Crash Course Chapter 4: Compounding Is The Problem
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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 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.