Borrowing to Invest to Get Rich

Governments in many less perfluent countries have borrowed thousands of millions of dollars in attempting to achieve permanent increases in the level of national economic activity and living standards.

The belief was that by borrowing “wealth” from the “rich” nations, they would be able to use it to generate more “wealth” of their own, enough to pay back the original “wealth” with interest and still leave enough to make their own country permanently wealthier.

This scheme can appear to work but can also fail disastrously. Its chances of success can be improved if the real nature of the transactions is understood.

Money represents throughput, and diversions of cash represent diversions of throughput. What the governments were borrowing was not wealth but throughput.

In return they were obliged to pay back not just the equivalent of the original throughput (less or more, depending on the change in value of the currency in which the loan was negotiated) but the equivalent of much more besides, the amount depending on the interest rate, the time over which the loan was to be repaid, and the self-reinforcing degree to which the repayments fell into arrears. A loan repayable at high interest rates over many years can demand the return of many times the original amount of money.

So the original loan, in its net effect, is not a helpful transfer of a quantity of throughput from a more to a less perfluent nation, but a transfer of many times that amount in the reverse direction – quite the opposite of what’s needed.

The borrowed throughput would have to generate many times itself, and then some. But wealth is what generates throughput, when acted on by throughput agents. Throughput itself is only a throughput agent to the extent that it consists of capital goods, i.e., manufacturing equipment that still needs wealth to feed it and to be throughput as goods and services. But wealth is not what has been borrowed, and a country’s quantity of wealth is not increased at all by the money loan.

The other side of the coin is that the international banks who sold these huge loans, believing that huge profits (throughput gains) would thereby come their way, will gain far less than expected, if anything. This has caused great problems of solvency for them.

What should deeply indebted nations have done to improve their lot, rather than borrow huge amounts of money from international banks?

Useful measures have been suggested earlier. Keeping always in mind that their aim is the direct transfer of throughput in their favour, less perfluent but wealthy nations should:

  • Follow the example of OPEC and raise the price, while restricting the supply of any resource that they export. The degree of success will vary, but the experience of OPEC shows that considerable success is possible with an important resource.
  • Encourage tourism from high-perfluence countries and extract from tourists the maximum amount of hard currency while tolerating no large or permanent environmental interference from them.
  • Accept money as outright gifts, never as loans.
  • Fight by every means to tear down import barriers. Much has already been achieved with this. More perfluent nations would prop up high wages in many of their industries by restricting or discouraging the import of goods from similar industries in less perfluent places where wages and prices are lower. An absence of tariff barriers forces industries in more perfluent econmoies to cut wages or close down, in either case benefitting the less perfluent.

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