September 13, 2019 Friday

Bedtime Story 

Money Multiplication

The other conclusions of the 1972 report titled “The Limits to Growth” were as follows:

Given business as usual, i.e., no change to historical growth trends, the limits to growth on earth would become evident by 2072, leading to sudden and uncontrollable decline in both population and industrial capacity.

Global industrial output per capita would reach a peak in around 2008 followed by a rapid decline.

Global food per capita would reach a peak by about 2020, followed by a rapid decline.

Global services per capita would reach its peak by about 2020 followed by rapid decline.

Global population would reach its peak in 2030 followed by a rapid decline.

While the report has its fare share of critics (the economists beings its greatest vilifies as expected) since the predictions to some extent have not been exactly accurate.

Yet increasingly and off late its conclusions are being seen as wise reminder why we apes need to mend our ways and veer away from the path of “business as usual”.                 

The compounding and geometrical progression – much like for the grains of wheat on the chessboard and water lilies on the pond - works for money going through fractional-reservation system in banking series and thus becomes a powerful tool for money multiplication.

But there are drawbacks to credit creation particularly through the fractional-reservation system as the banks end up lending out far more than they keep in as reserves hoping that it’s a perfect world where loans will be repaid with interest and profit will be made. 

When a bank creates credit, even though it is creating money, it is also creating a situation when it owes money to itself.

If it issues too much of bad credit, meaning too many bad loans on which the debtors have defaulted and have therefore become irrecoverable, then the banks risk of becoming insolvent or going bankrupt.

In Indian scenario this is a common occurrence with the state banks (the news of non-performing assets in state banks is a recurrent theme) with huge loans often get defaulted.

Many a times the credit takers have not merely defaulted due to business failures but systematically siphoned off the loaned money through a series of shell accounts to diffuse the movement of money being traced to the original source.

Bank loan frauds have truly come of age in the last decade with Hindu businessmen finding it the best way to attain wealth; any other meritocratic way is just too much of consistent hard work and ruthless discipline that lacks the glamour we Hindus lust for.   

After all, what is the point of attaining wealth if one has to keep working hard for it, isn’t it?

Two sensational cases of bank frauds that have caught the media headlines recently in India are the Punjab National Bank Scam and the Sterling Biotech Limited and Sandesara Group Scam.

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

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Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

    

September 12, 2019 Thursday

Bedtime Story 

The Second Mathematical Problem

“Would you rather have a million dollars or the sum of a penny doubled every day for a month?” 

A quick un-thoughtful answer to the above question would make many regret later on and which demonstrates the counter-intuitiveness of exponential growth even if the beginning is very humble or specially so.

The second mathematical problem concerning geometric progression and exponential growth is the water lily problem which poses the question to children in the following manner (it is not particularly a problem that is suitable to be posed to adults in interviews or exams as it is relatively much simpler in relation to the wheat/rice and the chessboard problem):

The children are asked to imagine a pond with water lily leaves floating on the surface.

The lily plants grow in such a manner that the population of the floating leaves doubles in terms of its surface area covering the pond every single day.

If left to grow by itself the leaves will cover the entire pond in 30 days and thereby become strangle the life out of other living forms (ignore the biological incorrectness for the sake of this problem).

To begin with the area covered by the leaves is small and hence it is decided it would only be sensible to cut down these water lilies when half the pond is covered and not every day.

Now the question that is posed to children is that when it takes 30 days for the pond to get totally covered on which day is the pond half full so that cutting of the lilies can begin? 

You will know the answer and hence I had said this is a childish question and yet at the same time it serves as a powerful tool to demonstrate the power of exponential growth.  

Carl Sagan in his final book “Billions and Billions: Thoughts on Life and Death at the Brink of Millennium” (1997) had the second chapter of it titled “The Persian Chessboard”.

In it he wrote that bacterial growth in ideal conditions exhibit exponential growth and “exponentials can’t go on forever, because they will gobble up everything.”

In a 1972 report titled “The Limits to Growth” that was based on a computer simulation of exponential economic and population growth in a scenario of finite resources one of the conclusions that was arrived at was:

“Exponential growth can never go on very long in a finite space with finite resources”.

