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Benson's Economic & Market
Trends
"The most powerful force in the
universe is compound interest"
- Albert Einstein
Not any more…"
- Ben Bernanke
Einstein was a genius known for his
simple elegant expressions of complex natural laws. Indeed, what is simpler
than E=MC²? While it may be urban legend that Professor Einstein was
reputed to have said that compound interest was the "eighth wonder of
the world and the most powerful force in the universe", the point is
well taken.
"Compound interest is the eighth
wonder of the world.
He who understands it, earns it ... He
who doesn't ... pays it"
- Albert Einstein
Einstein’s observations were
perfectly accurate back then as he noticed that the universe was expanding.
Because growth is a natural phenomenon, the human race, in general, and any man,
in particular, can take advantage of natural law by putting off consumption
today and investing in the future. This is the force behind compound
interest. A seed of corn not eaten but planted will multiply into a thousand
seeds at the future harvest; an acorn nurtured and planted can produce a
mighty oak; an olive grove cultivated now may take 40 years to mature but it
will take care of future generations. Thus, the moral of the story is always
the same: Save today, invest for the future, and reap fabulous rewards. If
you can invest at 7.2% for ten years, your wealth will double!
The mathematics of finance should be
incredibly simple and elegant to watch in motion, but they’re not,
thanks to the efforts of the Federal Reserve.
Einstein came to America during a time
of great turmoil in Germany and Europe. Germany was turning into a National
Socialist Party with a dictator and command economy. In a command economy,
interest can be fixed by the government at zero or even negative, and savings
accounts can be stolen and used to fund the wishes of the state. The river of
investment that runs forward creating capital can be forced by state-created
inflation to run in reverse, destroying capital. In other words, seed corn
rots if it’s not eaten, and investment dries up because saving is for
suckers.
Ah, welcome to 2012 America. The Fed has
decreed interest rates at zero for four years, and promised to keep them
there for at least another two. The Fed is still printing money out of thin
air as well as buying long term treasuries. By locking the yield of the
10-year Treasury at 1.6%, it’s well below the rate at which staples
like food, energy, utilities, transportation, education, and health care, are
rising in cost.
Today, and as far as the eye can see,
real inflation is well above interest rates. Instead of savers being rewarded
they are being taxed, mugged, and systematically destroyed by continued low
interest rates with no return on capital as the Fed tries to get people to
spend and not save to stimulate the economy. Where capitalism in our country
as Einstein knew it used to flourish, we’re now a land dedicated to
eating its seed corn, and encouraging people not to waste their time planting
acorns for the future.
Is it any surprise that pension funds
that assume they will earn an 8% return are all headed to insolvency? It is
now a simple mathematical fact that with spending encouraged and savings
taxed and given a negative return, only the superrich can set aside
sufficient resources to take care of themselves as they age. The average
American is destined to be a ward of the state.
Einstein understood physics and natural
law. He knew that if interest rates are set at zero and well below the rate
of inflation, capitalism would die. Trying to run an economy without real
interest rates is like trying to run the universe without gravity. It
doesn’t work.
Whenever I fly or take public
transportation and hear the government announcement "if you see
something, say something", it reminds me of Einstein because he came to
America to honor and support our capitalistic system, and would have stood up
to Ben Bernanke today by insisting he stop printing, before the train of
capitalism crashes.
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