Section 1.3 – Big Numbers

Section 1.3 – How big is a million – a billion – a trillion?

“We used to call these astronomical numbers, but now the national debt is bigger than that! Maybe we should call them economical numbers!” – Richard Feinman

All the time we are given statistics on the news and elsewhere mentioning sums of money or other figures measured in millions, billions and trillions.  Do you just allow these numbers to wash over you without really comprehending what is being communicated? Do you just assume that somebody somewhere can make sense of this?

I’m going to give you a handle on visualising these sorts of magnitudes.

First of all let’s take a volume the size of a small sugar cube, 1 cm on each side: how big would 1 million of those be?
… It would be a cubic metre – the size of the jumbo bag of gravel.

What about a billion of them? …This would take up the volume of an Olympic swimming pool, 50 metres long. 20 metres wide, and one metre deep.

What about a trillion? They would fill a reservoir – half a kilometre long, 200 metres wide and 10 metres deep.

Let’s think about $1 million in money: suppose it was in $100 bills. You could fit $1 million in $100 bills into a briefcase.>

How about  $1 billion? To carry $1 billion worth of hundred dollar bills, it would take a 20 foot shipping container, stuffed completely full.

And for $1 trillion? You would need a freight train 6 km long, with all the boxcars stacked tight with hundred dollar bills.

What could you buy with $1 million? Well, you could buy a small flat in central London, about fifteen terraced houses in Rotherham, or three fairly high end Ferraris.

With $1 billion you could buy enough Ferraris to sit together nose to tail in a traffic jam on the motorway three lanes wide, and 4 km long.

With $1 trillion you could buy enough Ferraris to sit in a traffic jam three lanes wide all the way from Miami to San Francisco!

How long does it take to earn $1 million? For a typical worker earning $25,000 a year it would take an entire working lifetime of 40 years. For the chief executive of an average Fortune 500 corporation it would take five weeks. For football player Carlos Tevez it would take about nine days. For the world’s top financiers, about 6 hours.

How long would it take to earn $1 billion? Well, for that typical worker it would take it would take 40,000 years. The top 20 sports stars in the world together earn about $1 billion between them in a year. Hedge fund boss James Simon earns $1 billion every eight months.

Examples in the millions:

• $1m –  cost of arming three Reaper drones, with two bombs and two Hellfire missiles on each one.
• $1.5 – cost of one cruise missile.
• $20m – cost to upgrade one nuclear warhead. The United States is currently planning to upgrade its entire stock of 3000 of them.
• $85m – cost of one intercontinental ballistic missile.
• 1m people – the number of lives that could be saved each year if clean water and sanitation were available to them.

Some things in the billions:

• $8Bn – the cost of a nuclear submarine.
• $10Bn – the amount Europeans spend annually on ice cream.
• $20Bn – the United States spends currently each year on nuclear weapons.
• $20Bn – the amount that American citizens spend annually on pet food.
• $100Bn – the amount Europeans spend annually on alcoholic beverages.
• $10Bn – the cost of providing clean water and sanitation everywhere on the planet

Examples in the trillions:

• $8 trillion – the cost of American military expenditure during the Cold War. Presumably a similar amount was also spent by the Soviet Union.
• $5.5 trillion – amount the United States spent developing and building nuclear weapons between 1940 and 1996.
• $18.6 trillion – annual GDP of the United States.
• $14.6 trillion – the net assets owned by the 50 richest individuals in the world.
• $??? – the total assets owned by the poorest 4 billion inhabitants of the world are difficult to estimate, but are almost certainly less than $14 trillion.
• $76 trillion – the total value of goods and services traded in the whole world in 2014.
• $1200 trillion – the total value of financial derivatives held by banks and other financial institutions.

This is Section 1.3 of my forthcoming book The World in 2100: What might be Possible for Humanity? It is the opening segment of the ‘Patterns and Numbers’ theme. When we return to this thread, the next topic will be The Dynamics of Exponential Growth.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section1.2 – The Great Pension Robbery

Section 1.2 -The Great Pension Robbery

A great many people reaching pension age today have had a nasty surprise. They are finding out that the pension they get is nowhere near what they had been expecting. Those approaching it have a sinking feeling that it is not going to work out as expected.

For example, let me tell you about my own experience. In summary, I was given to expect that I would get a pension for of around £14,500 a year for life, and what the plan actually yields is about £2,400 a year. Almost everyone I talk to is getting similar shortfalls.