(At this point please recall what I had written few nights ago - that our economic, finance and monetary system has been inherently geared up around a system of continuous growth and relentless money printing either out of government debts or through fractional-reserve banking/lending which any idiot can make out are both inherently unstable).           

The strange thing is that the failure of the existing type of finance system is not merely inevitable nor need to be predicted by economic experts but are a recurrent theme in the history of economies.

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

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Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

     

September 11, 2019 Wednesday

Bedtime Story 

Understanding the Power of Geometric Progression

We will quickly run through the two mathematical problems concerned with geometric progression tonight (but not with their solutions) that you might be familiar with.

This is merely to demonstrate the power of geometric series and progression that is exploited in finance and money creation by the commercial banks.

First is the wheat and chessboard problem which states that if a chessboard were to have wheat placed upon each square such that one grain were placed on the first square, two on the second, four on the third, and so on (doubling the number of grains on each subsequent square), how many grains of wheat would be on the chessboard at the finish?

As legend goes (as recorded by Shafi’I scholar Ibn Khallikan) this problem arose when a vizier of an Indian King by the name of Sissa Ben Dahir presented a very fine handcrafted chess board (and perhaps he was the inventor of the game for he certainly was a brilliant man) to the King in return for which the King wished to reward him.

As a reward the vizier asked that he merely wanted as many grains of rice as is proposed in the problem.

The King was taken aback and mentally scoffed at the vizier considering him stupid as to ask for such a triviality when he could have gotten so much more had he simply opened his mouth for anything else.

The King of course did not mind it and readily accepted to give him so.

The prize seemed to be easy enough in the beginning and the King seemed to be pleased.

The first signs of trouble started when the King’s men started to place the rice grains on the second half of the chessboard meaning the 33^rd square.

The term “second half of the chessboard” was coined by Raymond Kurzweil – a MIT graduate who is currently director of engineering at Google.

It was here that the real power of the compounding and exponential growth started to become visible.

By the 21^st square 1 million grains of rice are crossed and at the half way mark of 32^nd square 2 billion is crossed.

But remember that the problem of the King is not just the final number on the 64^th square but the sum of all the grains that would end up accumulating on the chessboard.

Now the number on the 33^rd square – that is the first square of the second half of the chessboard - crosses 4 billion which alone is more than the sum of all the grains in the first half!

The situation from then onwards got more dire for the King with each passing square on the chessboard.

The King never realized that he had given his word to something that he would never be able to fulfill as even today with the modern methods of agriculture the number of existing rice grains would fail to add up to the colossal numbers that is finally reached on the chessboard.    

The progression of series in compounding is so counter intuitive that even today if asked what you would choose if you were offered the following two options you might choose the former over the later:

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

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Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

September 10, 2019 Tuesday

Bedtime Story 

Series of Fractional-Reserve Processing Leads to a Geometric Series

This money that gets deposited now in other bank in turn undergoes processing through the same fractional-reserve system in other commercial banks where a fraction of it is kept back and rest lent out.

This cycle then continues.

It is also well known and understood that not all the money that has printed circulates in this manner as people have a tendency to hoard money both in the form of cash and unaccounted gold/foreign currencies/digital currencies with themselves.

Businesses try their utmost to minimize paying income taxes; in the United States the IRS identifies small businesses and sole proprietors as the largest group of tax evaders simply because there are very little ways to know their non-reporting of incomes without spending excessively on investigations.

The most common modality of tax evasion in the United States is to overstate the contributions made to charity especially to churches (Religion is everywhere, there is simply no escaping from it).      

These cycles of fractional-reservations and lending of the rest allows the money to increase in a geometric series.

Geometric series results in the growth of monetary supply in the economy via geometric progression which you know is the sequence of numbers where each term after the first is obtained by multiplying the previous one by a fixed, non-zero number.

This fixed multiplier is known as the common ratio.

For instance the sequence of numbers 1, 5, 25, 125 … is a geometric series whose common ratio is 5.

Similarly 25, 5, 1, 0.2, 0.04 … is a geometric series whose common ratio is 1/5.

