An Interesting Conspiracy
“There’s a very simple way to make a lot of money.” So
began Gideon Green’s presentation to The Board of Directors at Pyramid
Investments.
“You can’t make money, Gideon. You should know that. You can
only move it around,” responded Director of Finance, Peter Camsoner.
“Of course,” Green continued. “There’s no doubt that many
people earn a comfortable living though it’s those struggling that provide us
with our entry point. Let’s move some of this money. Towards us. Debt
consolidation using the principle of amortisation.”
One of the Directors required some
clarification: “Dr. Green, refresh me about amortisation.”
“As the lender, we get 12 additional
monthly payments that account for the interest people have been conditioned to
expect, but additionally the loan repayments involve interest on the interest
already added. And on it goes for the full term of the loan. Amortisation. Debt
consolidation is a subtle way of increasing that debt, but disguised as a
loan,” Green explained. “The beauty of this scheme is that the amortised
interest is hidden because the overall debt is reducing as it’s paid off.”
Green’s brief pause was met with silence in
the room.
“It’s probably more useful to illustrate
this with an example,” he continued. “If we charge 8% interest on a loan of
£25,000 from day one, we’ll get a return after 15 years of over £44,000. The
amortisation adds a relatively small and almost insignificant amount to the
basic interest over the entire 180 month loan period.”
“So,” interrupted Camsoner, “the advantage
of monthly payments rather than charging just one annual interest payment is
the increasing interest on a reducing amount?”
“That’s right,” confirmed Green and went
on, “an annual payment does not involve monthly amortisation, just the one bite
at the cherry. Monthly charging involves twelve bites of the same cherry and
since clients are borrowing they’re unlikely to be saving. They’ll probably
need to borrow more to offset the cost of borrowing and this is the same
principle as people using one credit card to pay off one debt by creating
another. The yoke gets heavier by the month. Banks make a great deal more money
from lending money at a monthly higher rate of interest than rewarding savers
with an annual lower rate, even though the savers’ money is used to make the
bank more money by constantly lending it.”
Not a murmur was to be heard as each Board
Member considered the scheme.
“We can even suggest that debt
consolidation actually reduces a debt by making just one easy monthly payment
rather than paying back several smaller ones. Our selling pitch can be that for
a credit card monthly debt of, say, £1000 halving that debt will give the
borrower an extra £500 a month to spend. Some will inevitably be sensible and
use that saving to reduce outgoings and pay off the debt, but most will
predictably spend it and in the process need more financing. This can only
increase the overall interest payable to us, but hides it pretty well. The real
sting in the tail is that by increasing the debt in the long term we make
ourselves much more money from the bait on our hook. Almost certainly, after a
year or two of a 15 year repayment period all the money will be gone and the
borrower will need further financing. Even the credit card companies and other
banks might owe us a commission for putting more business their way.”
“This is wicked, Gideon,” said Camsoner.
“Legalised loan-sharking. Terrific. It certainly seems that your PhD research
has brought dividends already and you could go a long way in this company with
ideas like this.”
“To finish up, there’s another angle I’d
like to mention and this links into the idea of the illusion of creating money
even though it doesn’t exist. Sort of virtual money,” Green expanded. “The
money we don’t actually have today from the theoretical pile we’ll get paid
back tomorrow can be used to make even more. Using my earlier illustration that
after 15 years we’ll get £44,000 from the original £25,000, the potential
£19,000 theoretical profit can be immediately relent.”
“Isn’t this very inflationary?” a lone
voice queried.
“Of course,” replied Green, “though banks
do it all the time by lending money on the basis of an electronic and virtual
system. As we know, real money doesn’t exist. The entire financial system has
been created on the back of gold and as a resource is fixed. You cannot destroy
or create gold although the alchemists have tried. We are not in the business of
magic, just illusion and redirecting attention away from reality. Every winner
has it’s corresponding loser and is a core principle in finance:
redistribution. Anyway, that isn’t our concern and can only work in our favour
as borrowers will need to borrow even more.”
“I’d not thought of that,” replied the member seemingly
satisfied with the answer. “This scheme, gets better and better. Perfect and
fool proof.”
“I hope it’s not too fool proof or we’ll
not hook anyone borrowing anything, ” joked Camsoner.
The sounds of laughter reverberated around
the Board Room.
“OK. Let’s do it,” concluded Camsoner.
Once the scheme had started, Dr. Gideon
Green immediately put his own inheritance to good use by borrowing £25,000.
Repayments to service the loan were just £240 every month and he could easily
afford this outlay. After 15 years, he’d make many £1000s by investing his
borrowings and he could only make a profit that actually got bigger. Since his
capital was increasing rather than decreasing, even at the lower savings rate
of interest, if he borrowed a further £1,000 every month, at the end of the 15
year term of his very affordable loans, he’d make a fortune. If he never
touched the original capital amount, but just increased it, the only direction
for his financial interests was upward.
By making his money work for him, Green
planned to retire a 40-something millionaire.
© Louis Brothnias (2008)