My roomie and myself had a discussion on economy of countries, India and US in particular. My roomie has a good understanding of the basics, he spoke about when to buy property, how does bank works etc. Here are the excerpts of our conversation.
Thumb of rule is that anything that goes high should come down one day, economy is the same and any industry is the same. A very simple example is the IT slowdown or the burst that happened in the period 2K. OK now when you take a closer look at today's Indian economy, we know the stronger rupee and positive India. But so is the soaring prices of land and houses, obviously when there is an economic progress/boom every monkey tries to make the best out of it. And the top players are real estate business men. So why do they increase the price and still people buy? (could call it a hype?) People are made to believe that the economy will continue to grow stronger and waiting further more is not utilizing the capital they poses. (I'm talking about the ordinary middle class man here) And so does bank increase the loans and rates.
Have you ever wondered how does bank give interest rate, though always the deposit are more than the spending, in simple terms the people who deposit are always more than the people who get loan from banks. Yes, so what does banks do? In order to make profit and give money to their investors, in turn banks invest in stock/trade (recent times) and from the old days the preferred area is real estate. So what happens if the economy is good, the banks investment in real estate will be good and they keep their profits. Say what happens if the economy is slow/sluggish/going down, there are very less people to buy the lands. which will in turn cause the bankers not to expect the ROI (Return Of Investment). Banks do not invest directly themselves, mostly they go by big players in the particular industry, in our case say real estate business leader abc holds bank xyz money. Then abc will tell xyz that i cannot give the money back because no one is ready to buy any property and all the money invested is sitting idle now. So the banks go under loss. Then a governing body comes in to picture to rescue the situation, automatically forcing the interest rate and increasing the flow of money in the market, so that the people will spur the economy again.
So whenever the economy is booming, it will hit a threshold and come down and the cycle repeats. But the threshold is a very speculative level here, no one really knows.
But there will be a set of people, I call the watchers here; will be having money ready to invest and they will exactly wait for the economic slow down and go and grab the things, this second set of people will inturn provide as a supplier of money and the number will increase to grow to make them the set one and then this vicious circle will keep going on and on and on.
One small story to end, the context here is people and the money market.
A merchant comes to a village and offers people 10 rupees for each monkey they catch. The villagers were so interested and they all start catching the monkeys, which are in huge numbers in their village. A month passed by and poor villagers who have not seen money started seeing it now. Now that the monkeys are not much available in the village, the merchant comes for the second time and tells, now i will give you 20 rupees for a monkey catch. Part of the villagers who still wanted money started reaching out of the village in and around and got some monkeys. Now the merchant comes for the third time and tells I will give your 30 rupees, not many are interested as they have already seen money now. But still the few of them went out of the village and caught monkeys, again the merchant comes and offers 40, for which a tiny group of people went out (really far) and caught monkeys and they were exhausted. The merchant comes again and tells now the offer is 50, no one is interested, but he also tells here after my assistant will take care of the business with your village. Assistant encourages the villagers, the fed up villagers say there are no monkeys, then the assistant tells OK, lets make a deal here. If we cooperate, we can earn money. The villagers asked how? the assistant says we have to cheat the merchant, I will get all the monkeys without his knowledge and you can give him as new monkeys. The assistant says, you have to give me 35 per monkey that i give you and you will make 15 since the merchant will give you 50. The assistant came to the village gave all the monkeys and got 35 for each monkey. But the merchant never came back. Finally the merchant and assistant made more money leaving all the monkeys to villagers. The villagers lost the money.
The moral is in the system, we forget where we get money and where it goes...
Think and act SMART.