Exponential Growth and Compounding Interest

Albert Einstein once said that exponential growth and compounding interest was the 8 Wonder of the world due to the ‘perceived rapid decompression of time towards the latter end of the process’. Now this might seem like mumbo jumbo at first glance but he’s dead right. Unless we actually dedicate a bit of time in properly trying to understand big numbers and this ‘hockey stick growth’, our brains can’t fully grasp it. The easiest way to understand it is to put it into a medium which we do understand, like time for instance. So 1 million seconds = 11.5 days and 1 billion seconds = 32 years. Any guesses how long 1 trillion seconds is………..? 32000 years! Another way to look at this is in terms of distance. Let’s imagine that there was a £1000 note (the same thickness of a normal £20 note) and we stacked them on top of each other. £1 million = 4.5 inches high, £1 billion = 325 feet (height of Norwich cathedral roughly), but what about £1 trillion……..? 69.7 miles high. That’s the edge of space and the height that Virgin Galactic spaceships fly at. So hopefully you can see that when the media casually talk about debt figures and throw the billions and trillions around, I’d hazard to guess that no one really understands these numbers and how much the US is in trouble with their $18 trillion debt and over $130 trillion in unfunded liabilities!

Here’s a real life example of this in action: – Zimbabwe hyperinflation.

In 2004, inflation measured at 132.75% (which is quite remarkable), however by mid November 2008, inflation measured at 89 700 000 000 000 000 000 000%. That’s 89.7 septillion%, the highest ever documented hyperinflation which also produced the highest currency note ever – the $100 trillion note, which is worth about £10 today as a collectors item. This is rather quite staggering as on the build-up to this, the inflation rate was increasing by 80 million % per month. The country could barely do anything; millionaires became homeless almost overnight and everyone (predominantly the working & middle class) who had spent years squirrelling away funds into savings/pension accounts ended up with nothing. $Billion notes were being used as toilet paper as it was cheaper than buying actual toilet paper, the situation was dire.

So what’s my point?

Without being a ‘doom and gloomer’, I suppose my point is that it could very well happen to us. People tend to snigger when I say we could experience hyperinflation in the UK, but it’s more common than you think. 21 countries have experienced hyperinflation in the last 25 years and a fair percentage of them were civilised western nations. Just study what happened to the Soviet Union or Chile. Although it’s not going to happen tomorrow, I’m fairly confident we’ll see it either in the US or Japan within the next 10 years. The reasons for this will have to wait for another article. So going by historical evidence, having your wealth in tangible assets instead of paper/electronic assets is a smart idea…