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Eureka: Human factors in recessions
by Jay Gutman
2017-01-10 10:55:11
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Let’s call the country the Republic of San Marcos. Let’s say it’s a tropical island with a lot of pineapple, bananas and papaya among other exotic fruits they export.

humrec01_400Let’s say the traditional economy of San Marcos is one where traditional farmers own a cow, a goat, and grow a few fruits and vegetables for their own self-consumption, and that farmers occasionally go to the market to barter fruits for meat. Then economists like myself explain that in case of drought, the people of San Marcos would face hardships, so it would be better if they adopted a market economy where they would export fruits and use the money to develop national infrastructures and industries, by developing an industry in the long run.

Let’s say the World Bank and IMF pick a guy like me, who speaks the language of San Marcos and understands the customs of San Marcos because I used to live in San Pedros, a neighboring island, so I get sent to San Marcos to explain how the economy works. You buy a few ships, sign contracts with countries who don’t grow bananas and pineapple, collect the money, put the money in your banks and use the money to build an industry, first in food packaging and textile, then fish packaging, then perhaps more heavy industries like steel so you can build cars and electronics.

Then let’s say the first round of exports works great, and a few oligarchs make money out of bananas and pineapple. Then, one of the oligarchs decides to send his children to the United States so they can get a better education. Schools in San Marcos are overcrowded, don’t have bathrooms and teachers often never read a book. The oligarch’s children get comfortable in the US and want to start a restaurant chain and invest in night clubs, because they eat out all the time and spend every weekends at night clubs, so they might as well own such facilities.

The oligarch hesitates then goes, ey, who would notice if a few thousand dollars disappear. The other oligarchs notice and make the same investment with their children, and before you know it the money that the IMF and World Bank loaned to build an industry along with the money made from exporting pineapple and bananas has been invested in night clubs and restaurant chains in Daytona Beach, Los Angeles, Miami and New York City. We discuss a settlement with the leaders of San Marcos and decide that we will own their banana and pineapple plantations for the next 20 years as a debt settlement. Then the people of San Marcos start calling foreign banks predators and cold-hearted monsters, and foreign pundits start writing columns about neo-colonialism.

Now at the more industrial level, the Republic of Xio-Sun has absolutely no natural resources. I lived in the republic of Xio-Sen and speak perfect Xio-sen-mal, the language of both Xio-sen and Xio-sun. Since they have no agricultural or mineral resources, I argue that it’s best if they build an industry. They build a textile, steel, car and electronics industry with a group of oligarchs owning the industry.

The children of oligarchs start spending profits and debt on building night clubs, restaurant chains, supermarket chains they call Xio-sun Mart and casinos. People in Xio-sun can’t get a job with the oligarchs so decide to loan money to set up businesses that can’t compete with the oligarchs. The debt snowballs and suddenly Xio-sun asks for a huge bailout, with no one really allowed to investigate where the money went.

The republic of Samala has huge oil and mineral reserves. IMF and World bank send me to teach them how to build infrastructure and industry, Samala republic sends its princes to Europe and the United States, they invest in hotels and bowling alleys, along with luxury cars and collectibles. That is, with the money that was loaned to build an industry.

So basically, a lot of recessions happen when you borrow money to build a local industry, and use the money to invest in Europe or the United States. Or when you use loans and divert them to invest in other venues. Simple. 

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