Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

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Monday, October 17, 2011

Millions, Billions and Trillions ...

A guest Blog from our friends at
Independent Banking Consultants 


Since 2008 references to “millions” “billions” and “trillions” have become commonplace; but do we really appreciate how big these numbers are?

In 2008 the collapse of Lehman Brothers signalled the onset of the global financial crisis, which in turn has escalated into the present sovereign debt crisis. Throughout this time references to “billions” and “trillions” have become commonplace in discussions about GDP, bank bailouts, quantitative easing and the like. So just how big are these numbers?

Before we try to put them into context lets first define the numbers themselves. Historically the international definitions of these numbers differed but the following are now the accepted ones:

1,000,000 - One Million (a thousand thousands)

1,000,000,000 - One Billion (a thousand millions)

1,000,000,000,000 - One Trillion (a thousand billions)

The problem is that these numbers are so huge that it is hard for the human brain to comprehend them without adding a frame of reference. And one of the easiest ways to do this is to relate them to a recognised period of time. Take ‘one second’ for example; there are 86,400 seconds in one day.

Therefore a million equates to more than eleven and a half days when measured in seconds.

A billion equates to roughly 31 years and eight months: in other words, if you had started a clock ticking when Margaret Thatcher first became Prime Minister it would only have passed the billion second mark last year!!

And your clock would have taken a staggering 31,709 years to count out a trillion seconds!!!

Putting some recent events in context

If we now apply the same frame of reference to some recent events it really helps to put them into context.

  • At the time of writing the UBS rogue trader has cost his (former) employer $2.3 billion – that’s nearly 73 years when measured in seconds, so you would have had to start your clock in 1938, the year before the Second World War started 
  • In April Lloyds TSB set aside £3.2 billion to cover the cost of payment protection insurance mis-selling – measured in seconds that equates to over 101 years, so that’s the same as your clock running since 1910 (two years before Titanic sank on her maiden voyage) 
  • Recently the cost of separating retail and investment banking was put at £7 billion – that’s 222 years, or back to 1789 (the start of the French Revolution) 
  • There is talk of increasing the European Financial Stability Fund to two trillion Euros in order to cover European bailouts and recapitalise its banks – that’s 63,418 years which would take us back to the time of Neanderthal man 
  • The USA recently increased its overall debt ceiling to $14.3 trillion – that’s an eye watering 453,438 years!! 
Small numbers are often not as benign as they may seem

So what conclusions should we draw from all this?

Well, you can remember this as a fun thing to entertain your friends with, although there is also a serious side to it that stems from our tendency to overlook the reality behind many numbers – sometimes numbers that can appear quite small and innocuous.

In our world we see this all the time, whether it is borrowers who fail to appreciate the difference that interest rates can make to the overall cost of some loans; or not appreciating the creeping effect of compound interest on the total amounts repayable.

It is always worth taking a reality check with numbers – especially when talking about loans that your business will be responsible for repaying, or for which you might be giving a personal guarantee. Getting the detail right can makes a BIG difference to the end result…

Independent Banking Consultants Ltd

www.independentbankers.co.uk

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