Thursday, February 12, 2009

Recessions Can Lead to Poverty Solutions

What lessons does the current long recession present to us grassroots sufferers? One: a few thousand US lending and investment managers handling over $100 trillion in capital can commit trillion-dollar mistakes. In 2005 such finance managers had been lending $600 billion in housing loans to US employees. Apparently most of them knew that the borrowers were already nose-deep in credit card and other debts, or had incomes that could not afford additional loan installments. The lending confidence was created by computer-generated formulas that supposedly could spread out risk if the loans were ‘sold’ to investment companies as triple A bonds. Another confidence builder was the $3 trillion worth of ‘good’ home loans that seemed solid enough to absorb the high risks.

Another mistake: the home lenders used their high-risk loans as collateral to sell $750 billion worth of bonds to investment companies. The buyers at the time had already lent out $525 billion to companies buying other companies (corporate takeovers). By 2007 the risky $600 billion home loan borrowers had proven their inability to pay. The $750 billion worth of ‘triple A’ bonds supposedly backed up by solid real estate suddenly became high-risk and could be sold to other buyers only at great loss to the sellers. The resultant panic froze bond sales and created large herds of stock market offers at increasingly depressed prices. Some $2 trillion in paper wealth disappeared, including those of debt-financed takeovers. Deepening panic stopped most bank lending. Loan-dependent US companies collapsed. Some 14 million US employees lost their jobs. Job losses shrunk consumer markets, which meant more companies closing shop from loss of sales. The contagion spread throughout 1st World Europe, whose markets were just as saturated and whose companies and publics just as neck-deep in debt. Export-dependent developing economies similarly suffered as their 1st World markets dried up. These days the recession lingers, and world economies are barely crawling towards positive growth. China and India are still growing but hardly at rates that will redeem their remaining 1.5 billion poor at ideal rates.

So how may world economies hasten the upward crawl? Expanding world markets is apparently the determinant. For some fifty years, the industrial and developing world’s companies had been selling to the 1st World with its less than a billion consumers. By 2005 such buying masses could buy no more even at near-giveaway credit. For over fifty years, very few 1st World entrepreneurs thought that there exists five billion 3rd World poor who form a planet-size potential market in producer and consumer goods, services and loans. Yet the process of converting the poor into huge markets had started with Japan since 1860s when the Japanese government imported entire industries from the West. In the 1960s-80s, Japan popularized factory sub-contracting and joint ventures in the Pacific Rim, in the process building large middle class markets within the region. In the 1990s, joint venture fever spread to China, creating some 200,000 factories that built a 500 million-strong middle class. Concurrently, 1st World companies were creating millions more middle classes in India, the Philippines and Eastern Europe thru outsourcing of office computer functions. Continent-scale poor were becoming huge markets for consumer goods.

The lessons must not be lost. Joint ventures, sub-contracting, franchising, licensing and outsourcing are effective builders of huge markets. However the rate of build-up has not been fast enough. The business world has to go turbo, for five billion poor still await redemption into middle class buyers. How? Involving the entire 3rd World’s employee masses appears to be the supercharged way. Reason: employees know how to build and run businesses, and there are two billion or so of them in the 3rd World. As large groups that partner with 1st World companies, they can create millions of jobs yearly. As half-owners of joint venture corporations, they may acquire fortunes in stock shares and dividends. In short, they become huge consumer markets together with the new employee hordes they create. Additionally, the joint ventures they set up become mammoth markets for producer goods (factory machines, transports, chemicals, processed materials), exactly what currently anemic 1st World factories produce.

Great, but how exactly can it be done? Incredibly, just two laws will perform the magic. First is a 3rd World law that dedicates a major portion of yearly state budgets towards lending to thousand-employee groups that set up joint ventures with 1st World companies. Second is an Expand World Markets (EWM) law passed by all 1st World governments. The EWM law channels 5-10% of yearly state budgets towards lending to the 3rd World joint ventures described. The twin laws should create thousands of world-scale companies and millions of jobs for 3rd World poor each year. Since good laws are forever, corporate formation, job creation and market expansion planet-scale goes on for all time. Eventually all the world’s poor get employed and trillions of dollars in stock shares and dividends flood 3rd World masses. Markets for all manner of producer and consumer goods become planet-size instead of mere 1st World scale. Increasingly larger portions of the 1st World’s over $150 trillion in investment assets gradually end the unimaginable miseries that 3rd World peoples have been enduring over centuries.

Now for the grand question: who are the heroes who will sell the scheme to world politicians and fund managers? Only one ‘army of redeemers’ qualifies: blogging nets. The initial campaigns don’t even cost much: bloggers popularizing the 'earn good sideline income' scheme to two billion employees worldwide, blogger or not.