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)