Wednesday, May 03, 2006

Royal road to riches: compounding

Back in the 1960s the old Union Carbide Corporation would send out a very valuable little spiral-bound booklet. They sent it free for the asking. The booklet was entitled simply, "Compound Interest Tables." Later Dow Jones-Irwin put out a marvelous little book. It was called the "Dow Jones-Irwin Guide to Interest. What You Should Know About the Time Value of Money." These were the two best investment books I've ever read, and believe me, I've read a lot of investment books.

I've always called compounding "the royal road to riches." I don't know whether anyone publishes compounding tables any more, but I know I spent many profitable hours studying those tables. In fact, I based my whole investment philosophy and my career on the basis of what these compounding tables taught me.

The process of compounding assets that throw off interest or dividends is a fascinating and wonderful experience. Baron Rothschild (who was a very rich gentleman) was once asked whether he could name the seven wonders of the world. The Baron confessed that he could not, but then he added, "I do know the eighth wonder of the world -- it's called compound interest."

The process of compounding interest-bearing or dividend-paying assets is a wonderful procedure. But sadly, I must tell you that there's a reverse side of compounding -- and the reverse side is the very devil. I'm talking about the process of compounding debt. This is exactly what the US is doing. We've built a monstrous edifice of debt -- debt so incredibly huge that the world has never seen anything like it -- and this debt is compounding daily, weekly, monthly, yearly.

The compounding of the debt process is relentless, and it will eventually grind us under. But there's a way to fight compounding debt. You can simply renege on it, declare bankruptcy and start over. But the US will never do that. You see, there's a second alternate route. You can devalue your currency, which is just another way of saying "instant inflation." Or you can devalue slowly, let the dollar sink bit by bit. And, of course, you can raise taxes which will help a government pay off the interest on its debt.

As I said at the beginning of this piece. I'm a sort of an amateur-expert on the compounding process. And I'm thinking that the total debt of the US has gone so far that it's past the point of no return. This means that to avoid national insolvency or bankruptcy, the US must inflate, probably by systematically devaluing the dollar. It's INFLATE or DIE.

Now we come to the essence of this short piece. As the dollar is devalued, it requires more and more of these fiat dollars to buy a unit of real money, intrinsic money, money that can not be devalued. And, of course, I'm talking about gold.


Blogger Mr. x said...

Hey Doug,

Nice blog and a great post here.

Do you mind giving Richard Russell credit for the text you borrowed in this post?


Mr. X

7:00 AM  

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