re-negotiation on price (as they claim weakening rupee will benefit Indian exporters also we have just seen that may be the case always).
 
Non residents Indians (NRI) are happy because if they send foreign currency to India now they will get much better return (i.e. more Rs for every $ sent). However, such fun is only possible if they don’t want to take money out of India at a later date. If NRIs send money to India and invests in a scheme in India, when they convert money later from Rs to $/£/€, chances are – due to rupee weakening even more, they will get a very poor return.
 
So, in short, weakening rupee is not a good news for investors especially those who want to invest foreign currency in India and then want to convert that to their native foreign currency once their investment is matured. If rupee falls further between the time they invested and investment matured and considering rate of return and inflation, they may even get same/lower than what they originally invested in $/£/€ terms!
 
In theory, Reserve Bank of India (RBI) can intervene by imposing a temporary limit of foreign currency going out of India but that will irk lots of common public and goes against free market economy principle (which India has adopted since 1990s).

Why Microsoft created Windows 8 Metro interface?

2013/04/21

There was nothing wrong as such in Windows 7. However, unless businesses can make working things obsolete via upgrade to newer versions they won’t make enough money!

So Microsoft introduced Windows 8. However, unlike previous versions of Windows, they tried to force new Metro interface which is more suitable for touch screen devices. Most users were unhappy and wanted to revert to Windows 7 like interface. But why Microsoft introduced it in first place?

Metro and legacy Windows applications are not compatible. An app designed for Metro interface won’t run in traditional Windows environment. Metro apps can only be downloaded via Windows Marketplace. Now this is a very crucial difference. In earlier Windows, you could download apps from literally millions of websites. However, in Metro interface, your only option is Windows market place. This is similar to Apple’s AppStore concept. Microsoft did at because they wanted to capture 30% of all app sales. They can only do it if those apps are sold using their own app store only.

The trouble for Microsoft started when consumers did not like Windows 8. In fact various statistics show PC sales have been slowed down because consumers shunned Windows 8. Now Microsoft is caught between devil and deep sea. Backtracking from their Metro interface means potential loss of profit in future and acceptant strategic failure. However, if they continue to force Windows 8 Metro interface to consumers they may face continued backlash.

This is also the reason why Microsoft does not offer any option to start Windows 8 straight into legacy desktop! Because they want consumers to adopt their new Metro interface. Some consumers are using third oath apps to make Windows 8 behave like Windows 7.

But now you know why Microsoft did not offer these simple options themselves!

Why trading statements put negative values within brackets?

2012/09/06

If you have ever looked at a company’s trading statement (usually profit and loss statement), you must have noticed that negative numbers as printed within brackets like (10)% – rather  than -10%.

This concept originated from an era when these statements were typed using typewriters. Usually negative figures mean loss, which require special attention. Using brackets mean person typing it has to type two characters – thus chance of missing a negative number is lower than if it was marked by a single character like minus sign.

Historically same tradition still continues. Even though we now have everything computerized, this trend did not change – largely because in Excel it is easy to make negative numbers formatted within brackets without causing any problem in calculation (where they are automatically treated as negative values).