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    Compounding Is The Problem: Crash Course Chapter 4

    By the time the problem is visible, it can't be avoided
    by Adam Taggart

    Friday, July 11, 2014, 4:32 PM

Chapter 4 of the Crash Course is now publicly available. It includes Chris' famous "magic eye dropper" example of how the compounding nature of exponential systems speeds up over time, often in ways very non-intuitive to the human mind.

The key takeaway: when dealing with a problem that's exponential in nature, by the time you see the warning signs, it's already much too late to solve things. Instead, spend your time preparing how best to manage the outcome.

 

Coming next Friday: Chapter 5: Growth vs Prosperity

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available — now– to our enrolled users.

Enrolled users can access the new series at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course — the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

 

Transcript

The purpose of this chapter is to help you understand the power of compounding.  If something grows over time, such as population, demand for oil, money supply – really anything that steadily increases in size -- and as you graph it over time, the graph will look like a hockey stick.

Said more simply, if something is increasing over time on a percentage basis, it is growing exponentially.

Using an example drawing on the magnificent work of Dr. Albert Bartlett, let me illustrate the power of compounding for you.

Suppose I had a magic eye dropper and I placed a single drop of water in the middle of your left hand.  The magic part is that this drop of water is going to double in size every minute.

At first nothing seems to be happening. But by the end of a minute, that tiny drop is now the size of two tiny drops.

After another minute, you now have a little pool of water that is slightly smaller in diameter than a dime sitting in your hand.

After six minutes, you have enough water to fill a thimble.

Now suppose we take our magic eye dropper to   Yankee Stadium and right at 12:00 p.m. in the afternoon we place a magic drop way down there on the pitcher’s mound.

To make this really interesting, suppose that the park is water-tight and that I handcuff you to one of the very highest bleacher seats.

My question to you is: how long do you have to escape from the handcuffs?   When would the stadium be completely filled with water? In Days?  Weeks?  Months?  Years?  How long would that take?

I’ll give you a few seconds to think about it.

The answer is: you have until   12:50 on that same day to figure out how you are going to get out of those handcuffs.  In 50 minutes, our modest little drop of water has managed to completely fill Yankee Stadium.

Now let me ask you this – at what time of the day would Yankee Stadium still be 93% empty space, and how many of you would be just beginning to realize the severity of your predicament?

Any guesses?  The answer is 12:45. If you were sitting idly in your bleacher seat waiting for help to arrive, by the time the field is covered with less than 5 feet of water, you would now only have 5 minutes left to get free.

And that, right there, illustrates one of the key features of compound growth. The one thing I want you take away from all this is: with exponential functions, the action really only heats up in the last few moments.

You sat in your seats for 45 minutes and nothing much seemed to be happening. And then in four minutes – bang! – the whole place was full.

This example was loosely based on a wonderful paper by Dr Albert Bartlett that clearly and cleanly describes this process of compounding which you can find on the Peak Prosperity website.  Dr Bartlett said:  “the greatest shortcoming of the human race is the inability to understand the exponential function”.  And he’s absolutely right. 

With this understanding, you’ll begin to understand the urgency I feel – there’s simply not a lot of maneuvering room once you hop on the vertical portion of a compound graph.  Time gets short.

This makes   “Compounding” the first key concept of the Crash Course. 

Now, what does all of this have to do with the future of our money system, our economy, and our way of life? I can’t wait to tell you. Please join me for Chapter 5: Growth vs Prosperity. 

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3 Comments

  • Fri, Jul 11, 2014 - 8:21pm

    #1

    Adam Taggart

    Status Platinum Member (Offline)

    Joined: May 25 2009

    Posts: 2653

    Fun user-created animation of exponential growth

    User hanbzu created this animation of a digital Chris as an alternative way to visualize the "magic eye dropper" exercise:

    Click here to watch

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  • Fri, Jul 11, 2014 - 8:52pm

    Reply to #1
    Thetallestmanonearth

    Thetallestmanonearth

    Status Bronze Member (Offline)

    Joined: Feb 28 2013

    Posts: 313

    haha. because who hasn't

    haha. because who hasn't wanted to watch a colleague drown at least once?  I'm glad the water level dropped back down and he is ok.  We need Chris around here.

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  • Sun, Jul 13, 2014 - 12:41pm

    #2

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 488

    Good work

    I know you have to keep the time down, but I found Dr. Bartlett's explanation of doubling time and the math associated with the number 70 really enlightening.  I also found how he used the final minutes of his bacteria/jar example through the remainder of his presentation to show how news about new oil finds have very little impact on the wiggle room at the end of an exponential growth curve.  You come away clearly understanding that even phenomenally great news has very little impact on the vertical component of the curve.

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