[vivekiny2k]

Let me try to explain with an illustration.

we know banks can create money (not wealth). e.g. if I deposit 100 Rs in bank, legally bank is allowed to lend may be 19 times to the market in terms of paper money, because it's required to keep only 5% liquidity as reserve. Thus the supply of money increases. This money multiplier works pretty well when the money is lent to business with the right scope and future. which is why banks do a lot of investigation before lending.

Money multiplier - Wikipedia, the free encyclopedia (India raised it to 5.75% last year)


Coming back to the point, imagine everybody targets the same market, and takes loan from the bank, buys goods from the other people with loans taken on "supposed profits" in next few years as collateral, invests in infrastructure, and suddenly you have good roads, good food, good wine, people have great vacation and whatever else makes them happy.

And then everybody realizes the market is not big enough to sustain all of them. When savers realize they were sold these baseless dreams, they pull back their resources and the whole economy slows down.

Technically this was a bubble of expectations which increased the standard of life at a pace faster than expected and then slumps for a few years until everything comes back to normal.

yes, some people get rich in the process. Redistribution does take place. Some get hit really hard. But there is no denying that on an average the economy slows down going in recession for next few years.

The inflated salaries you see are also a part of problem, where they received what they did not deserve. Not because of some moral code, but because there were no sustainable profits to support such salaries.

[Samurai]

Originally Posted by tsk1979

Bogeymans are needed.
There is some recession, but not what it is made out to be.
Its somewhat of an excuse. Europe is seeing some crisis, again not has big as corporations would want you to believe
Attachment 859340

I am unable to find the chart upto 2010.

I am not sure what we are supposed to infer about current recession from a 6 year old chart.

Originally Posted by tsk1979

Corporate earnings, ceo pay, profits are up to record levels, yet production works pay has increased only 4.6%(inflation adjusted) in past 50 years

The comparison between executive pay vs worker pay shows only the decay of morality of among executives. It is no indication of economic/financial situation.

When US government gave cash bailout to banks, they happily gave themselves fat bonuses. Plain greed & lack of shame, nothing to do with economics or finance.

We can't keep bringing up corporate stupidity as anecdotal examples for explaining economic or finance. Often they are unrelated, and merely examples of principal agent problem.

[GTO]

Originally Posted by FanaticOnWheels

If I make a profit here, does someone else, somewhere, make a loss?

I have a somewhat related answer to this question. Think of a WIN-WIN situation.

Classic example : Google Search

You win, because you get the search results you want for free.

Google wins (profits), because surfers use its search engines and click on ads.

Advertiser wins, because he has gotten visitors to his website who might be interested in his product or service.

Thus, everyone profited and no one lost.

I'm going to get out of here and leave the gurus to discuss economics now.

[phamilyman]

Originally Posted by tsk1979

Figures don't lie, do they

Workers(employees) pay has risen by 5% in 50 years, while average CEO pay has gone up by 400%+

how do you explain this.

What samurai said.

Originally Posted by tsk1979

So I will reply to the original poster.
If the total amount of cash in world is constant, then if you make a profit, somebody else will make a loss.

If the total wealth increase in the world(eg GDP) is less than total salary increase of some people, some people will have to take a salary cut.
I guess I have answered the OPs question

No yaar. simply wrong. I will reply in detail to this over the weekend.

Originally Posted by Samurai

The comparison between executive pay vs worker pay shows only the decay of morality of among executives. It is no indication of economic/financial situation.

When US government gave cash bailout to banks, they happily gave themselves fat bonuses. Plain greed & lack of shame, nothing to do with economics or finance.

We can't keep bringing up corporate stupidity as anecdotal examples for explaining economic or finance. Often they are unrelated, and merely examples of principal agent problem.

Absolutely perfectly said. I couldn't have said it better.

Here is another example:
http://www.star-telegram.com/2011/04...#ixzz1fB2q2Wgn


American Airlines declared 'bankruptcy' even as it has $4.1bn in the bank and its CEO doles himself another bonus?!!

