Saturday, 8 May 2010

The numbers just roll so easily off the tongue

Ten billion here, a trillion there. It all rolls so easily off the tongue as governments continue to both spend more than they “earn” and bail out banks & other institutions. How often though do you think about what these sums actually represent? That’s something I did today which I thought I would share. Firstly let’s try and appreciate what a billion dollars, that’s $1,000,000,000, is by looking at three images courtesy of The first sets the scene with a $100 note, then the second image piles these $100 bills into a million dollars and finally the last image piles these $100 bills into 10 pallets of money to give one billion dollars. Impressive isn’t it. Now let’s look at just two news items from Thursday.

Firstly one of my favourites – Greece. The Greek finance minister on Thursday said that Greece was just two weeks away from defaulting on part of its debt worth 8.5 billion Euros. That’s 12 billion dollars or 120 pallets of $100 bills. But it gets worse. The loan they are chasing from the International Monetary Fund (IMF) and their European partners (maybe that should be suckers) is 110 billion Euros, which is 142 billion dollars or 1,420 pallets of $100 bills. Let’s look at it another way. The population of Greece in 2008 according to the World Bank was 11,237,094. This loan alone is equivalent to a debt of 9,789 Euros for every man woman and child in the country. The average annual salary for a manufacturing employee in Greece is around 15,960 Euros. So in one single go the government just borrowed around 2/3 of this average person’s salary.

So that’s just example from Europe. Let’s now head over to the United States. On Thursday Freddie Mac, which once upon a time used to be a publically listed company, asked for an additional $10.6 billion to stem its losses on bad loans. That’s 106 pallets of $100 bills. But don’t worry it’s all ok [sic] as the US government has pledged to provide unlimited support to both Freddie Mac and Fannie Mae over the next three years. That is just amazing. Boy I wish that my private company gave me free access to as much money as I wanted. Since 2008 both these institutions have consumed $136 billion in US tax payer’s money which is 1,360 pallets of $100 bills. But it gets even better. Over the next 10 years these two institutions are likely to consume $400 billion or 4,000 pallets of $100 bills. So with a population of 307,006,550 according to the US Census Bureau these two companies require $1,300 from every man woman and child in the US.

Of course in both instances these debts/losses will be paid for by yet more borrowing. Greece will take their money from the IMF who will get their money from places like the UK who are already running deficits meaning that this new loan will come from yet more borrowing. The European partners are already running deficits and so their contribution will also just come from more borrowing. The debt is just moving around while it gets bigger and bigger. The US is also in hock up to the eyeballs so their generous contribution to Fannie and Freddie is again just sourced from yet more borrowing. This is all going to end in a mess. It’s just a matter of when not if in my opinion.

Some day someone is going to have to pay this back. Unless of course the traditional developed nations choose to just default like Argentina in the past. If they do decide to pay it back then that little responsibility will fall on the young of today or the children of tomorrow. They really aren’t going to be best pleased. The irresponsibility of the current generation really does shock me sometimes.

As always DYOR.


  1. How do go about ensuring you really get the diversification +/- correllation you are after. I have spent an hour or two looking at ishares offerings and there seems to be a great deal of overlap between the etf's, particularly within the UK and Euro etf's, where I was concentrating. It looks very easy to mistakenly buy funds which on the face of look to add to ones diversification but where the largest holdings all seem to be Bp, HSBC, Vodafone etc.

    Also, do you diversify between ETF providers on the basis that recent years have demonstrated that, leaving aside client money rules etc, the financial strength of hitherto august institutions is not always as it seems?

  2. Hi Dilbert

    Great name by the way - engineer by any chance?

    For the UK I am trying to buy FTSE All Share Index Trackers wherever possible. I've just had a look at the allocation of my largest UK fund (within my Pension and not an ETF) and it shows the Top 5 holdings as follows:
    1. BP 6.8%
    2. HSBC 6.7%
    3. Vodaphone 4.6%
    4. Shell 3.9%
    5. GlaxoSmithKline 3.8%

    Given that as of today 17.8% of my low charge portfolio is allocated to UK Equities this gives my total portfolio an exposure to BP of 1.2%. Only time will tell if that is to high an allocation.

    Regarding Europe why can't you buy ETF's that are Europe ex UK. For example iShares IEUX has its Top 5 holdings as:
    1. Nestle 3.88%
    2. Total 2.74%
    3. Roche 2.52%
    4. Novartis 2.48%
    5. Banco Santander 2.44%
    So no BP, HSBC or Vodaphone in there.

    Regarding ETF diversification I hold ETF/ETC's from iShares, db x-trackers and ETF Securities. This is mainly to minimise fees and get the funds I want but I do have a little diversification of provider in the back of my mind always.

  3. Found that one now, thank you.