The general formula for a geometric series for a fixed common ratio r is:

a, ar, ar², ar³, ar⁴, …

Here the letter ‘a’ represents a number which is known as the scaling factor which is also the starting value of the series.

Of course it is understood that for a geometric series the number ‘r’ can never be equal to zero.

The letter ‘r’ and its value is most important in deciding how the geometric series will behave.

If the value of the letter ‘r’ lies between -1 and +1 but not zero then the series will head towards exponential decay.

But the greatest dividend comes when the value of the common ratio is greater than 1; in such a case the sequence will show exponential growth towards positive infinity if the sign of the initial value of a is positive.

In markets and finance both the compound interest and Ponzi schemes rely on the exponential growth for their success and lucre.

The counter-intuitiveness of exponential growth through geometric progression has been well demonstrated by two classical mathematical problems:

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

Advertisements

Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

September 09, 2019 Monday

Bedtime Story 

Credit Creation is the Whole Game

The bank-issued credit is the largest credit in existence in today’s world and so is the world and national debts as any credit necessarily and symmetrically has to be reflected as debt in someone’s balance sheet.

Credit and debt are like two sides of a fair coin that are inseparable though human apes have shown their ingenuity in undoing that impossibility too.   

Today’s banking is almost nothing or very little to do with the traditional role of bank as an intermediary between the group that saves and the entrepreneurs that borrow and set up industries.   

Modern banking and finance is all about the creation of credit to feed into the growing population and its ever increasing appetite for more and better things.

Today every third-world citizen - since they have access to intelligent algorithms and affordable internet connectivity can see the standard of living that apes inhabiting the North America and West Europe enjoy - aspires to have diet, roads, air, health-care, working conditions and even leisure matching or compatible to that of their first-world counterparts. 

The only possible way (it usually never really works as wealth tends to get distribution in a highly skewed fashion with the bulk of it ending up with a lucky few and the majority of apes ending up with peanuts of wealth) to even possible aspire to that kind of life quality is credit creation.

Usually when the commercial banks sanction loan to a customer they do not hand over cash to him but instead open a deposit account for the borrower.       

The customer then uses this account to withdraw money.

Later this same account is where he would deposit the loaned money.

But since by the very act of loan sanctioning a depositor account had been created the commercial banks has inadvertently created credit through its loan.

Whenever a bank issues credit (which means passes a loan) it makes a negative entry into its liabilities column of its balance sheet and simultaneously incorporates the same amount into its assets column.

It is an asset on the assumption that not only the loan will be paid but paid with an interest.

Credit is therefore money.

It may also happen, as it does happen, that commercial banks need not even wait for the depositors to deposit their money.

Central Banks may decide to inject reserves into the commercial banks (this obviously will not happen to you or me but those with powerful contacts and sources in the government and finance ministry) which are then given out as loans by the commercial banks through the fractional-reserve system.

Now a part of this money is lent out by the commercial bank which is then deposited again possibly in some other bank after series of business transactions.

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

Advertisements

Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

September 08, 2019 Sunday

Bedtime Story 

How Commercial Banks Create Money 

Now if you are left dazzled with the mechanism of creation of money by the central banks secondary to the deficit spending by the governments there is something else to further blow your mind.

We saw and understood how governments and central banks work hand-in-gloves in the creation of money when the government overspends and borrows.

In the act of borrowing money is created de novo.

Besides the central bank the commercial banks are involved too in the process of money creation whose modus operandi is even more dazzling than those of central banks.

Unknown to most of you perhaps the one single greatest service or the function of commercial banks is the credit creation.

Credit is the stuff around which the entire world of economics, finance and banking revolves.

While the word ‘credit’ technically means trust of any means for deferred payment in practice it is synonymous with money.

Commercial banks deploy a gimmick that is known as fractional reserve wherein in the usual process of accepting deposits from customers and lending loans to borrowers the banks retain with them only a fraction of the money that the depositors have left with them.

Banks usually hold these reserves either as cash with them or as balances in the bank accounts.

How much money the commercial banks are supposed to keep in reserve is determined by the central banks of each country.