AMR Corp. Chief Executive Gerard Arpey received $5.2 million in total compensation last year, even though the parent company of American Airlines was the only major U.S. carrier to lose money in 2010.
Arpey's compensation grew 11 percent over 2009, boosted by an increase in stock awards and options that were granted in May.

Coming back to diamonds, it seems even diamonds are not subject to as much cartelization as I had originally believed. ALROSA - Wikipedia, the free encyclopedia

In August 2009 during the recent financial crisis, Russian Prime Minister Vladimir Putin announced the Russian government, via Gokhran, would buy $1 billion in uncut diamonds from Alrosa.[1] This was to support the Russian diamond mining industry while avoiding saturation in the global diamond market and thus further depression of diamond prices.

[bblost]

Originally Posted by FanaticOnWheels

Plus, if I make a profit, that means I sell something more than what it's worth, so someone is buying it at more than what its worth, so he, in a way, is making a loss? (Though this approach might be shaky).

Adding another take.

You buy a stone for Rs X.
Then you sell the same stone for Rs X *1000000.

But in between you transformed that stone into a master piece statue.

You still sold the stone. The person buying it has bought what at the basic level is still a stone.
But art...its value is that it has enriched the world in a way that is far greater than all the money in the world.

[roy_libran]

Originally Posted by GTO

You win, because you get the search results you want for free.
Thus, everyone profited and no one lost.

Almost there, but IMO, this sentence needs to be edited as follows:

You win, because you get the search results you want for free. But, You Lose, since you are going to pay for all of this, by buying something that you perhaps did not NEED (not WANT), aka Consumerism.

At the end, everyone else Profited, and customer Pays.

[msdivy]

Originally Posted by vina

Anyway, I think I have made my point - the subject is too technical and is of such nature that those who do know don't talk much and those who don't just rush in with their expert comments. I don't think TBHP is the right forum for this discussion, even after a thousand posts an average man from the street will not be able to find anything useful here

Though the subject of economics has evolved over a century, the concepts are surprisingly simple. For instance, unlike in engineering or medical, a person who has done basic course in economics can *understand* the theory proposed by the Nobel laureates. Again, there is nothing that stops from discussing and understanding better.

Originally Posted by tsk1979

If doing a MBA course taught you economics, you would not have the entire banking industry sitting on the road with a begging bowl.

A plenty of medical schools teach medicine, but still there many diseses for which there is no cure and people still die

Economics is a tool to understand whats happening around in the market. It doesn't provide any solution. Solution has to be found by people studying economics. Probably the people with begging bowls now chose to ignore the symptoms.

Originally Posted by FanaticOnWheels

If I make a profit here, does someone else, somewhere, make a loss?

Thats true in case of mostly-closed market like stock exchange which just deal in one product. Assuming you bought a share for Rs 100 & sold it for Rs 150, so these is a person who is buying at Rs 150. Your profit of Rs 50 is from his money.

But real world is mostly open market with multiple products and economic activity can happen over long time (like somebody might buy land or gold now & sell after 2 centuries). So its difficult to judge profit/loss immediately.
There are plenty of raw materials in nature (like crude oil, gold mine which is free). People process these and sell. Though the form of substance is changed, there is no concept of loss here, since everything happens within earth. Currency/credit card/DD are just a tools for economic activity. Central Banks in every country pump & withdraw money from market whenever they deem its fit. For instance, RBI does it (regularly these days) by revising CRR & other ratios. Year on year there is GDP growth and nobody is getting poorer. So if you make some profit, it need not necessarily mean somebody somewhere made a loss.

Originally Posted by vivekiny2k

URL="http://en.wikipedia.org/wiki/Money_multiplier"]Money multiplier - Wikipedia, the free encyclopedia[/url] (India raised it to 5.75% last year)

Money multiplier is different concept and is not related to profit/loss. With money multiple, the central bank can ensure many times the original money is in circulation in the economy. Just to give a simple example, RBI might lend Rs 900 (print Rs 1000 amount and keep as Rs 100 interest) to big banks. Big banks might lend Rs 800 to smaller banks (Rs 900 amount with Rs 100 interest deducted). Smaller banks might lend Rs 700 to money lenders (Rs 800 amount with Rs 100 interest deducted). Money lender might lend Rs 600 to people (Rs 700 amount with Rs 100 interest deducted) and so forth.
Big banks think they have Rs 900. Small banks think they have Rs 800. Money lenders think they have Rs 700. People think they have Rs 600. So there is Rs 3,000 (900+800+700+600) in the market. But RBI printed just Rs 1,000.

