by Dr. Mark Skousen, Chairman, Investment U
Friday, October 27, 2006: Issue #599
I remember as a young boy people telling me that borrowing money and going into debt were very, very bad.
“Neither a lender nor borrower be,” declared Shakespeare. Ben Franklin warned in The Way to Wealth, “The first vice is running in debt… You give to another power over your liberty… Be frugal and free.”
And church leader J. Rueben Clark says debt “never sleeps nor sickens nor dies… and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”
Financial advisors warn repeatedly to stay out of debt, and gold bugs publish charts showing the national debt by consumers, business and government climbing to unsustainable levels.
Sounds ominous, doesn’t it?
Going into debt is a serious matter and should not be done lightly. I don’t recommend it for most consumer goods, and certainly not for buying food at the grocery store or 7-Eleven. In short, use cash.
Debt, however, does have its advantages. In this issue, we’ll discuss Nobel Peace Prize winner Muhammad Yunus, founder of the Grameen Bank and the Micro-Credit Revolution. First, a closer look at the virtue of debt as it relates to the Micro-Credit movement…
The Profitable Side of Managed Debt
If handled properly, easy credit allows you and your family to buy a car or a home when you’re young. Paying a monthly mortgage is a forced savings plan. After 30 years, you own the home outright. Real estate guru Jack Miller said it best: “Want to become a millionaire? Borrow a million dollars and pay it off.”
And where would most businesses be without loans and credit lines from banks, investment bankers, insurance companies, mortgage companies and venture capitalists? Without these sources of capital, where would our savings go? You can’t build a sophisticated complex global economy on equity financing alone. Mortgages, bridge loans, commercial and government bonds, even junk bonds are necessary to lubricate the financial world.
If you have the wherewithal to pay the interest on the debt, you can survive and even prosper, as a consumer or business – and even a government. On the other extreme, if you can’t pay the interest, debt can “crush you,” as Clark says.
In Investment U, I have recommended a variety of ways to profit from the debt market, including:
- Prime rate funds, such as the Van Kampen Senior Income Trust (NYSE: VVR)
- Junk bond funds, like the Debt Strategies Fund (NYSE: DSU)
- Business development companies, such as Allied Capital (NYSE: ALD), and
- Mortgage REITS like Thornburg Mortgage (NYSE: TMA).
These companies manage millions in “profitable” debt. But here’s a $50 loan that’s made all the difference to one entrepreneurial couple…
The Difference Between Starvation and Prosperity
For those of you still skeptical about the virtue of debt, consider this…
Laily Begun and her husband, Atiqullah, were manual laborers in Bangladesh who barely had enough to eat. She took out a $50 “micro” loan from the Grameen Bank to buy a cow, which allowed her to make some extra cash selling milk.
She borrowed another $65 for a second cow, and her little business flourished. Now she had enough to apply for a mobile phone. Laily became known as the “Village Phone Lady,” and before long, she was earning nearly $300 a month. With their savings, the couple set up five shops and a restaurant. They now live in a brick house, own two color TVs, a refrigerator and a cassette player, and send their three children to school.
All because of a $50 starter loan.
The Grameen Bank is not a charity. Billions in foreign aid have been thrown at poor people without effect. Only when a for-profit bank began lending to the desperately poor did anything positive come of it. Grameen Bank charges 18% interest on its micro-loans, and has only a 5% default rate. How is this possible? Borrowers must join small support groups, and if one defaults, the others are forced to take over his debts.
It seems impossible, but so far the Grameen Bank has made more than $5 billion in loans, and its model has been imitated around the world, even by the World Bank.
Free-Market Economist Muhammad Yunus Wins Nobel Peace Prize
The genius behind the Grameen Bank and the Micro-Credit Revolution is Muhammad Yunus, who just won the Nobel Peace Prize for his work with the poor. He is a former professor at the Chittagong University who decided not to just teach about the wealth of nations, but to do something about it.
Yunus founded the Grameen Bank in the world’s poorest country, and today has branches in over 71,371 villages in Bangladesh through collateral-free micro credits to needy entrepreneurs.
While the World Bank has imitated his micro-credit model, Yunus decries the organization in his book Banker to the Poor: “We at the Grameen Bank have never wanted or accepted World Bank funding because we do not like the way the bank conducts business.” Nor does he like foreign aid. “Aid-funding projects create massive bureaucracies, which quickly become corrupt and inefficient, incurring huge losses.”
Yunus was a Marxist until he came to the United States and saw how the market liberates the individual. “I do believe in the power of the global free-market economy and in using capitalist tools… I also believe that providing unemployment benefits is not the best way to address poverty.”
Not surprisingly, the Grameen Bank is considered by Marxists as the “enemy” of the socialist revolution.
Yunus believes that poverty can be eradicated by loaning poor people the capital they need to engage in profitable businesses, not by giving them a handout or engaging in population control. In his own words, “All human beings are potential entrepreneurs.”
Good trading, AEIOU,
P. S. I’ve invited Muhammad Yunus to speak at FreedomFest next July 5-7, 2007, in Las Vegas, and there’s a very good chance he will join us. For more information, visit the website