I still have the letter that the salesman (sorry, I mean the financial advisor) sent me when I took out my pension plan in 1984. What he said was that by paying £70 a month I could expect my retirement fund to be £161,727.00 by the time I retired. This was assuming a 12% growth rate, which he said was conservative. This fund would provide a £40,431.75 lump sum, and leave £121,295.25 to buy an annuity which would give me an income for life of £14,555.00 a year, assuming an annuity rate of 12%.

It’s worth pointing out the £14,555 would have been quite a substantial income in 1984 – equivalent to about £43,000 a year today according to the official inflation figures, which are hopelessly understated anyway. Even though wouldn’t be worth nearly as much today, I would still be delighted if I were getting £14,000 a year from the pension now.

But the reality of the situation is this: when I got to retirement age I found that the fund hadn’t grown by anything like the 12% he had suggested. Instead of the projected £160,000, it had £58,000 in it – giving me a lump sum of £14,500 and leaving £43,000 to buy the annuity. But the real kicker was that the annuity rate is nowhere near 12% now – it’s somewhere around 5.5% at best, and so the actual income that I get is only about £2,400 a year!

The financial people just shrug their shoulders and say “Well that was only an estimate! We didn’t guarantee that it would work out like that.”

Let’s have a look at how these pension schemes are supposed to work in theory… In fact it’s exactly the same process as any honest form of wealth generation: there is an accumulation phase and a payout phase.

• In the accumulation phase you pay a portion of your earnings into a fund that is invested in income-earning assets.
• All the income that those assets generate is re-invested back into the fund, so that it grows much faster than it would by your payments alone, by “the miracle of compound interest”.
• In the payout phase, the income that the fund generates is paid out to you, rather than being re-invested.

For pension schemes, it is normal practice for the fund to be invested in an annuity for the payout phase. This is like a life insurance policy in reverse; instead of taking your monthly premiums while you are alive and paying out a lump sum when you die, the provider takes a lump sum at the start and pays out a monthly distribution to you as long as you live. This generates a slightly larger income than if you had just invested the capital yourself in a “safe” investment (such as government bonds). However in that case, your capital would have remained intact at the time of your death for distribution to your heirs. In the case of the annuity, the balance goes to the insurance company when you die. If you live less than the average expected time, it’s a very good deal for them! And I’m sure they have worked out the sums so they don’t do too badly, however long you live.

All this is a re-run of the Endowment Mortgage Scandal, which came to a head in the 1980s. In the late seventies and early eighties, most people buying houses were persuaded to take out endowment life assurance policies that were intended to pay off the house purchase loan at the end of the agreement, and also produce a surplus bonus payment. In the late eighties it became apparent that the estimates of the investment performance had been ludicrously over-optimistic, and the payouts were going to be nowhere near large enough to pay off the loans.

It’s not only personal pension plans that are running into trouble. People who are relying on company schemes which promise 2/3 of the final salary for the rest of their lives might be in for a nasty shock too. The funds that the companies have been paying into are running into exactly the same sorts of problems that the personal ones are showing. They may be paying out as agreed at the moment, but further down the line the cupboard might turn out to be bare.

There are a lot of issues raised here which I’ll discuss in much more detail later, for example:

• Just look at the ridiculously precise figures he quoted me, given the speculative assumptions that the calculations they were based on. Isn’t it absurd that he quoted the final value of the fund to eight significant figures, when it turned out to be over 63% off at the end of the day? (I call this the delusion of spurious precision – this is a whole subject in itself, that I’ll deal with in a later section:  How to Avoid Number Bafflement, within the ‘Patterns and Numbers’ theme). That wasn’t his fault – he just punched the numbers into his computer and quoted the figures that it spat out (as no doubt he was trained to do by the company). And how successful would an advisor be who said “You might end up with about 160 grand, give or take 100 grand”? But he would at least have been honest!
• Was the 12% a year growth rate he suggested completely fanciful? Given that the UK stock market index went from 1040 in 1984 to over 6400 in 2013 (a compound growth of over 7% annually), and that most of the blue chip companies paid annual dividends of about 4%, I would have been able to get around 11% annual growth myself by simply investing directly in a cross-section of major industrials and re-investing the dividends. Where did the rest of it go? It went into the pockets of the practitioners of the financial system.
• The 12% annuity rate he quoted was at least representative in 1984, but how come it has gone down to 5.5% or less now, with such disastrous effect on the pensions of people now reaching retirement age?
• Why has inflation reached such epic proportions in the last few decades? And who wins? And who loses?