PS: I am not an economist. Please correct if any point is wrong.

[nayakrnr]

hope i'am not going OT here. but my 2 cents..

couple of days back i saw some program on history channel. They were calculating the net worth of the WHOLE OF U.S.A. they calculated it at 293 trillion $ !

I don't know how these people (economists) make such precise calculations. but isn't it silly & idiotic!

But, the opening poster is right about his question. Because I feel there is not a thing in this world that i purchase makes me think that i have paid a rightful price. Be it small or big, i always feel someone is making a lot of profit from my money. The problem with today's economy is that everything is overvalued for whatever it's worth.

I think i'am (LOSS)t here

[msdivy]

Originally Posted by nayakrnr

Be it small or big, i always feel someone is making a lot of profit from my money. The problem with today's economy is that everything is overvalued for whatever it's worth.

In economics there is nothing like fixed right price. The right price is the price buyer willing to pay the seller. This varies from buyer to buyer and seller to seller (even for the same product).

For instance, isuppli says bill of materials for iPhone 4 is $187.51. So what is the right price of iPhone 4 - $188? $200? $300? Apple sells unlocked iPhone 4 sells at $599. Since people buy it, that must be the right price.

[tsk1979]

Originally Posted by msdivy

TA plenty of medical schools teach medicine, but still there many diseses for which there is no cure and people still die .

A meltdown would a global pandemic which reduces the population of the world. Eg Spanish flu in 1918.

Last I checked, doctors are saving people who otherwise would have died. So quite a wrong analogy.

As for 6 year old chart, here let me give you latest charge,
I finally got them
CHARTS: Here's What The Wall Street Protesters Are So Angry About...

charts for your reference. Remember, these are all data, not opinions
First lets look at unemployment charts
letsstartwiththeobviousunemploymentthreeyearsafterthefinancialcrisistheunemploymentrateisstillattheh

anditsnotjustconstructionworkerswhocantfindjobsthemediandurationofallunemploymentisalsonearanalltime

Unemployment all around. This is one metric we can use to say, "RECESSION".

Now lets look at the money.

Recession should mean an overall reduction, overall market negativity, lower profits.
What if that is not the case.

The OWNERS, or the upper class, is seemingly not getting recession at all.
How.

Look at corporate profits


Maybe economy is growing and the corporates are losing money? Well that is not the case either. Corporate profits as percentage of economy.
corporateprofitsasapercentoftheeconomyareneararecordalltimehighwiththeexceptionofabriefhappyperiodin

If you see the above chart, you will see that the corporate profits have actually dipped only around 2008-2009, right now they are at an all time high. What recession

Now lets come to viveks query about wealth redistribution.


CEO pay used to be 50X of worker pay in 1950s, now its 350X (2006 data, could not find newer data)

Also look at average hourly earnings of normal people


So while corporate profits as percentage of economy has grown, wages as percentage of economy has gone down
inshortwhileceosandshareholdershavebeencashinginwagesasapercentoftheeconomyhavedroppedtoanalltimelow

Also look at the share of the top 1% in the pre tax income
ofcourselifeisgreatifyoureinthetop1ofamericanwageearnersyourehaulinginabiggerpercentageofthecountrys


Lots of other stats on that page.

Just go through them.

Recession came, and then corporates bounced back, with record earnings, but did the worker get a share of the pie?

Economics in classrooms of MBA schools may teach you a lot of theory, but all principals like

1. Demand and supply
2. Wage and skill distribution
3. Earnings vs standards of living

All this goes for a toss when you have a pretend free economy.

For example, competition is supposed to get you cheap broadband? right?

