Thursday, July 24, 2008

How much is one billion? 11 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Not a lot if it is in Zimbabwean dollars (maybe could buy a loaf of bread), but really, are we getting numbed by billions being thrown around, being lost here, being written off there? Is this *gulp* an inflation phenomenon?

I guess it is a matter of context. For example, for a bank to write off $1B in the midst of the bull market last year would have been one hell of a shocker, as did indeed happen when banks started writing off amounts of that magnitude when the subprime crisis started and turned the bull market. But clearly people have become numbed as the crisis stretched and now the markets rally because banks "only" wrote off $1B.

It is also partly a psychological thing. Just as a $1 loss on a $20 blue-chip sounds more impressive than a $0.005 loss on a $0.05 penny stock (even though the percentage loss on the latter is double that of the former), $1 billion dollars just does not have the same aura as $500 million even though it is double that amount. Perhaps, it is because common people have always strived for that magical MILLION, and hence they can be impressed by SEVERAL HUNDRED MILLION. One billion, on the other hand, is something not many can intrinsically warm to unless it is framed in the context of ONE THOUSAND MILLION --- which we are seldom impressed upon.

How much is one billion also rests on the context. I am not going to go into the classic demonstrations of how many houses or cars or egg sandwiches that $1 billion can buy, but rather I will highlight three factors that would affect both perception and real impact.

First would be the absolute level of wealth. Clearly one billion as a fraction of one trillion, say, would be insignificant. If lost, it may merely be regarded as an expense of operation, a frictional loss, something that can be "learnt" from so that the future may be better. The source of that wealth is also important of course, for it makes a difference whether it is purely personal wealth or fiduciary funds that one is managing on behalf of another party, or whether the funds come from a cash-cow business or is simply non-renewable (in which case the one billion is ALL THAT ONE HAS).

Second would be the application for which the $1B is used for. Two broad categories of expenditure would be consumption and investment. Consumption is for the present, and any necessary consumption expenditure has to be undertaken no matter what the amount, though it tends to add no value beyond the period in question. Investment is building growth capacity for the future, and abstention from unnecessary consumption to invest for the future is a virtue and should be seen as such. The worst form will be bringing the money to a casino for gambling, in which case one billion dollars is a huge amount.

Thirdly, the time frame over which one billion is consumed/invested/expended. This is self-explanatory. One cannot expect to consume $1 billion over one year and not see it as huge unless he is Mike Tyson. In the same way, a return of $1 billion over one year is fantastic while a similar return over one century is still fantastic, but less fantastic. Ermm, the reverse applies of course.

Fund managers and corporate officers should keep these in mind when they manage billions of dollars and not lose the money perspective. It brings to mind the dehumanising process/system that facilitated German officials of World War 2, all ordinary citizens, to grow to see Jewish prisoners as simply "digits" to be handled when they all played a part in the supply chain that sent the prisoners to their doom.




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