This is Section 1.2 of my forthcoming book The World in 2100: What might be Possible for Humanity? within the ‘Finance’ theme. When we return to this thread, the next topic will be The Nature and Meaning of Money. 

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section 1.1 – The Big Picture

Section 1.1 – The Big Picture

We live in extraordinary and paradoxical times.

• We are told every day that ‘economic growth’ is the solution to all our problems – but what benefit have you had from the past decades of growth?
• Housing is becoming more unaffordable year by year.
• If you are “lucky” enough to be employed – you are likely stressed out, overworked, and sliding deeper into debt.
• Education leaves graduates with a crippling debt burden before they even start on their career, and with less and less certainty that they will even get a job at the end of their studies.
• Pensions are turning out to produce a paltry fraction of the promised income.
• Mounting levels of pollution are destabilising the planet, yet political leaders only respond with denial or empty gestures.
• Armed conflicts inflict horror and suffering on a prodigious scale, while the politicians who instigate them keep themselves well out of harm’s way.
• 70 years of astounding technical progress have failed to deliver the promised improvements in quality of life – possibly even the reverse.
• There’s enough food in the world to feed everyone, yet millions starve.
• Billions live in acute deprivation, when we have the technology and the resources to bring comfort and abundance to all.
• We have booby-trapped the planet with enough thermonuclear warheads to wipe out life on Earth – many times over.
• We could have abundant cheap clean energy, but we can’t break the addiction to fossil fuels.

My conviction is that this is not going to go on much longer, because it can’t. The question then arises: “What comes next?” Will it just collapse into poverty and chaos, as so many civilisations have in the past – although never yet on a global scale? If it does collapse, how far back will that take us – to feudalism? – to the stone age? – to a planet populated by protozoans? And what would be the chances for the human race to rebuild all the positive features of our modern world, after such a collapse? And if not a descent into poverty, what else is possible? And how do we get from here to there?

There’s a powerful tendency for all of us to accept any current situation and circumstances around us as “Normal” – maybe even “inevitable” – even if things had actually been very different in the recent past:

• It’s now normal for both partners in a marriage to have to work full-time jobs to pay the basic living expenses, whereas fifty years ago one income was enough.
• It’s now normal for a house or flat to sell for four or five times what it costs to build it, whereas fifty years ago, its price was the build cost plus a modest profit margin of 20% or so.
• It’s now normal that students graduate with a crippling debt burden before they have even found a job, whereas we used to have our fees paid and get a grant that covered our living expenses.
• It’s now normal that workers are expected to do unlimited unpaid overtime, whereas it used to be standard that after forty hours, any extra time was paid at 50% above the basic rate.
• 40 years ago it was normal that office workers had a 35 hour week, and expected to take an hour for lunch to sit down for a two or three course meal in a restaurant (even the clerks and typists), rather than assuming the only option was to grab a sandwich at their desks.

I’m not denying the benefits that science and technology have brought us, and that we so often take for granted:

• a warm comfortable secure place to live, and a soft bed at night,
• food on the table without ever being uncertain whether it will arrive,
• transport to anywhere we like in the world with speed and comfort that would have amazed kings and emperors at any time in history,
• entertainment at the touch of a button,
• communication instantly to anywhere on the planet (but the quality of the content that is being communicated is another question entirely).

(Of course, many are not so fortunate to have these things, but I’m guessing that if you are reading this you are among the lucky ones).

Asking questions is an activity that many struggle to find time for in the tempo of modern life – and this suits the global elites just fine.

The project that led to the writing of this book started when I asked the question: “How come – given the widespread understanding in 1971 that  the human race was hell-bent on a disastrous course – that nothing has changed, except to become more entrenched?“

Later on I asked another question that seemed completely unrelated: “How come my pension (and just about everyone else’s) is not paying out nearly what was projected?“ It was only as I followed up on both of them that it slowly dawned on me that they were in fact threads in the same complex and fascinating tapestry. I hope you enjoy exploring it with me as much as I have enjoyed investigating it.

And in the background is the question I really want to get to: “What is actually possible? – Could every human being on the planet have their tneeds met for a healthy and fulfilling life, in a system that is sustainable for centuries, even for millenia?”

So I suggest the question to start with is:

Section 1.2 will open the Finance thread by examining the disastrous results that most people’s pension plans are returning.

If you haven’t already done so, you can register to receive a free review copy of The World in 2100: What might be Possible for Humanity? just before it goes on general sale later this summer, and to get regular extracts as they become available. Do make sure to click the link in the confirmation email, as this completes the registration process.