The above words were spoken by Senator John Danforth back in 1992 and may be interpreted either as a lament or as a confession. In any case they are a statement of an irrefutable truth which applies both across time and place. The preceding decade had seen public debt increase at a compound rate of 13% per annum. As the late Murray Rothbard said some years ago:
"'In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of one trillion dollars. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their President, who would not let them down."
So you can see quite clearly that nothing changes regardless of whether the President is black or white, Democrat or Republican. The words of Senator Danforth openly admit that the scourge of humanity has been the steady stream of politicians of all persuasions who can enter into agreements, impose taxes and wage war, as well borrow and spend on behalf of citizens both present and future. It is also an irrefutable fact that their behaviour invariably benefits the few at the expense of the many. Any benefits bestowed on the many are transient at best and dearly paid for in the longer term.
Politicians eventually get voted out of office or retire, but their legacy lives on because the debts they incur not only remain but continue to compound like a silent cancer that clings and spreads.
Consider the following:
1. On July 1, 1900 the debt of the U.S. government stood at just over $2.1 billion ($2,136,961,091 to be precise). If we assume a compound rate of interest at 5% per annum with no capital repayments and no further deficits, that amount on its own would exceed $480 billion by July 1, 2011.
2. Since the 1977 financial year the U.S. government has racked up over $9 trillion in interest "payments" whilst the level of indebtedness went from $698,800,000,000 ($698.8 billion) to $13,561,623,030,891 ($13.56 trillion). In effect the interest has never been paid, it just keeps on getting added to the bill, to the future, and therefore onto the backs of future generations.
4. Between 1861 and 1865 the American Civil War was fought and the debt of the nation went from just over $64 million dollars to over $2.48 billion in the space of a decade. This increase equated to a yearly compounding rate of almost 44%. The bewildering aspect of this conflict was that the cost of buying the freedom of the slaves instead of waging a civil war has been estimated at around $2.7 billion in 1860 dollars. This was deemed too expensive a proposition for government at the time, yet the ensuing increase in the national debt by $2.4 billion over the decade, plus the death, private capital destruction, misery and long term animosity created by the civil war somehow made more sense to those who preferred conflict over economic logic.
The conflicts in Iraq and Afghanistan are similarly contrary to economic logic and as I have stated previously:
"So why does a nation borrow money it can never pay back, to fight wars it cannot win, when it could spend less to secure the allegiance of every person in these nations by simply "buying their GDP" which is less than the cost of the wars?" -- (from "The Real Reason They Hate Gold")
5. Similar explosions in debt accompanied the 1940's when debt levels increased by 19.6% compounding yearly as well as the decade between 1840 and 1850 when debt growth was at the yearly rate of over 33%.
There is of course no civilized logic to all of the above from the viewpoint of the masses, but there is more than ample logic if you are a financier shovelling debt down the throat of spendthrift governments and individuals or you are a "shareholder" of the military-industrial complex. Successive governments that believed they could wage mindless wars and neglect productive infrastructure will now be haunted by the spectre of not just crumbling bridges but also a crumbling society.
As the Abbot of St Silouan Monastery said:
"The system of consumption made man a prisoner of the logic of profit. The logic of profit transformed the earth's resources into financial calculations and financial calculations loosened the reins of the passions of the soul and body....then individual freedom and self-worship caused people's aspirations to become greater than the environment's capacity to pump vital capital into them and so heaven and earth could no longer match people's wild cravings."
Compounding is indeed the eighth wonder of the world as Einstein is said to have once remarked. The real issue however is whether mankind harnesses its beauty to compound the benefits of civilization or whether humanity falls under its yolk until it is crushed by the weight of the resultant debt and the destabilizing effects of mindless consumption.
The observations contained herein, are not exclusively reserved for the USA. They are equally applicable to all nations and governments. Moreover, they apply to human beings in general.
Compounding neither forgives nor forgets. It simply rewards those who understand it and punishes those who ignore it. So the question becomes, "how does one master compounding?" The answer is that it can never be really mastered because nothing can compound forever, neither wealth nor debts. Some observations may however be worth making:
1. Not even gold or silver can compound forever. These precious metals simply protect people from the total and inevitable destruction of fiat. They enable people to tread water when all else is sinking. Their portability and universal acceptance makes them outstanding choices in times of catastrophic upheaval and the recent earthquake, tsunami and nuclear disaster in Japan provide incontrovertible evidence of this.
2. Compounding is the mathematical outcome of extrapolating one's investment and consumption decisions. The cost of an extra cup of coffee from the shop, or packet of cigarettes seem almost negligible until the compounding cost is calculated. A most useful site is to be found at http://www.1728.com/compint.htm which enables calculations without the use of any special knowledge of mathematical formulas or even calculators.
Perhaps we need to turn to the life of Johnny Appleseed whose story fascinated me as a primary school student. He was a son of America and a pioneer nurseryman who introduced apple trees to large parts of Ohio, Indiana, and Illinois. In my mind he is perhaps one of the finest examples of how one man's actions compounded for the benefit of the United States. It is only enlightened visions and actions of humans that come close to the ideal of compounding benefit. Unfortunately, it is compounding theft, greed and stupidity that have driven personal, corporate and government agendas.
Instead of a Johnny Appleseed, the United States is faced with a Federal Reserve Bank and a string of governments that have long ago stepped off the edge of the economic precipice. You may ask why there has been no final impact. The reason is that they are digging a hole at the bottom which has extended the fall but which will only serve to make the inevitable impact more painful and destructive. Such is the economic grave dug by Keynesian cowboys, ignorant and easily "persuaded" politicians and depraved money men.
The current feud over the reduction of government expenditures by some paltry amount is an insult to anyone with even a solitary brain cell. Their negotiations are about as useful as a passenger on the Titanic negotiating for a cheaper fare after the collision with the iceberg. Nothing more needs to be said.
As for anyone staring at a computer screen praying for the Dow to levitate forever upwards all I can say is that they are engaging in self hypnosis. Once the Dow Jones Indstrial Average is adjusted for the devaluation of the dollar against other major currencies in the last 10 years and the efforts of the plunge protection team, the result is both telling and dismal. But hey, who cares? People are just sucked in by graphs, dollar signs with a string of zeroes and bozo politicians trying to jump start a dead horse economy that has been gutted. The only question is whether the U.S. economy is headed for the museum of dead empires or whether there are any true leaders and true patriots left to clean the mess and reinvigorate the populace.
In the midst of this mess we are left with gold and silver that require no dollar signs, no zeroes, no introductions or guidance. They are what they are and what they have always been ...........time travellers that neither age nor die and never become lost or unwelcome. My advice is to hitch a ride with these time travellers and enjoy the scenery.
My final word is to be wary of a "new" international currency made up of a basket of currencies including gold. This is nothing more than a trap and reminds me of an environmental scientist who years ago told me that "the solution to pollution is dilution.'' It is the same flawed reasoning which says that the Euro can survive despite the failing finances of the whole European periphery simply because Germany provides a strong nucleus. Any attempt to neutralise gold by bringing it into the fold will simply see a replay of Gresham's Law as good money (gold and silver) is withdrawn from circulation by the smarter players.
There is much to ponder and much to fear but even more to hope for. Perhaps galloping technological innovations will be matched one day by more noble human beings. In the meantime stick with the noble metals of gold and silver.