Unfortunately, in many parts of the world, in most of the areas you have duopolies or monopolies

Ditto in other fields

Through lobbying and campaign contributions, corporations can buy laws, restrict freedoms, and get away with anything.

Another factor which is touted is that the richest pay the most taxes!

Here is another chart on rich vs poor taxes. Richest pay the highest taxes because they earn the most
asthenationsrichestpeopleoftenpointouttheydopaythelionsshareoftaxesinthecountrytherichest20pay64ofth


I am no economist, but when I see the world economy, esp big ticket economies, after every recession recovery, the recovery of the worker is dwarfed in comparison to the recovery and rise of the owners.

[msdivy]

Originally Posted by tsk1979

Last I checked, doctors are saving people who otherwise would have died. So quite a wrong analogy.

About the analogy, almost all countries/companies have people who have studied economics. They make rational decisions. So for every failed company, there are thousand others who survived because they made right decision. Study of economics helps in making right decision and save the company, just like doctors save people with diseases.

PS: I am quoting few points where I have comments.

The OWNERS, or the upper class, is seemingly not getting recession at all.

For rich, their living needs form very small percentage of their earnings. They are not affected for their daily living but their net worth is down or their propensity to take risk might be affected.

CEO pay used to be 50X of worker pay in 1950s, now its 350X (2006 data, could not find newer data)

Maybe the CEO's role is valued more now. Possible reasons could be because there is so much information available that companies need someone who makes right decision. One wrong move can be deadly (like in Lehman Brothers, which went bust over a weekend).

For example, competition is supposed to get you cheap broadband? right?

Unfortunately, in many parts of the world, in most of the areas you have duopolies or monopolies

Duopoly or monopoly is the decision made by respective Govt.
Economics doesn't recommend monopoly or dupoly or competition. It just studies each of these and gives relative merits & demerits.

I am no economist, but when I see the world economy, esp big ticket economies, after every recession recovery, the recovery of the worker is dwarfed in comparison to the recovery and rise of the owners.

Probably the economists understand the situation better in 2008 than in 1930s, the centrals banks made right decisions & recession in 2008 was not bad as in 1930s.

Of course there are economists whose prescription are wrong, just a doctor's prescription can be wrong.

[roy_libran]

Originally Posted by tsk1979

I am no economist, but when I see the world economy, esp big ticket economies, after every recession recovery, the recovery of the worker is dwarfed in comparison to the recovery and rise of the owners.

Great post Tanveer. Thanks.

But, on this last point that you make, I do not see this as wrong, principally.

Reason: Risk-Reward ratio. The Owner is the one, who bears the brunt of Risk, and hence takes the Lion's share of the reward.

What is, however, debatable, is the extent to which the Reward Ratios between the Owners and the Workers, are skewed. This Reward Ratio is what has gone for a toss in the last two decades, as you demonstrated in an earlier post as well.

[Samurai]

Originally Posted by GTO

I have a somewhat related answer to this question. Think of a WIN-WIN situation.
.
.
.
Thus, everyone profited and no one lost.

Exactly, this is what most people fail to grasp.

Economics is not a zero sum game. In fact, it is opposite. Economics strives to maximize benefits for everybody who participates in the transaction. However, it is not easily evident to everybody. Therefore, it leads to misconceptions like one can profit only at the cost of others. Thanks to this misguided idea, poorer people start hating the richer people even though their income sources are unrelated.

As before, let me take a very simple example.

X is a farmer, who grows rice.

Y is a goat herder, who milks the goat and also slaughters them for meat.

Let's say currency doesn't exist for now.

X can manage to live just eating rice. And Y can manage to live just eating meat and drinking milk. But that will really limit their food options. However, they are neighbors, and they decide to barter portion of their food. As a result X gets to eat rice + meat + milk. And so does Y. Can you tell me who is the loser here? None. Both benefited by the exchange. Both improved their diet by this transaction. This is the Win-Win situation.

Now let's take up little more complex situation I used eariler:

Consider a country X, started by 100 people, there is no currency or economy of any sort. Among the 100 people, they have various skills and they start making use of those skills.

