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As Einstein claimed to have done, let’s do a little thought experiment. Douglas Adams,
author of Hitchhiker’s Guide to the Galaxy, as with so many other concepts, inflated this
idea of compound interest like a party balloon to the size of a blimp. His characters
would go to The Restaurant at the End of the Universe for the most expensive dinner and
floor show in many a galaxy. Using Bistromathic and Infinite Improbability Drives to
travel back in time to open a savings account in one’s own name in the future, deposit a
penny there, and with the compound interest, have enough money in one’s account to pay
for the fabulous dinner and floor show at the Restaurant at the End of the Universe.
Of course later each night, huge time generators crank back “present” time to the day
before the end of the universe, so that the show can go on again the next evening.
Combining Adams and Einstein with two 20th century American engineers, Ted Thoren
and Dick Warner, in their seminal, “The Truth in Money Book – Appendix 7” we get a
real look at the power of compound interest.
With:
• the current spot price (July 2010) of gold of around $1200 per Troy ounce, and
• gold weighing 1,205.6 pounds per cubic foot, and;
• 1.2153 troy ounces = 1 avoir dupois ounce
doing the math we conclude that at $1200 per Troy ounce, one cubic foot of solid gold is
worth $28,131,181 – 28 million bux! But hold on to your hat, podner, cause that’s not
even remotely near the amount of money that 1 penny at 6 percent compound interest
will generate in 2010 years!
We need to convert the value of our cubic foot of solid gold – the 28 million – to
scientific notation so we can finish our little thought experiment. So let’s divide our total
amount of money generated by the compound interest on the penny - $7.3246 ^ 48 by the
price for a cubic foot
$7.3246 ^ 48
2.8 ^ 7
which gives us 2.61 ^ 41 cubic feet of solid gold – which is still a number far too big to
get a handle on. Is this much gold as big as the sun? – A solid gold sun? Let’s see:
Volume of a sphere
With the diameter of our sun being about 855,000 miles, that gives us a radius of ½ that
or 427,500 miles. Keep in mind that this will give us the volume of the sun in cubic
miles and what we need is cubic feet, so we have to multiply what we get by 1.47 X 10 ^
11 (5,280 X 5,280 X 5,280).
It comes out to (ta da) 4.988 X 10 ^ 28 cubic feet in the sun. Give or take.
If we know anything about Scientific Notation (and who does, really?) then we can see
that there is STILL an enormous difference between 10 ^28 and 10 ^ 41, so how many
suns of solid gold do we have from our penny at 6% compound interest for 2010 years?
Are you sitting down?
5.232 X 10^12th power!
Still too big a number to comprehend? OK, like Ted and Dick did in 1994, let’s assume 1
billion earth size suns of solid gold per solid gold galaxy. A billion in Scientific Notation
is 1 X 10^9 – 1,000 million, so basically we have
5,232 GALAXIES
each with 1 billion solid gold suns!
Maybe this is the source of many quotes mis-attributed to Einstein, such as compound
interest is the most powerful force in the universe; the greatest invention of all time,
greater than his theory of relativity, etc. Or maybe he really was impressed with it and he
said all these things about it and more, and those who think that the world’s greatest
genius, Time Magazine’s Man of the Century, shouldn’t bend so low as to talk about lots
of money, and they are busily combing the Internet to remove such quotes. Maybe.
My point, and I do have one (as Ellen would say) is the power of compound interest is a
two edged sword – great if you’re getting it, horrible if you’re paying it. We the People
are PAYING it!
Liabilities and Assets
Accounting for banks is opposite what it is for us. If we personally have money in a
bank, that goes on our Net Worth Balance Sheet/Financial Statement as an ASSET –
something of value. If we have a mortgage with that same bank, on our balance sheet,
that’s a LIABILITY. But for the bank, these two are opposite. Deposits become
LIABILITIES because they don’t belong to the bank – they belong to their customers.
The customer’s MORTGAGE LOAN (LIABILITY) is the bank’s ASSET – because the
customer owes it to the bank, and the bank is also making interest off the loan. On our
deposits or savings in the bank, the bank has to pay us (the customer) interest.
So having seen the terrible power of compound interest, what side of that game would
YOU want to be on if you were a bank? Uh huh! Now do you see why Americans have
very little in savings? Now do you see why the so called “national debt” is growing
exponentially? Now do you see why the idea of a Social Security Trust Fund scared the
bankers shitless? Now do you see why Wall Street bought off “our” representatives and
had them perennially raid Al Gore’s “lockbox” of social security funds? (Or was that the
porcine eco-terrorist’s LUNCH box he was on about?)