CHAPTER 1 WHAT IS THE FUSION ECONOMY? The converging world economy has created a whole new paradigm for the 21st century. Global warming, credit crunches, currency meltdowns, food crises, and trade wars are just a few examples of how our everyday lives are being altered by a myriad of forces, many of which are economic in nature. And like nuclear fusion, which joins together hydrogen molecules and releases enormous amounts of energy in the process, the converging global economy is releasing a lot of new energy-we just need to figure out how to use it. This new fusion economy brings together forces and reactions in ways that are impossible to understand using normal linear forms of approach. It used to be that we could follow a fairly simple path to arrive at an economic conclusion: A better product or a more efficient company meant more productivity, which meant a higher standard of living for all. But today, things aren't so simple. How can we say that economic growth in China or India is a good thing if it increases global pollution or leads to food scarcity? How can we say that increased access to mortgage financing is a good thing if it entices subprime borrowers to buy houses they can't afford to pay for, leading to failing banks in Europe and the United States, stock market crashes in Asia, and a worldwide credit crisis? With hundreds of billions of dollars worth of mortgage-backed securities being traded annually, the market for subprime debt became, at one point, bigger than the entire market for U.S. Treasury bonds-the biggest bond market in the world. When banks and mortgage companies realized they could pass on the risk of the mortgages they were issuing, they became more concerned about increasing volume and less concerned about whether the borrowers could pay back their loans. Consequently, credit standards were relaxed and many poor and low-income borrowers were given mortgages to buy homes-leading to ever-increasing home prices. Many borrowers bought homes they knew they couldn't afford, but assumed that rising home prices would cover their loan commitments, allowing them to refinance at a later date, once the house's value had gone up. When the housing market began to cool, many subprime borrowers were unable to refinance their loans and were unable to make the interest payments on their original loans. Delinquencies-borrowers' failure to make their mortgage payments-began to rise, and the value of the bonds that were based on subprime mortgages began to decline. When large numbers of these subprime borrowers started going bankrupt, the subprime mortgage securities had to be revalued downward. In the end, the banks and investment houses around the world that had bought these mortgage-backed securities were forced to write off large portions of their debt-up to 80 percent of their original value in some cases-leading to a credit crisis that spread around the world as other banks and investment houses refused to provide the cash that the world's companies and financial institutions need to keep running. Banks around the world had to be rescued by cash-strapped governments. In the United States, Lehman Brothers, one of the largest investment banks in the country, was forced into bankruptcy, and another investment bank, Bear Stearns, had to be sold off with help from the U.S. Federal Reserve-for a fraction of its previous value. AIG, the largest insurance company in the world, also had to be bailed out by the Federal Reserve. Once the financial meltdown had started it was impossible to stop. In addition to financial meltdowns, even cataclysmic events such as hurricanes and global warming are influenced by the expanding 21st-century economy, which is bringing forces to bear that are making it impossible to predict what will happen in the future. For example, the destruction of the Amazon rain forest, primarily for economic reasons, has led to a sharp increase in the relea Excerpted from The 21st Century Economy: A Beginner's Guide by Randy Charles Epping All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