Some are hunters, so they go hunting and bring the food.
Some are builders, who build shelters for people to live.
Some are tool makers (carpenters & blacksmiths), who make tools and weapons needed by others.
Some are foragers, who collect various items from the forest, which can be used as food or make to cook food.
Some are artisans who make leather clothing and other items of decoration.
Some are cooks, who can cook all kind of delicacies.
Some are people with varied special skills like healers, entertainers, managers, etc.

If you look at the above list, you will note that everybody needs everybody else, but not to the same extent. In the absence of any currency, they have to do lot of bartering. That's what they did in the early days. Rare items had more value, common items has less value.

In the above scenario, transactions are absolutely necessary, or most would starve or run around naked. Each person gains by exchanging his goods with others. The only loser will be somebody who had items that were not needed by anybody.

Currency was introduced to make the above transactions simpler. That is when question of profit & loss came into picture.

Now let's go back to the original example with currency.

X spends 1 rupee to produce 1kg of rice.
Y spends 5 rupee to produce 1kg of meat and 1 rupee to produce 1lt of milk.

X sells to Y 20kg of rice at 10 rupees/Kg (Rs.200 purchase)
Y sells to X 3kg of meat at 50 rupees/kg and 5lt of milk at 10 rupees/lt (Rs.200 purchase)

I intentionally made both purchases same amount so that it can be comparable to bartering without currency. In the absence of currency we agreed that there was no loser. This time we can calculate it. X made Rs.190 in profit and Y made Rs.180 in profit. Still there is no loser. Both made good profit and spent it on food to enrich their diet.

Some of you might wonder didn't X & Y not lose 10 and 20 bucks respectively at the end. It looks like that only because I equated their purchases. But keep in mind that they will sell to other buyers too, and may not spend all the profit on buying food. It is a loss only if they had spent more than the selling price. Here they sold it for 10 times the cost.

Originally Posted by tsk1979

Economics in classrooms of MBA schools may teach you a lot of theory, but all principals like

1. Demand and supply
2. Wage and skill distribution
3. Earnings vs standards of living

All this goes for a toss when you have a pretend free economy.

This is what happens when you start guessing what is taught in Economics classroom. Economics addresses all kinds of economies, not just free economy. There is no perfect free economy any way. The governments are always interfering with it using fiscal and monetary policies to meet their own goals, even in the most free country.

[tsk1979]

Originally Posted by roy_libran

Reason: Risk-Reward ratio. The Owner is the one, who bears the brunt of Risk, and hence takes the Lion's share of the reward.

What is, however, debatable, is the extent to which the Reward Ratios between the Owners and the Workers, are skewed. This Reward Ratio is what has gone for a toss in the last two decades, as you demonstrated in an earlier post as well.

Yes, the risk reward ratio has gone for a total toss.
Risk is transferred to the small guy now, without the rewards.

A guy with 50 million dollars losing 1 million loses more than guy making losing 80,000$ out of 100,000$, but if you look at the loss, the little guy, while making less loss, actually lost most of his earnings.

So 80000$ loss is much less than 1 mill$ loss, however, in income terms, the small guy actually suffers much more.

Recent examples, a guy on the forum informed that many companies made 1 saturday working to compensate for $ falling. With $ touching 54 now, none of those companies are offering extra holidays.

So risk reward ratio has gone for a toss.

The worker is getting screwed more and more. Business who lose money are compensated from tax payers money(sops, and bailputs), so where is the risk, when you will get the money back.,

However, guys losing jobs and their entire savings aren't getting much back!

[GTO]

Originally Posted by roy_libran

But, You Lose, since you are going to pay for all of this, by buying something that you perhaps did not NEED (not WANT), aka Consumerism.

Well, if that's the case, maybe we should stop visiting any area with stores (similar to an online website) or walk into a store (visit the website). Google's not holding a gun to your head to buy from the link you click on. Remember, you get the search results without clicking on the links. And even if you DON'T buy anything, the merchant still pays for the click.