Time for some economics!!

I received this great email from one of my friends.Very interesting..

Don’t worry this article doesn’t use terms like Commodity market or debt to equity ratio or any other term that you hate to read in your business newspaper.
This is really a good and simple explanation. Please give 5-10 minutes of your free time to read it, its worth.

ANECDOTE:

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar.

The net asset of the country = 3 dollar.

3) C thought that since there is only one piece of land in the country and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.

A has a loan to C of 1 dollar, so his net asset is 1 dollar.

B sold his land and got 2 dollar, so his net asset is 2 dollar.

C owned the piece of land worth 2 dollar but with his 1 dollar debt to A, his net asset is 1 dollar.

The net asset of the country = 4 dollar.

4) A saw that the land he once owned has raised in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, a now owned a piece of land that is worth 3 dollar. But since he owed B 2 dollar, his net asset is 1 dollar.

B loaned 2 dollar to A. So his net asset is 2 dollar.

C now has the 2 coins. His net asset is also 2 dollar.

The net asset of the country = 5 dollar. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollar. The payment is by borrowing 2 dollar from C and cancellation of his 2 dollar loan to A.

As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar.

B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net Asset is 2 dollar.

C loaned 2 dollar to B, so his net asset is 2 dollar.

The net asset of the country = 6 dollar. Even though, the country has only one piece of land and 2 Dollar in circulation.


(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blowed. An evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan? There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only."

A also thought the same.

(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset becomes -1 dollar.

C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating.

The net asset of the country = 3 dollar again.

Who has stolen the 3 dollar from the country? Of course, before the bubble burst B thought his land worth 4 dollar. Actually, right before the collapse, the net asset of the country was 6
Dollar in paper. his net asset is still 2 dollar, his heart is palpitating.

The net asset of the country = 3 dollar again.

(9) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now.

A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset is 0 dollar. ( B lost everything ) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) The net asset of the country = 3 dollar.

****************End of the story***************************
Now the analysis is below.

There is however a redistribution of wealth.

A is the winner, B is the loser, C is lucky that he is spared.

A few points worth noting -

(1) When a bubble is building up, the debt of individual in a country to one another is also building up.

(2) This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.

(3) An over damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.

(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.

(5) If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.

(6) When the bubble was in the growing phase, everybody made money.

(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.

(8) Instead of land, the above applies to stocks as well.

(9) The actual worth of land or stocks depends largely on psychology.

Forest Case: An analysis by one of my friend (who does not wish to be named)

Forest Case: What Relief are we talking about for Common Man?

Who is the sufferer? Common man like us, who have been staying here for 4 decades or who have invested in house and paying Pre-EMI installments for last few years. (Without knowing whether he will get possession of the house)

Developers have already build complexes and handed over to housing societies & in case of under construction projects it is the people’s hard earn money or loan taken from banks, it is not developers money at stake.

Government would be responsible - if something like this happens
Bigger Banking Crisis: if all the families staying in the affected areas stop paying EMI - 1 lakh families already staying & plus another 75000 families who have invested in house and have taken loan from the bank as per the progress of the development. (Let the state government pay for all the mistakes they have created)

As per today’s scenario normally all banks processing housing loans have rigours check list before they start processing the loan disbursement to the developers (banks normally advertise like “approved project”) -why should people pay to the banks as anyway the flat does not belong to them it belongs to the forest department and let the forest department pay all the EMI’s or the loan amount disbursed for under construction projects.

Few Questions that needs to be answered by the government bodies.

It has been almost 2 years (since May 2006) that discussion are been going backward & forward from Supreme Court to High Court & again to Supreme court to check the validated whether the land belongs to forest department or no.

Why was Government building infrastructure like roads, drainage, collected taxes like property tax, water tax, BEST giving power & plying bus for 50 years in these areas
What was forest department doing for 50 years when the development was happening?
Why was a stampduty & registration amount collected by state government?
Why did the BMC approved all the development plans
If Government departments are not integrated? It is not our mistake.
What prompted them to take action now?

I believe that It is high time government resolves this issue for the common man (for no faults of there’s) for all the people staying in these colonies & people who have invested in projects.

Unusual Use of RTI Act:Interesting

Today I came across an interesting news in a Marathi newspaper.It was about an unusual RTI request made to Pune collector office by an applicant below poverty line.

Govt of Maharashtra has started citizen services delivery via single window through SETU scheme some 5 years back.These SETU center are located at each Tehsildar and collector offices across all districts of Maharashtra.Citizens can get the services and certificates like caste certificate,domicile certificate,income certificate etc etc through these centers.

This particular applicant in Pune filed an RTI to collector office Pune and requested the entire data and the supporting documentation of ALL SUCH SETU applications made by citizens at Pune SETU office in last 5 years!!!Please note that a typical such application for example one for caste certificate requires supporting documentation of at least 10 pages!..

In one day a typical SETU center receives minimum 50-60 such applications..and more when there is a heavy demand for certificates in June-August period when schools and colleges do ask for such certificates for admissions.So one can imagine ,what will be the number of pages collected in 5 years.....

So collector office calculated the cost of giving such information which came to Rs.13.5 Lakhs!!..However the real problem came when administartion filed the reply to the applicant.Generally,the applicant has to pay Rs 2 per page of information,but as per the RTI act,applicants below poverty line are to be provided the information free of cost...

So now collector office is in a fix and has requested for special aid to Govt for making this information available.

Such incidences also show that the act has been grossly misused and its effect is diluted.
Please free to put in your comments!