Présentation	Foreword	Lie No 1

The lie of “Many Happy Returns”

Let’s start with a simple lie, not maybe the most important one, but an illustration how easy it is in the absence of sufficient thought or questioning, to make massively erroneous assumptions.

This lie is a mathematical one, starting with a quiz-like question.

The phrase “Many hapy returns” is normally said on your birthday. It may not be your birthday today but answer the following question:

You take $100 dollars to the bank and deposit it in your savings account, which returns you 2% per annum. The bank takes your $100 and lends it on to another of its customers at 5%. At the end of the year the bank receives $5 in interest from this customer, gives you $2 and keeps $3 for itself. The administration cost in the transactions (not passed on to you) was $1.

You earned 2% return on your money.

Question: What return did the bank earn on its money?

Your first impulse may be to reply 3%, which may also appear to you quite reasonable; but this would be the wrong answer.
The correct calculation is as follows:

Bank’s transaction profit = $3
Less Bank’s cost= $1
Bank’s net profit= $2
Bank’s return on investment= Bank’s net profit/Bank’s cost = 2/1 X 100% = 200%

Needless to say this is substantially more than 3%! Some people might find it scandalous that the bank earns 200% while they earn 2%, but twist and turn it as you might the mathematics cannot be escaped!

Note: The extent of earnings and returns of banks in general and of any bank in particular are obscure for the following reasons:

• 1. Experts are not clear among themselves whether banks really lend out savings as suggested above, or whether they lend out money that they themselves have created out of nothing - in which case the returns are even higher. Where the costs of creation and lending tend to zero, the returns on investment tend to infinity.
• 2. Banks’ quarterly and annual reports and balance sheets show earnings from service charges of various sorts, and from interest earned less interest given on loans and savings. They do not however reveal details of gains and losses that the banks incur in their speculative trading of financial instruments - transactions “off the balance sheet”. These sums may be substantial and affect a bank’s financial position considerably more than earnings from its other activities. This off-balance sheet activity affords banks considerable flexibility to present reports and accounts according to the desired political and economic image they wish to project.

We shall not go further into the complexity of this here, nor are we looking to suggest that banks make unreasonably high profits. The point is simply that the general assumption that the extent of banking returns may be roughly indicated by deducting savings rates from lending rates, is gravely in error.

	Présentation	Foreword	Lie No 1