The Business Of Debt

This is a very short tale of the business of debt.

Tom wants to marry Toodles and set up a family with her. To do that he needs to buy a house, for that is the Asian culture. Both of them see a nice fanciful $1.2 million house. They emptied their savings of $200k and took on a loan of $1 million at 5% per annum. Both of them borrowed the money from Jerry Bank.

Jerry Bank now loans out $1 million which Tom and Toodles have to pay over 25 years. Using simple interests for ease of calculation, we have $50,000 of interests per year. Jerry Bank will earn a total of $1.25 million over a period of 25 years. The loan is now worth $1 million (principal) + $1.25 million (interests) = $2.25 million. However, Jerry Bank has limited deposits which he can use to loan out to people, and it takes too long to earn that interest money. Jerry Bank has a wonderful idea.

Jerry Bank sells the loan to Spike Hedge Fund for $1.25 million, immediately recovering back the $1 million principal and earning $250,000 in interests. With the $1.25 million in hand, Jerry Bank can happily provide more loans to many more Toms. On the other hand, Spike Hedge Fund can now earn $1 million for doing nothing. But now it only means that Jerry Bank pushed the problem to Spike Hedge Fund. What can Spike Hedge Fund do? It certainly does not want to wait 25 years to earn $1 million. At this point, Spike Hedge Fund has a return on investment (ROI) of 3.2% per annum.

Spike Hedge Fund also has a wonderful idea. It approaches all the Jerry Bank branches in the country and buy up all their property loans. Spike Hedge Fund has now $100 billion worth of loans on hand. Spike Hedge Fund now packages the $100 billion loans into Spike Stability Income Fund, offering a projected 2.5% annual dividend yield marketed to conservative investors who just want to protect their money and earn some dividends every year. Spike happens to also charge 1% management fee, because you know it takes effort to monitor the market to ensure the stability of their clients’ investments.

Back to Tom and Toodles. They just took up a $1 million loan. They saw on Youtube that an investment guru called Quackers happened to be promoting Spike Stability Income Fund. Quackers said that money should not be sitting in the bank collecting dust, but by putting their money in Spike Stability Income Fund, they could earn an ‘almost’ guaranteed dividend yield of 2.5% + the ever slight potential of the fund increasing in value. Afterall, with inflation, every product on the market will slowly increase in value over time.

In a separate newspaper article, Droopy recommended retail investors to invest in funds instead of stocks or cryptocurrency. Because stocks are risky and crypto is a scam, but with funds and its diversified portfolio, although retail investors will not earn much, they will also be more protected in times of financial crisis. For investing noobs like Tom and Toodles, investing in a fund indeed seems to be a safer choice. The fact that Quackers is a well-known Youtuber with millions of followers and Droopy being featured in a well-known media is a big confidence boost.

Tom and Toodles did some research, and found out that Spike Stability Income Fund is indeed good. Although the fund is a bit expensive, but the stability is what they really want. They squeezed out a monthly savings of $500 and invest into the fund regularly. Very soon, Spike Hedge Fund manages to sell $100 billion worth of loans at a healthy profit. Unfortunately Spike Hedge Fund is not very honest. Spike did not exactly say what constitute the full make up of the fund’s investment portfolio. Spike Hedge Fund secretly mixes in some bad debt and let Tom paid for it unknowingly.

We assume now Spike is selling quality fish soup at $10 per bowl. Inside this fish soup are supposedly 20 quality fish slices. Unfortunately Spike has some fishes that has gone bad, but it would be a loss to throw them away. Spike instead put 18 fresh fish slices and 2 bad fish slices into the soup. Tom, who bought the soup, also unknowingly paid for the 2 bad slices. Spike is happy that there is no food wastage, and Tom is happy to be able to eat quality fish soup.

They said ignorance is bliss. Because no matter what goes on behind the scenes, Tom and Toodles now have a lovely home and an assurance that upon their retirement 25 years later, they would have paid off their new house and get a healthy retirement sum because Spike Hedge Fund is a well-known financial company with a solid reputation.

It is now in the interests of Tom, Jerry, Spike and the governor of Tomland to keep prices of property high. In fact, as long as the governor promises Tom that his house will keep rising in value, Tom will happily vote him in every single time. Tom will also be an obedient salaryman, staying out of trouble because he needs the job to pay off that heavy mortgage. But as the future generations see that property prices are too high for them to purchase their own houses, they will resort to get rich quick schemes such as playing the financial markets, doing side businesses or even lying flat etc. All these will be too fluffy in the eyes of Tom. Tom will tell his future kids that they should just be grounded to reality, work hard at their jobs, save up and in a few years they will also be able to buy a house and start a family just like Tom did many years ago. Afterall, it was his tried and tested personal experience and wisdom that Tom is passing to his future generations.

Certainly a heart-warming story.