Now the commercial banks keep their reserves far below their deposit liabilities – deposit liability being all the money that people or companies have deposited with the bank and which at some point of time or other they are going to ask back with their interest.

Banks take this chance of keeping low reserves for two reasons.   

One is that they take it for granted (or consider it unlikely) that not all the depositors are going to demand back their deposits at the same time (this assumption gets thrown out of the windows during the times of economic crises when people develop low faith in banking system, panic herd mentality sets in for cash withdrawal and the dreaded bank run sets in).

Second, the commercial banks also consider it likely that most depositors are going to withdraw only a part of their deposits with most of the times leaving the majority of their savings to grow.

The amount that is the difference between the deposit liability and the reserve is given out on loans or credit which the borrower has to refund with interest.

In banking and finance such loans that are given out at interest are considered to be asset and thus by giving loan commercial banks are increasing the money supply not only in their own accounts but in the economy as well.

This thus is the second mechanism of money creation on the assumption that all loans are secure.

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

Advertisements

Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg

         

September 07, 2019 Saturday

Bedtime Story 

How Independent Can Central Banks Be? 

The queerest and the most damning aspect of this whole chicanery is that greater the government goes in debt the greater is the prospect of money supply increasing in the economy.

So where is the catch?

The catch is in the induced inflation and the interest rates due to “excess” fiat currency in the economy but we will not go into those because we are still to understand how this entire machination of money creation works.

It is not surprising therefore that with this lopsided economics where money is created ex novo (yet again a fancy economic term for shameless printing of paper currency) it is the wealthiest developed economies that have the greatest national public debts. 

As I had said earlier the United States federal government since its formation was in public debt; it was a nation that was forged out of money created ex novo (the famous Continental currency or the Continentals if you recall that collapsed on its own weight or rather volume).

It is both the governments of the United States and Japan that are the world leaders in national debt figures both in absolute terms and in relative terms such as percentage of GDP, percentage of world public debt or even per capita. 

The central bank in theory is supposed to control the amount of money it prints regardless of how much the government (“we the people”) pressurizes it to print but in practice it is hard to believe that the bosses of central bank would stay free and independent from the clutches of the powerful politicians who have to keep the baying crowd pleased and prevent from getting restless and storming the castle.

It is the general belief that at least in most developed nations central banks are independent institutions but tell me how can it be so when even the board of governors of the Federal Reserve System (The Central Banking System of the united States) comprising of seven-member are appointed by the President of the United States?

Moreover, it is the federal government that sets the salaries of the board’s seven governors.

In every which way, right from its appointment to its salaries, the Federal Reserve is an instrument of the United States Government (meaning “We the People”) and yet it makes the farcical claim that “the Federal Reserve System is an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive and legislative branches of the government, it does not receive funding appropriated by the Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms.” 

And even if let us presume that to some extent some governors of the board of the Fed do manage to stay away from the influence of powerful politicians and businesses what chance do the bosses of Central Bankers have of banana republics such as Nigeria, Nicaragua, Pakistan, Russian Republic or India?

We have recently been witness to governors of Reserve Banks of India either resigning in protest (Urjit Patel and his deputy Viral Acharya) and Dr. Raghuram Rajan not seeking extension of his term largely due to disagreement with monetary (and not economic) policies of the government.

Stay tuned to the voice of an average story storytelling chimpanzee or login at http://panarrans.blogspot.com

                              

Good night Mon Ami and my fellow cousin ape.

                           

  

                

                  

Advertisements

Another great educator and a teacher that I am aware of is Professor Subhashish Chattopadhyay in Bangalore, India.

While I narrate stories, Professor Subhashish an electronic engineer and a former professor at BARC, does and teaches real mathematics and physics.

He started the participation of Indian students at the International Physics Olympiad.

Do visit him here:

http://skmclasses.weebly.com/

All his books can be downloaded for free through this link:

https://zookeepersblog.wordpress.com/science-tuition-chemistry-physics-mathematics-for-iit-jee-aieee-std-11-12-pu-isc-cbse/

For edutainment and English education of your children, I recommend this large collection of Halloween Songs for Kids:

https://www.youtube.com/channel/UCd14DRdYKj454znayUIfcAg