Microfinance, Part II

When I was looking at microfinance before I noticed that the organization that was promoting it in the USA was soliciting donations, and I thought that was just a little odd. They had gotten a loan from some unspecified source to use for making their loans, but they were also taking donations. In that case, they must not be making a profit, at least not yet. Either their overhead or their default rate is too high. I suspect it's their overhead. All the headache that goes into vetting the applicants and then you're only collecting some miserable percentage on the small amount they borrow. It's not a booming business model.

They I realized that there is a more traditional source of money for small loans, and that is loan sharks. They charge userous rates, but evidently it's enough to make it worthwhile because they still get mentioned seven days a week on cop shows on TV. I have heard all kinds of rates quoted for loans from loan sharks. The latest rate of seven points a week comes from a new episode of Law & Order: Criminal Intent I saw last week. Seven percent a week can be done if you are turning over a high volume of merchandise. It adds up to 350% a year which is considerable, but it is paid on a weekly basis, so compounding doesn't enter into it.

An example I heard about was an immigrant who was selling kids toys at a flea market. He borrowed a thousand dollars, spent it on tricycles and kids bikes, and sold them all on Saturday at the local flea market and doubled his money. In this case $70 for the vig sounds like a good deal. He makes enough money in one day to survive until the next weekend.

There is also the illegal / recreational drug business. It can be much, much riskier because you really have to keep to the straight and narrow to avoid falling into any one of the chasms that will surround you. Even with the best people, there is still substantial risk, so there needs to be a big payoff to make it worthwhile. So you probably won't be able to get seven points if you are using the money to buy drugs.

What every good capitalist wants is a machine that prints money. You make a capital investment (the printing press), you hire a guy to run it, and you set up suppliers for your paper and ink and you go to town. The machine prints money and everything is wonderful. Of course, the government frowns on people usurping their role as the providers of all that paper and ink goodness, so a law-abiding capitalist looks for something that won't get him / her crosswise with the coppers.

Cranes working on the expansion of Intel's Ronler Acres Fab

The printing press model has made lots of money for lots of people. First it was the newspapers, now it's microchips. Printing microchips is a lot more complicated, sophisticated and precise than printing newspapers, but it's still the same model. You invest the money to buy the printing press, in this case it's several billion dollars to build a chip fabricating plant, you hire a double handful of people to run the press, and then you start cranking out chips. The chips from one sheet of paper (a silicon wafer) can bring tens of thousands of dollars. It doesn't take long for the money to start pouring in.

It can get galling when people are dealing with smaller sums of money, sums they can comprehend. I mean, who understands what a billion dollars can do? I have a hard time with it, but a thousand dollars I can understand. Say you have a guy who invests three thousand dollars, hires a someone else to do the work, whatever it is, and the business starts making ten thousand dollars a week. The employee was getting $200 a week to start, and now, even though the business is making money hand over fist, he is still barely making enough to survive. That's when you run into problems. A smart capitalist would give the worker bee a raise, it wouldn't cost him a lot, at least not compared to what he is making. A greedy capitalist would not give his employee a raise and would not care whether he was generating any ill will. The trick is not to work for the greedy capitalist, and that can be a very difficult trick to pull off.

On the other hand, paying the employee any more than is absolutely necessary is contrary to good business sense. If the employee can be easily replaced, it doesn't make sense to pay them any more. And this is where we are. We have a surplus of  people who would like to have a job that pays decent money and we do not have enough capitalists setting up printing presses.

Update February 2017 replaced missing picture.