“You can put a price on how much people trust you,” I told my fifth-grade students. “In other words, you can measure a person’s integrity in dollars and cents.”
“Really?!” Peter eyed me with suspicion. “How?”
“Oh, I want to hear this one. It’d better be good,” said Taylor. She pulled out her calculator and was ready to punch in whatever magic formula I was about to divulge.
I wrote on the mark board the following: My word is my bond —JP Morgan. “Bond in this context,” I explained, “means debt. When you make a promise, you are borrowing debt from others. Like everything else you buy from the store, debt has a price, and that price is what we call interest rate.”
Then I wrote on the board: Promise = Debt = Principle * (1+ interest rate). Taylor threw down her calculator, dutifully copied down the formula in her notebook, and then stared up at me with a puzzled look.
“If you always keep your promises,” I continued, “and if you always pay back your debt on time, then people trust you. They are willing to lend you money at a very low interest rate. If you ever fail to keep your promises or pay back your debt, then people will no longer trust you. They will be less likely to lend you money. If they do, they will charge you a very high interest rate. Now, what is the interest rate the country of Greece has to pay on its debt today?”
Several hands shot up. One by one, my students ventured wild guesses, ranging from 20 percent to 50 percent, but none could come close to the real answer. In their sheltered life on the island of Manhattan, these eleven-year-old kids could not fathom anyone has to pay that high an interest rate, let alone a sovereign country.
I wrote on the board: 126 percent (Note to readers: the yield on one-year Greece sovereign bonds has climbed upward steadily since I taught my students this lesson. As of January 17, 2012, its yield has hit 415 percent). Then I raised another question, “If Greece borrows $100 from you, how much money does it have to pay you back a year later?”
“Two hundred and twenty-six dollars,” Taylor called out the answer. She was the math whiz of the class. Several students’ eyes widened as the meaning of this exercise sunk in. Peter put his right hand over his pocket protectively, as if trying to fend off an imaginary loan shark.
“Why does the country of Greece have to pay such a high interest rate?” I asked. No one answered. Fifteen pairs of young eyes were locked on me.
I answered my own question. “Because the government of Greece lied to its bankers several years ago about how much money it makes each year and whether it can pay back its debt or not. Today no one trusts the government of Greece. No one is willing to lend money to Greece. But Greece still needs money to survive. That’s why it has no choice but to borrow money at such a high interest rate. Do you think Greece can pay back its loans?”
Everyone looked at each other uncertainly, but no one offered an answer. So I continued, “Unfortunately, most bankers don’t think Greece is capable of paying back its loans. At 126 percent interest rate, no matter what Greece does, it’s almost impossible for it to generate 126 percent of profit each year to pay back its loans. If you fail to keep your promises, you may have to pay a dear price just like the country of Greece does today. If people don’t trust you, it will be very difficult for you to get a bank loan, do business, get a job, or do anything productive. Do you want to lose people’s trust like the government of Greece has?”
